February Retirement Plan Newsletter 2020

February Retirement Plan Newsletter 2020

 

LUTZ BUSINESS INSIGHTS

 

FEBRUARY RETIREMENT PLAN NEWSLETTER

TOO MANY CHOICES: HOW MANY INVESTMENT OPTIONS SHOULD YOU OFFER?

Many plan providers struggle with deciding how many investment options to offer in their retirement plans. While people generally like to have lots of options when making other decisions, having too many plan options can potentially lead to poor investment decisions by plan participants. In addition, increasing plan options can also increase plan costs, as well as the administration associated with the plan.

Choice Overload

In a study on retirement plan options, researchers concluded that it is possible to present plan participants with too many options1. The researchers began by offering people selections of jams and chocolates. Some were offered a wide variety, while others received fewer choices. The wide variety of jams got more attention from people, but more people purchased jams when the choices were limited. When sampling chocolates, people enjoyed choosing from the larger selection more, but also expressed more dissatisfied with the choices. Those who sampled from a smaller selection were more satisfied and more likely to buy chocolates again. The study showed that as the number of options increased, people became concerned with the possibility of making the wrong choice, and were increasingly uncertain that they had made the best choice possible.

Looking at Plan Options

Chocolates and jams aren’t big decisions but the researchers found that these same behaviors carried over to retirement plans. They examined participation rates for 647 plans offered by the Vanguard Group, a large investment management company, covering more than 900,000 participants. They found that as plans increased the number of options, employee participation decreased. In fact, for every 10 options added to the plan, participation dropped by 1.5-2 percent. Plans offering fewer than 10 options had significantly higher employee participation rates.

Rising Costs

In addition, more plan options can increase costs both for participants, in the form of fees, and for plan sponsors, who may face additional administrative charges from third-party administrators for additional options. Further, auditing and other costs may increase, since the number of options could increase the time necessary to conduct audits.
It’s important to balance choice overload against the requirements of ERISA Section 404(c) which requires plan sponsors to have at least three diversified investment options with different risk and return characteristics.

For more information on plan options, consult your plan advisor.

1 http://www.columbia.edu/~ss957/articles/How_Much_Choice_Is_Too_Much.pdf

 

USE PLAN ANALYTICS TO EVALUATE YOUR RETIREMENT PLAN

Your retirement plan is a valuable resource for your employees and serves as a vehicle to attract and retain top talent. Ensuring plan success is crucial. Examining plan analytics can help evaluate its success.

Plan analytics you should explore:

  • Median age, tenure and savings rates of plan participants

These analytics can be helpful to determine which age groups are not strongly participating and may be encouraged to do so via on-site meetings, focused mailings and other communication and education.

  • Participants not contributing sufficiently to receive all eligible employer match

Participants “leaving money on the table” can be studied to explain why contributing to the employer match maximum is so advantageous (e.g., with a 50 percent match, participants automatically earn 50 percent “return” on their contribution before any investment gains occur).

  • Participants, by age, in each target date fund

Another demographic that can be helped by focused participant communications.

  • Participants taking loans

It is important for plan fiduciaries to determine if the plan loan provision is being abused. This can result in significant asset leakage with participants and oversight concerns for plan fiduciaries.

  • Loan default rates

Loan defaults also create problems for participants (taxation & penalties for premature distributions) and plan fiduciaries (loan defaults at 90 days arrear are a fiduciary breach).

  • Dollar amounts of employee contributions by type and source

These analytics allow for a deep dive into appropriateness of participant behavior potentially impacting plan menu design decisions, employee investment assistance, Roth utilization, TDF utilization and more.

Many factors impact the success of your plan. Studying your plan’s analytics helps you improve your plan and ensures your employees reach their retirement goals.

TARGET DATE FUNDS AND FIDUCIARY OBLIGATIONS

 Target date funds (TDFs) — which rebalance investments to become more conservative as a fixed date approaches — are a convenient way for plan participants to diversify their portfolios and reduce volatility and risk as they approach retirement, making them an increasingly popular choice. However not all TDFs are created equal, and selecting and monitoring them can pose unique challenges for plan sponsors and fiduciary advisors.

TDFs were first introduced in 1994. A little over ten years ago, just 13% retirement plan participants were invested in TDFs. Today, that number has risen to more than 50%, according to a new report from Vanguard, which also estimates that 77% of Vanguard participants will be invested in a single TDF by 2022.

However, the “automatic” rebalancing feature of TDFs doesn’t supplant the obligation to monitor funds and educate participants. The Department of Labor (DOL) provides guidance on TDFs in the form of tips for ERISA plan fiduciaries. A fiduciary advisor can help plan sponsors understand the rules and assist with compliance.

