April Retirement Plan Newsletter 2021

April Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: APRIL 12, 2021

april RETIREMENT PLAN NEWSLETTER

YOUR INVESTMENT POLICY STATEMENT IS IMPORTANT TO US

The template Investment Policy Statement (IPS) is crafted by a team of ERISA attorneys and investment professionals. Throughout the years, our organization receives myriad versions of the template IPS as edited by a vast number of clients’ in-house counsel as well as ERISA counsel. The ERISA team takes the best of the ideas and incorporates them into a revised IPS template. In essence, the template IPS is the product of hundreds of ERISA attorneys whose input is all taken into consideration.

In regard to the language of the template IPS, it is drafted to be neither too constrictive nor overly vague. An overly vague IPS leaves the reader with no understanding as to what process fiduciaries follow. In that scenario, the IPS does not help protect the fiduciary by creating evidence of a roadmap of a prudent process. Conversely, an overly constrictive IPS can cause an unwary fiduciary to accidentally run afoul of its terms. The template IPS is crafted to avoid using words like “must” throughout its provisions to avoid such a scenario.

If you have specific questions regarding verbiage, our ERISA team is happy to address them. Forward your inquiries to your financial professional.

401(K) PLAN TAX CREDIT SUMMARY

Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.

If you qualify, you may claim the credit using Form 8881 PDF, Credit for Small Employer Pension Plan Startup Costs.

Eligible employers

You qualify to claim this credit if:

  • You had 100 or fewer employees who received at least $5,000 in compensation from you for the preceding year;
  • You had at least one plan participant who was a non-highly compensated employee (NHCE); and
  • In the three tax years before the first year you’re eligible for the credit, your employees weren’t substantially the same employees who received contributions or accrued benefits in another plan sponsored by you, a member of a controlled group that includes you, or a predecessor of either.

Amount of the credit

The credit is 50% of your eligible startup costs, up to the greater of:

  • $500; or
  • The lesser of:
  • $250 multiplied by the number of NHCEs who are eligible to participate in the plan, or
  • $5,000.

Eligible startup costs

You may claim the credit for ordinary and necessary costs to:

  • Set up and administer the plan, and
  • Educate your employees about the plan.

Eligible tax years

You can claim the credit for each of the first three years of the plan and may choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective.

No deduction allowed

You can’t both deduct the startup costs and claim the credit for the same expenses. You aren’t required to claim the allowable credit.

Auto-enrollment Tax Credit

An eligible employer that adds an auto-enrollment feature to their plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the employer includes the auto-enrollment feature.

RETIREMENT PLAN COMMITTEE ACTIVITIES

A retirement plan committee consists of co-fiduciaries who are responsible for all plan management activities that have been delegated to them by their plan’s named fiduciary. 

ERISA states that the committee must act exclusively in the best interests of plan participants, beneficiaries and alternate payees as they manage their plan’s administrative and management functions. Many committees meet regularly in order to have sufficient opportunity to deal with the myriad of fiduciary functions.

All fiduciary level decisions must employ ERISA’s procedural prudence which includes documented expertise on the topic being considered and periodic review to ensure the decision remains prudent. In terms of investment selection and monitoring, qualitative and quantitative considerations should be included in the decision making process. Quantitative issues involve performance metrics and price, while qualitative issues involve the management approach, process, personnel and more. Due to the importance to both participants and plan fiduciaries, the committee must ensure that the plan’s qualified default investment alternative reflects the needs and risk tolerance of the participant demographic.

As there are many other important activities for committees, it makes sense to establish an annual calendar of topics to consider at upcoming meetings. Agenda items may include: plan goal setting & review, fiduciary investment review, fiduciary education/documentation, participant demographics/retirement readiness, fee reasonableness & structure, plan design analysis, TDF suitability, client advocacy, participant financial wellness, legal, regulatory & litigation activities, employee education, provider analysis, reporting and disclosure requirements. detailed minutes and documenting the processes for each of its decisions is also best practice for fiduciaries.

The Department of Labor [DOL] is now asking plan sponsors to provide documentation of a comprehensive and ongoing fiduciary training program for all plan fiduciaries. 

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.

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April Retirement Plan Newsletter 2021

March Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: MARCH 16, 2021

MARCH RETIREMENT PLAN NEWSLETTER

THE CASE FOR INVESTMENT REFRESH

Investment refresh is an optional extension to automatic enrollment whereby participants would be notified that, as of a certain date, their current investment allocation will be transferred to the plan’s qualified default investment alternative (“QDIA”) investment. The QDIA is frequently an age/risk appropriate target date fund (“TDF”). Any participant may opt out of this action prior to or at any time after the transfer date.

The premise underlying investment refresh is that participants do not always make prudent investment decisions. We frequently find that, although the vast majority of participants are deferring into the plan’s TDF, their prior assets often do not get transferred. This is an interesting but contradictory fact that can be attributed to a conscious act, simple neglect, or potential loss aversion, but the reality is, that it may be detrimental to the participant’s actual intent or their best interest. In addition, we also know that there is often a mismatch between the level of risk participants tell us they are comfortable with and the risk level in the actual portfolio they have constructed.

Clearly, many participants would benefit from additional assistance. Our experience tells us that investment refresh could provide significant help.

EXCESSIVE FEE LITIGATION: THE BEST DEFENSE IS COMPLIANCE

Excessive fee litigation is increasing at a steady pace and all signs are it will continue to increase. The positive side of this situation is that we now have more caselaw to consider as we work toward compliance in creating a “best defense”. Early caselaw did not reflect the consistency of court decisions. Some court rulings were in direct conflict with those of other courts, and some did not seem well reasoned.