TDF Tip Highlights

  • Establish an objective process for comparing and selecting TDFs. Some of the things DOL suggests you consider include: fund performance, fund fees and expenses and how well the fund’s characteristics align with your employees’ ages, retirement dates and salaries.
  • Establish a process for periodic review of your plan’s TDFs. If there are significant changes in any of the criteria you considered when you added the TDF – management staff of the fund, performance, objectives – consider replacing it.
  • Understand the fund’s investments and how these will change over time. Aside from the primary strategy and underlying risk, another important aspect to consider is the fund’s “glide path.” Some TDFs reach their most conservative state closer to the target date, while others continue to become more conservative as participants move through their retirement years, with the assumption that funds will be withdrawn over a longer period of time.
  • Review the fund’s fees and expenses. Even small differences in fees can have a large impact on the growth of participants’ savings over time. In addition to fees and expenses charged by the component funds held by the TDF, are there additional charges for rebalancing or other services?
  • Ask whether a customized TDF that includes component investments not managed by the TDF vendor would be better for your plan. There may be additional costs associated with a custom TDF, but it may be worth it and you should ask the question.
  • Develop effective communications about TDFs for your plan participants, especially disclosures required by law. Check EBSA’s website for updates on regulatory disclosure requirements.
  • Use available sources of information, such as commercially available resources and services, to evaluate and review TDFs as well as any recommendations received concerning their selection.
  • Document your process for choosing and reviewing TDFs, including the decision-making process regarding individual investment options.

*Read the full DOL Target Date Retirement Funds — Tips for ERISA Plan Fiduciaries document here https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/target-date-retirement-funds.pdf). The trend toward TDFs has changed the landscape for retirement plan investors, and it’s a trend that shows no signs of slowing down anytime in the near future. For assistance navigating this relatively recent evolution in retirement planning and investing contact your plan advisor.

1 https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/target-date-retirement-funds.pdf

2 https://pressroom.vanguard.com/news/Press-Release-Vanguard-Launches-How-America-Saves-2018-060518.html

3 http://www.ucs-edu.net/cms/wp-content/uploads/2014/04/I_ABriefHistoryOfTargetDateFunds.pdf

PARTICIPANT CORNER: TAKE ADVANTAGE OF YOUR COMPANY'S RETIREMENT PLAN MATCHING PROGRAM

Over 40 percent of employers now offer at least a small retirement plan match to employees, who can help manage their financial wellness by taking advantage of this offer. Even if your employer only matches a small percentage, you’re losing money by not participating. But before you sign up for your company’s retirement plan, it’s important to know how to make the most of it. Here are a few tips that can help.

Get the Details

If you haven’t already clarified the details of your business’s retirement plan offerings, it’s never too late to find out. Ask your HR representative to list the benefits and find out how you can maximize your savings. Some employers offer a 50 percent match for each dollar you put in, while others match a dollar for every dollar. Find out what your company’s maximum match contribution is and decide whether you want to save only to that point or more.

Don’t Be Afraid to Contribute More

If your employer only matches up to a certain amount, don’t feel you have to only save that up to that point. Every dollar you save will grow tax-free over the years, providing a healthy cushion for your retirement years. The IRS does impose contribution limits, but those are fairly high, so it’s likely you won’t need to worry about it.

Don’t Assume You’re Enrolled

New employees often assume they were automatically enrolled in a business’s retirement, especially if the employer match was a selling point during the pre-hiring process. Make sure to ask if there’s something you need to do to enroll in the retirement plan program and take advantage of the match. Ask for program details and pay particular attention to any vesting schedule. If your employer-sponsored program has vesting requirements, you may find that you only receive the full benefits after a set time of employment.

An important part of financial wellness is getting every benefit possible out of your work-sponsored retirement program. This often comes in the form of an employer match to your retirement plan, which will help you get a big head start on saving for your future!

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

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Omaha, NE 68154

P: 402.496.8800

HASTINGS

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Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

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Grand Island, NE 68803

P: 308.382.7850

Tax Credits Increase for Companies Establishing a Retirement Plan in 2020!

Tax Credits Increase for Companies Establishing a Retirement Plan in 2020!

 

LUTZ BUSINESS INSIGHTS

 

tax credits increase for companies establishing a retirement plan in 2020!

chris wagner, investment adviser

 

On December 20th, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law.  One of the major enhancements included in the bill is the increase in tax credits available to small businesses who establish a retirement plan after 12-31-2019.  A small business is considered to have less than 100 employees who make at least $5,000 per year. 

Small businesses cite the biggest reason they don’t offer a company sponsored retirement plan is costs.  Under the SECURE Act, the tax credit for the first 3 years equals 50% of the plan’s startup costs up to the greater of $500, or $250 multiplied by the number of Non-Highly-Compensated employees eligible to participate, to a maximum of $5,000 per year.  A non-highly-compensated employee (NHCE) is classified as making less than $130,000 of compensation in 2020 and less than 5% ownership. 

Additionally, a new tax credit equal to $500 for up to 3 years is available if the small business adds automatic enrollment to a new or existing plan.  Automatic Enrollment enrolls employees in the company retirement plan at a pre-determined percentage of pay upon meeting eligibility requirements.  It simply changes the enrollment process by requiring employees to opt out of participating vs going through the process of opting into the plan.  According to research by Vanguard, among new hires, retirement plan participation rates nearly double to 93% under automatic enrollment compared with 47% under voluntary enrollment. 

 

Let’s review a few examples:

  1. XYZ Company has 10 eligible Non-Highly-Compensated employees and implements a 401(k) plan in 2020. XYZ Company would be eligible for up to $2,500 ($250 x 10) per year in tax credits to cover start up and plan administrative costs.  This credit would be available for 3 years assuming they maintain 10 eligible employees.  If the plan includes automatic enrollment XYZ Company will receive an additional $500 tax credit for 3 years.
  2. ABC Company has 40 eligible Non-Highly-Compensated employees and implements a 401(k) plan in 2020. ABC Company would be eligible for the maximum $5,000 ($250 x 40 = $10,000) per year in tax credits to cover start up and administrative costs.  This credit would be available for 3 years assuming they maintain at least 20 ($250 x 20 = $5,000) eligible employees.  If the plan includes automatic enrollment XYZ Company will receive an additional $500 tax credit for 3 years.

 

Why is it important that small businesses provide their employees with access to a company sponsored retirement plan?

According to the U.S. Small Business Administration Office of Advocacy, small businesses employ approximately 48% of the workforce.  A Labor Department report estimates that only half of the workers employed by companies with fewer than 50 employees have access to a retirement savings plan through their employer.  Most workers without access to a company sponsored retirement plan do not save on their own and have little or no retirement savings. 

Implementing a company sponsored retirement plan also provides substantial benefits for the employer.  Opportunities for ownership and key employees to make meaningful tax deferred contributions, an enhanced benefit package to attract qualified employees in the low unemployment job market and a financially secure workforce just to name a few.  Companies can now provide this great benefit at a substantial discount for the first 3 years thanks to the SECURE ACT.  That is a win for everyone!

ABOUT THE AUTHOR

402.827.2077

cwagner@lutz.us

LINKEDIN

CHRIS WAGNER, LUTCF®, CHFC®, CFP®, CPFA® + INVESTMENT ADVISER

Chris Wagner is a Retirement Plan Consultant and Investment Adviser at Lutz Financial with over 12 years of industry experience. He focuses on providing retirement plan consulting and investment advisory services.

AREAS OF FOCUS
  • Retirement Plan Consulting
  • Investment Due Diligence and Analysis
  • Provider and Fee Benchmarking
  • Fiduciary Guidance
  • Plan Design Analysis
  • RFP Provider Searches
  • Investment Advisory Services
  • Participant Education
AFFILIATIONS AND CREDENTIALS
  • National Association of Plan Advisors, Member
  • Life Underwriter Training Council Fellow
  • Certified Financial Planner®
  • Certified Plan Fiduciary Advisor®
  • Chartered Financial Consultant
EDUCATIONAL BACKGROUND
  • BSBA in Marketing, Midland University, Fremont, NE
  • American College of Financial Services, Bryn Mawr, PA
COMMUNITY SERVICE
  • Knights of Columbus, Member
  • St. Wenceslaus, Volunteer Coach

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

February Retirement Plan Newsletter 2020

January Retirement Plan Newsletter 2020

 

LUTZ BUSINESS INSIGHTS

 

JANUARY RETIREMENT PLAN NEWSLETTER

FINANCIAL WELLNESS AND PRODUCTIVITY: HOW ARE YOUR EMPLOYEES AFFECTED?

Employees worried about their personal finances are less productive, more distracted and are easier targets for poachers. While none of that is a revelation, a recent nationwide survey showed just how pervasive financial insecurity is in the workforce and how large the losses and potential risks are for employers at every level. When asked what they feel stress about, 59% of respondents said personal finances were their number one concern. Other familiar stressors paled in comparison — “my job” at 15%, “relationships” at 12% and “health” at just 10%.

If you have a retirement planning professional who works with your employees, that’s a good start, but the study shows the problem — and effective solutions — go much deeper.

 

Who’s at Risk?

Not surprisingly, younger, lower-earning employees feel stressed about their finances. But that concern extends all the way up the income ladder and across all generations. In fact, 38% of Millennials reported feeling financial stress, compared to 34% of Gen X and 25% of Baby Boomers.

 

Employers impact on Financial Wellness

EFFECTS OF FINANCIAL STRESS

Effect Those Who Say They’re Stressed Those Who Say They Aren’t Stressed
Finances have been a distraction at work 47% 10%
Spend three hours or more at work each week thinking about or dealing with personal finance issues* 49% 30%
Health has been impacted by financial worries** 26% 18%
Relationships at home have been impacted by financial worries** 38% 18%

For companies concerned about a stressed workforce, financial wellness goes beyond having a retirement plan advisor inform employees about their options and basic financial literacy. Formal coaching on handling personal finances can lower stress, boost productivity and increase retention. Employees who participated in a formal financial wellness plan at work say that it helped them prepare for retirement (47%), pay off debt (29%), save for their goals (29%) and control their spending (29%). Demonstrating concern for employees’ financial health could also reduce the allure of jumping ship if they feel your company cares and is taking steps to help them.

 

Changes, and not Just in Attitudes

Organizations using retirement plan advisors that offer robust financial wellness programs aren’t just engaging in self-interested risk-abatement – they’re signaling to employees that they understand our economic system is undergoing rapid and significant change. The 20th century paradigm of locking into a lifetime profession has been replaced by seismic shifts and massive uncertainty. Companies that offer employees effective help in navigating the new economy stand to benefit from a workforce that is not only more productive, but one that’s more loyal and committed as well.

 

For more information on financial wellness and preparing your employees for retirement, reach out to your plan advisor.

*Asked of those who say finances have been a distraction at work
** As noted on page 19 of the study, employees could choose as many answers as applicable to the question, “Which of the following have been impacted by your financial worries?”

  1. https://www.pwc.com/us/en/industries/private-company-services/library/financial-well-being-retirement-survey.html
  2. https://www.pwc.com/us/en/private-company-services/publications/assets/pwc-2019-employee-wellness-survey.pdf

 

WHY CFOS SHOULD CONSIDER PARTNERING WITH A RETIREMENT PLAN ADVISOR

Many companies are outsourcing more and more activities, mainly because outsourcing can provide cost savings and increase productivity. Outsourcing allows companies to focus more on their core businesses, rather than spending time on areas outside their expertise. For retirement plan sponsors, outsourcing services makes sense for these reasons as well as others.

 

Reduced Risks

As a plan sponsor, you and your company are plan fiduciaries, and can be held legally responsible for the plan’s administration and performance. Many sponsors outsource some or most responsibility. A 3(21) investment fiduciary assumes part of the risk, functioning as a co-fiduciary that provide prudent and objective advice. A 3(38) investment fiduciary accepts total responsibility and the lion’s share of potential liability for selecting, monitoring and replacing investment options, which helps the plan sponsor manage the risk of legal action concerning investment decisions. A true 3(16) outsourcing of the plan administrator role means offloading not only the day-to-day mechanics of plan administration, but the ultimate fiduciary responsibilities attendant thereto. That said, when plan sponsors contemplate outsourced 3(16) services they need to dive deep into contract review to understand what is actually being outsourced and what might remain in their hands.

 

Increased Objectivity

Independent third-party plan administration and fiduciary services help your retirement plan by managing conflicts of interest, biases or self-interest. As set out in the Employee Retirement Income Security Act of 1974 (ERISA), both 3(21) and 3(38) investment fiduciaries, as well as 3(16) plan administrators, are required to act solely in the interest of plan participants and must act prudently when making decisions about, or administering, the plan. These actions provide plan sponsors and plan participants with a greater level of risk management and confidence in the retirement plan.

 

Increased Service Level

Typically, a third-party plan administrator or fiduciary can devote much more time and attention to the support of your retirement plan than can employees. Employees often ‘squeeze in’ plan-related tasks around their regular duties, and may lack the skills, training and resources that an outsourced provider offers.


For more information on outsourcing fiduciary services, contact your plan advisor. portant group.

IMPROVE YOUR RETIREMENT PLAN BY ENCOURAGING EMPLOYEES TO JOIN

Many organizations face the problem of increasing employee participation in their retirement plans. Participation is crucial to the success of the plan, and it improves employee retention and overall job satisfaction – but how can plan sponsors improve participation rates?

  • Design: Your plan needs to meet the needs of your employees and your company. Employee matching contributions, waiting periods for new employees, loan or hardship withdrawal options, investment options, and more should be structured to make it easy for employees to join and feel confident they can control their assets. A qualified consultant can help you understand design features that meets your company and employee goals.
  • Communication: Investing and financial markets are confusing for most people, and confusion doesn’t inspire confidence or trust. One way to improve confidence and trust in your plan is to regularly supply plan information and investment education. Communication to employees helps your plan advisors demonstrate their competence and expertise. Consider setting up dedicated meetings, targeted communications, one-on-one sessions, e-mails, webinars, and more! These are just a few ways to communicate the value of your retirement plan to employees and help them prepare for retirement.

For other ideas on how to improve your retirement plan and encourage your employees to participate, reach out to your plan advisor.

PARTICIPANT CORNER: THE IMPORTANCE OF KEEPING BENEFICIARY INFORMATION UPDATED

Planning for the departure of a loved one is a difficult thing to think about, but no matter how delicate, it is something any pragmatic planner must consider. What happens to your retirement account when you, your spouse or partner pass? When choosing your retirement plan it’s likely that you were asked to designate a beneficiary – the individual who would receive the money accrued in your retirement account in the event of your passing. As difficult as this may be to think about, it’s always best to be prepared for any contingency. Here are a few tips to consider when updating your beneficiary information.

 

Take Time to Review Your Account

When reviewing your retirement savings account, take time to consider your designated beneficiaries. This is an important step since retirement account assets typically are not governed by your will. Instead, the assets will pass to the beneficiaries named on the account, which is why it is of utmost importance to keep this information up to date.

 

Spousal Consent Notice

If you’re married, it is imperative that your spouse’s signature consent is signed in front of a notary public, or your plan administrator, to designate anyone besides your spouse as a beneficiary.

 

Life Changing Events

Remember to make changes to beneficiaries after any significant life event, including marriage, divorce, birth of a child, or any other milestones. If you’re unsure if something qualifies as a ‘life changing event’, your plan advisor will be happy to assist you. By keeping your beneficiary form up to date, you can ensure that your assets will be distributed as you intended.

As always, planning for retirement and keeping your plan up to date – even in the event of unforeseen adverse situations – is very important. Your plan advisor is here to help you through every step, so make sure to reach out at any time with questions.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

Financial Market Update + 2.18.2020

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

February Retirement Plan Newsletter 2020

December Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

DECEMBER RETIREMENT PLAN NEWSLETTER

THE BENEFITS OF MATCHING RETIREMENT CONTRIBUTIONS

As the unemployment rate has dropped, hiring has grown increasingly competitive – especially for businesses with highly-specialized positions. It’s important to understand how retirement matches factor into the hiring process and how they can financially benefit your company. Here are a few reasons why offering a retirement match helps your business.

Competitive Hiring

If you don’t offer a retirement match, chances are your competitors do, meaning it’s more difficult to attract top talent. A full benefits package that includes a retirement match may prevent you from paying top dollar to win candidates who might consider a job offer from your competitors.

Reduced Turnover

In order to reap the largest rewards attached to a retirement plan match, employees often must work for a particular period of time, known as vesting1. This timeframe encourages employees to stay and maximize their contributions to receive the best benefits. Since replacing a departing worker is expensive2, reduced turnover brings cost savings.

Tax Savings

Your finance department will love the savings received at tax time from your retirement plan match. Businesses can deduct every dollar they contribute toward employee retirement plans in addition to the tax savings employees reap for participating. Small and mid-sized business may also be able to deduct their retirement plan startup costs under the Credit for Small Employment Pension Plans Startup Costs3.

Future Compliance

In most states, businesses aren’t required to offer retirement plans for their employees, but that is changing. Seven states4 now have a government-mandated retirement option in place for residents, and in Oregon and Illinois5, employers are required to enroll their workers in a plan. By having an employer-matched retirement plan in place, your business will be prepared if a mandate impacts your workplace.

By understanding the benefits of a retirement plan match, your business can make informed decisions and save money. For further questions about matching or other questions relating to retirement plans, contact your plan advisor.

 

1. https://money.cnn.com/retirement/guide/401k_basics.moneymag/index10.htm

2. https://www.peoplekeep.com/blog/bid/312123/Employee-Retention-The-Real-Cost-of-Losing-an-Employee

3. https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit

4. https://primepay.com/blog/state-retirement-plans-now-mandatory-7-states

5. https://www.forbes.com/sites/ashleaebeling/2016/09/13/when-will-new-state-retirement-plans-start-enrollment/#7905e2f57e0f

THE MORE YOU KNOW: AUTOMATIC ENROLLMENT NOTICES

 Many retirement plans today provide automatic enrollment for employees, meaning the plan sponsor initiates enrollment into the retirement plan on behalf of the employee. One common question plan sponsors come across is whether their enrollment kit satisfies the annual automatic enrollment notice requirement.

At first glance, it may seem that enrollment kits contain all the necessary information to satisfy your obligation to provide an annual notice of your plan’s automatic enrollment feature, however the notice must include the following information:

  1. The default contribution rate that will apply if the participant does not make an affirmative deferral election.
  2. The employee’s right to elect not to have the default rate apply, or to elect a different contribution rate.
  3. How default contributions will be invested absent an investment election by the participant.
  4. The notice must be provided before each plan year.

Do you expect to send out enrollment kits to all covered employees before the beginning of each plan year? Since most plans merely provide an enrollment kit at the time an employee first becomes eligible to participate, the enrollment kit will not likely satisfy the annual notice requirement.

For more information on automatic enrollment notification requirements, contact your plan advisor.

TOP TEN FIDUCIARY RESPONSIBILITIES

A plan fiduciary plays an important role in the organization’s financial health. Not only do they oversee the fiduciary process, but they identify and serve the best interests of a retirement plan’s participants and beneficiaries. Here are 10 important responsibilities to keep in mind.

  1. Limit liability: As a fiduciary, it is imperative that you understand ERISA so you can keep yourself and your business safe from liability.
  2. Find the right plan provider: Finding a retirement plan provider is much more complicated than many realize.
  3. Keep costs low: No matter how big your business’s budget, always monitor fees to ensure you are getting the best deal.
  4. Oversee plan performance: Once a retirement plan is in place, continuously monitor its performance.
  5. Educate plan participants: Regardless of position and hierarchy, employees may come to you asking about plan options. What should you say?
  6. Stay informed: Your role is to know more about your business’s retirement savings plan than everyone else, so education is vital.
  7. Avoid personal gain: As a fiduciary, it’s important to distance yourself from any situation that could be perceived as personal gain from the retirement plan.
  8. Diversify investments: The investment options offered in your plan should be diversified. This limits financial risk and helps balance risks and rewards.
  9. Monitor participant satisfaction: Evaluate employee satisfaction with the plan. Follow up on complaints, and regularly gauge the plan needs to determine the right time for change.
  10. Ensure employees understand their options and monitor their satisfaction levels.
PARTICIPANT CORNER: INCREASING YOUR RETIREMENT DOLLARS

1. Don’t Cash Out Retirement Plans When Changing Employment

When you leave a job, the vested benefits in your retirement plan are an enticing source of money. It may be difficult to resist the urge to take that money as cash, particularly if retirement is many years away. If you do decide to cash out, understand that you will very likely be required to pay federal income taxes, state income taxes, and a 10 percent penalty if under age 59½. This can cut into your investments significantly and negatively impact your retirement savings goals! In California, for example, with an estimated 8 percent state income tax, someone in the 28 percent federal tax bracket would lose 46 percent of the amount withdrawn. When changing jobs, you generally have three options to keep your retirement money invested – you can leave the money in your previous employer’s plan, roll it over into an IRA, or transfer the money to your new employer’s plan.

 

2. Take Your Time: Give Your Money More Time to Accumulate 

When you give your money more time to accumulate, the earnings on your investments, and the annual compounding of those earnings can make a big difference in your final return. Consider a hypothetical investor named Chris who saved $2,000 per year for a little over eight years. Continuing to grow at 8 percent for the next 31 years, the value of the account grew to $279,781. Contrast that example with Pat, who put off saving for retirement for eight years, began to save a little in the ninth and religiously saved $2,000 per year for the next 31 years. He also earned 8 percent on his savings throughout. What is Pat’s account value at the end of 40 years? Pat ended up with the same $279,781 that Chris had accumulated, but Pat invested $63,138 to get there and Chris invested only $16,862!

 

3. Don’t Rely on Other Income Sources, and Don’t Count on Social Security

While politicians may talk about Social Security being protected, for anyone 50 or under it’s likely that the program will be different from its current form by the time you retire. According to the Social Security Administration, Social Security benefits represent about 34 percent of income for Americans over the age of 65. The remaining income comes predominately from pensions and investments. They also state that by 2035, the number of Americans 65 and older will increase from approximately 48 million today to over 79 million. While the dollars-and-cents result of this growth is hard to determine, it is clear that investing for retirement is a prudent course of action.

 

4. Consider Hiring a Financial Advisor!

Historically, investors with a financial advisor have tended to “stay the course”, employing a long-term investment strategy and avoiding overreaction to short-term market fluctuations. A financial advisor also can help you determine your risk tolerance and assist you in selecting the investments that suit your financial needs at every stage of your life.

For more information on retirement tips, contact your plan advisor.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

 

LUTZ BUSINESS INSIGHTS

 

new irs indexed limits for 2020

 

WASHINGTON — The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF), posted today on IRS.gov. This guidance provides cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2020.

Share this valuable information with your clients. Download a communication to send to your clients and memo for your clients to send to their participants in the Advisor Portal Resource Center > Fiduciary Compliance & Plan Design > Plan Limits folder.      

 

ITEM

2020

2019

2018

401(k), 403(b), 457 Elective Deferral Limit

$19,500

$19,000

$18,500

Catch-Up Contribution Limit (age 50 or older)

$6,500

$6,000

$6,000

Annual Compensation Limit

$285,000

$280,000

$275,000

Defined Contribution Limit

$57,000

$56,000

$55,000

Defined Benefit Limit

$230,000

$225,000

$220,000

Definition of Highly Compensated Employee

$130,000

$125,000

$120,000

Key Employee

$185,000

$180,000

$175,000

IRA Contribution Limit

$6,000

$6,000

$5,500

IRA Catch-Up Contributions (age 50 and older)

$1,000

$1,000

$1,000

 

HIGHLIGHTS OF CHANGES FOR 2020

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $19,000 to $19,500.

The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2020.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase-out ranges for 2020:

  • For single taxpayers covered by a workplace retirement plan, the phase-out range is $65,000 to $75,000, up from $64,000 to $74,000.
  • For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $104,000 to $124,000, up from $103,000 to $123,000.
  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $196,000 and $206,000, up from $193,000 and $203,000.
  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income phase-out range for taxpayers making contributions to a Roth IRA is $124,000 to $139,000 for singles and heads of household, up from $$122,000 to $137,000. For married couples filing jointly, the income phase-out range is $196,000 to $206,000, up from $193,000 to $203,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $65,000 for married couples filing jointly, up from $64,000; $48,750 for heads of household, up from $48,000; and $32,500 for singles and married individuals filing separately, up from $32,000.

 

KEY LIMIT REMAINS UNCHANGED

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

Details on these and other retirement-related cost-of-living adjustments for 2020 are in Notice 2019-59 (PDF), available on IRS.gov.

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

February Retirement Plan Newsletter 2020

November Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

NOVEMBER RETIREMENT PLAN NEWSLETTER

KEEPING IN COMPLIANCE: IRS TIPS FOR PLAN SPONSORS

As an employer, you’re responsible for keeping your company’s retirement plan in compliance at all times. Additionally, your plan document should be reviewed on an annual basis and administered accordingly. The IRS offers useful tips for plan sponsors, helping you to stay compliant, informed and prepared to provide the best possible retirement plan for your employees – here are some highlights.

It’s very important to understand and verify your adoption agreement options. For pre-approved plans, you may have an adoption agreement that supplements the basic plan document and lists features that may be selected. Understanding this document is critical – and you should very specifically understand and comprehend what it says about plan eligibility, types and limits of contributions, how contributions are divided among plan participants, as well as vesting and paying benefits.

Learn everything you can about your service agreement. As a plan sponsor, it’s important to understand what your service agreement does and does not cover. For administrative tasks, it’s imperative to know who will perform these – and to make sure that person has the information they need in order to perform the following:

  • Administer the terms for enrollment, contribution and distribution of funds.
  • Give mandatory plan notices to participants.
  • Determine any testing that’s required and carry it out in a timely manner.
  • Perform all required recordkeeping properly.
  • Review the plan document for any legal changes and make updates as needed.
  • Make all required filings to the IRS and Department of Labor

Communicate with your pre-approved plan provider. Notify your provider if you make any changes with respect to your business, employees or compensation – or if you need to make changes to your plan’s terms. In addition, it’s important that you:

  • Understand all fees that will be charged by the plan provider.
  • Retain the IRS issued opinion or advisory letter for your pre-approved plan.
  • Promptly sign any plan amendments from your plan provider.

Maintain open communication with your plan service provider regarding the following. Advise your provider about any changes in employee status, new hires, terminations and compensation as well as:

  • Accurate census data for determining plan eligibility and benefit payments.
  • Terms for defining employee contributions, payments and loans.
  • Any amendments to the plan (e.g., loan or hardship provisions, contributions or allocation formulas).

Stay on top of your plan maintenance requirements. Review all reports, including the allocation report for potential contribution errors and the distribution report to verify that participants have started their minimum required distributions and consented to these payments. Monitor that all loans are made in accordance with the terms of the plan, and that payments are made in a timely fashion. Document your actions with respect to defaulted loans and retain all documentation for hardship withdrawals. The IRS also recommends an independent review of your plan.

View the full IRS document at the link here (https://www.irs.gov/retirement-plans/plan-sponsor/a-plan-sponsors-responsibilities) – or for further questions relating to your specific plan, consult your plan advisor.

THE TOP THREE REASONS TO OUTSOURCE FIDUCIARY SERVICES

Many companies are outsourcing more and more activities, mainly because outsourcing can provide cost savings and increase productivity. Outsourcing allows companies to focus more on their core businesses, rather than spending time on areas outside their expertise. For retirement plan sponsors, outsourcing services makes sense for these reasons as well as others.

Reduced Risks.

As a plan sponsor, you and your company are plan fiduciaries, and can be held legally responsible for the plan’s administration and performance. Many sponsors outsource some or most responsibility. A 3(21) investment fiduciary assumes part of the risk, functioning as a co-fiduciary that provide prudent and objective advice. A 3(38) investment fiduciary accepts total responsibility and the lion’s share of potential liability for selecting, monitoring and replacing investment options, which helps the plan sponsor manage the risk of legal action concerning investment decisions. A true 3(16) outsourcing of the plan administrator role means offloading not only the day-to-day mechanics of plan administration, but the ultimate fiduciary responsibilities attendant thereto. That said, when plan sponsors contemplate outsourced 3(16) services they need to dive in deep in contract review to understand what is actually being outsourced and what might remain in their hands.

Increased Objectivity.

 Independent third-party plan administration and fiduciary services help your retirement plan by managing conflicts of interest, biases or self-interest. As set out in the Employee Retirement Income Security Act of 1974 (ERISA), both 3(21) and 3(38) investment fiduciaries, as well as 3(16) plan administrators, are required to act solely in the interest of plan participants and must act prudently when making decisions about, or administering, the plan. These actions provide plan sponsors and plan participants with a greater level of risk management and confidence in the retirement plan.

Increased Service Level.

Typically, a third-party plan administrator or fiduciary can devote much more time and attention to the support of your retirement plan than can employees. Employees often ‘squeeze in’ plan-related tasks around their regular duties, and may lack the skills, training and resources that an outsourced provider offers.

BEAT RISING HEALTHCARE COSTS WITH A FINANCIAL WELLNESS PROGRAM

Healthcare costs are on the rise, and employers expect double-digit growth in the next decade. As a result, there’s a growing trend toward financial wellness programs included with employee benefits, as this both benefits employees and minimizes a company’s fiduciary risk. In addition to these growing trends, workers are beginning to look for the during job searches.

If your business doesn’t invest in financial wellness for your team, you may find it difficult to attract and retain the best employees. For fiduciaries, this is a great time to conduct in-depth research about financial wellness programs and recommend the best one to your employer. Considering starting a financial wellness program? Here are a few things to consider before starting a program of your own.

Financial Education. Financial education is nothing new in the business world. For decades employers have invested in seminars and workshops to assist employees with their financial health. The new era of financial wellness goes beyond traditional training classes for budgeting, paying off debt and amassing an emergency fund. It emphasizes the need for your employees to not only plan for retirement but enjoy financial health prior, thus developing happy, loyal and productive workers.

Wellness Assessment Check-Ups. Traditional financial workplace training typically lacks follow-up. Newer wellness programs include regular assessments, where participants review the progress they’ve made on each of their goals. Afterwards, employees possess the data needed to create a roadmap for future financial plans. It’s important for employers to tailor educational programs to the unique needs of their employees, guaranteeing everyone receives appropriate advice and assistance.

PARTICIPANT CORNER: THREE TAX TIPS THAT CAN HELP AS YOU APPROACH OR BEGIN RETIREMENT

Retirement is a whole new phase of life. You’ll experience many new things, and you’ll leave others behind – but what you won’t avoid is taxes. If you’ve followed the advice of retirement plan consultants, you’re probably saving in tax-advantaged retirement accounts. These types of accounts defer taxes until withdrawal, and you’ll probably withdraw funds in retirement. Also, you may have to pay taxes on other types of income – Social Security, pension payments, or salary from a part-time job. With that in mind, it makes sense for you to develop a retirement income strategy.

Consider when to start taking Social Security. The longer you wait to begin your benefits (up to age 70), the greater your benefits will be. Remember, though, that currently up to 85 percent of your Social Security income is considered taxable if your income is over $34,000 each year.

Be cognizant of what tax bracket you fall into. You may be in a lower tax bracket in retirement, so you’ll want to monitor your income levels (Social Security, pensions, annuity payments) and any withdrawals to make sure you don’t take out so much that you get bumped into a higher bracket.

Think about your withdrawal sequence. Generally speaking, you should take withdrawals in the following order:

  • Start with your required minimum distributions (RMDs) from retirement accounts. You’re required to take these after all.
  • Since you’re paying taxes on taxable accounts, make this the second fund you withdraw from.
  • Withdraw from tax-deferred retirement accounts like IRAs, 401(k)s, or 403(b)s third. You’ll pay income tax on withdrawals, but do this before touching Roth accounts.
  • Lastly, withdraw from tax-exempt retirement accounts like Roth IRAs or 401(k)s. Saving these accounts for last makes sense, as you can take withdrawals without tax penalties. These accounts can also be used for estate planning.

These factors are complex, and you may want to consult a tax professional to help you apply these tips to your own financial situation. You can test different strategies and see which ones can help you minimize the taxes you’ll pay on your savings and benefits.

DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial (“Lutz”), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz’s current written disclosure Brochure discussing our advisory services and fees is available upon request. Please Note: If you are a Lutz client, please remember to contact Lutz, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Lutz shall continue to rely on the accuracy of information that you have provided.

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

Financial Market Update + 2.18.2020

Financial Market Update + 2.18.2020

The U.S. dollar has been appreciating relative to other currencies, and it is nearing the highest levels since 2017. Currency movements have both direct and indirect impacts on investors…

read more
Financial Market Update + 2.11.2020

Financial Market Update + 2.11.2020

It has been a rough start to the year for oil, which has entered a bear market after falling over 20% from its early January peak. The market narrative explaining this weakness…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

115 Canopy Street, Suite 200

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850