Recent excessive fee caselaw does help us determine a more solid foundation for liability mitigation. Clearly, it is most important to have a robust process for making prudent investment decisions, as per ERISA “procedural prudence”. This has always been the case, but now we have more clarity in how this process should be conducted. Courts want to see evidence that based on the information that the fiduciaries had at the time they made their decision; a robust structured process was followed. As always, it is crucial that you follow your investment policy statement and document your process and reasons for all fiduciary level decisions.

QDIA... WHY IS IT IMPORTANT?

The qualified default investment alternative (“QDIA”) is arguably the most important investment in a plan’s investment menu. By far the most often selected QDIA investment is a target date fund (“TDF”). TDFs are typically the only investment selection that offers unitized professionally managed portfolios that reflect the participants’ time horizon today and as they go to and through retirement.

TDFs are tied to the anticipated year of your retirement. Retiring in 2035? The 2035 TDF is the easy pick. This portfolio will be professionally managed to become more conservative as you approach your retirement. This de-risking is based on an investment “glide path” which contains more aggressive investments during the participant’s younger years and utilizes more conservative investments as retirement approaches.

TDF QDIA selection is important for plan fiduciaries as well. The Department of Labor (“DOL”) has indicated that if the TDF has been prudently selected and commensurate with the plan’s participant demographics, the suite meets certain structure requirements, and required notices are provided, fiduciary liability mitigation would be available. Prudent process entails identifying your participant demographic needs. Your participant demographic need may tend towards a low-risk portfolio (e.g. participants are on track for a satisfactory retirement), or perhaps a more aggressively positioned portfolio (e.g. less savings so the need to obtain higher returns), or perhaps a multiple glidepath approach for a financially non-homogenous population.

Prudence of TDF selection is also determined by cost relative to other TDFs with similar risk levels, as well as the quality of underlying investments.

PARTICIPANT CORNER: TAX SAVER'S CREDIT REMINDER

You may be eligible for a valuable incentive, which could reduce your federal income tax liability, for contributing to your company’s 401(k) or 403(b) plan. If you qualify, you may receive a Tax Saver’s Credit of up to $1,000 ($2,000 for married couples filing jointly) if you made eligible contributions to an employer sponsored retirement savings plan. The deduction is claimed in the form of a non-refundable tax credit, ranging from 10% to 50% of your annual contribution.

Remember, when you contribute a portion of each paycheck into the plan on a pre-tax basis, you are reducing the amount of your income subject to federal taxation. And, those assets grow tax-deferred until you receive a distribution. If you qualify for the Tax Saver’s Credit, you may even further reduce your taxes.

Your eligibility depends on your adjusted gross income (AGI), your tax filing status, and your retirement contributions. To qualify for the credit, you must be age 18 or older and cannot be a full-time student or claimed as a dependent on someone else’s tax return.

Use this chart to calculate your credit for the tax year 2021. First, determine your AGI – your total income minus all qualified deductions. Then refer to the chart below to see how much you can claim as a tax credit if you qualify.

FILING STATUS/ADJUSTED GROSS INCOME FOR 2021

Amount of Credit

Joint

Head of Household

Single/Others

50% of amount deferred $0 to $39,500 $0 to $29,625 $0 to $19,750
20% of amount deferred $39,501 to $43,000 $29,626 to $32,250 $19,751 to $21,500
10% of amount deferred $43,001 to $66,000 $32,251 to $49,500 $21,501 to $33,000

 

For example:

  • A single employee whose AGI is $17,000 defers $2,000 to their retirement plan will qualify for a tax credit equal to 50% of their total contribution. That’s a tax savings of $1,000.
  • A married couple, filing jointly, with a combined AGI of $42,000 each contributes $1,000 to their respective retirement plans, for a total contribution of $2,000. They will receive a 20% credit that reduces their tax bill by $400.

With the Tax Saver’s Credit, you may owe less in federal taxes the next time you file by contributing to your retirement plan today!

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.

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April Retirement Plan Newsletter 2021

February Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: FEBRUARY 15, 2021

FEBRUARY RETIREMENT PLAN NEWSLETTER

CONTINUITY, CORONAVIRUS, ERISA, STIMULUS PACKAGE

The coronavirus relief includes a “temporary rule preventing partial plan terminations” for plan sponsors of defined contribution retirement plans. The provision specifically states, “A plan shall not be treated as having a partial termination (within the meaning of 4119(d)(3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.”

This provision allows defined contribution retirement plan sponsors to avoid the requirements that terminated participants must be 100% vested in plan benefits.  Prior to the adoption of this provision, they would have triggered partial plan termination due to layoffs, furloughs, or terminations of employment if they experienced a reduction in eligible employees equal to, or exceeding the IRS’s 20% presumptive threshold. Ultimately though, the determination of partial plan termination is a facts and circumstances test.

PRIVATE EQUITY INVESTMENTS IN DEFINED CONTRIBUTION (DC) PLANS

Private equity funds invest in privately held companies whose stock is not traded on public exchanges. Private equity fund managers expect to increase the value of their investments by providing capital and acumen for the purpose of improving performance/value of these companies.

The Department of Labor (DOL) recently released an “information letter” regarding the potential inclusion of private equity investments in DC plans. The DOL indicated that it will allow DC plans to offer indirect investment in private equity funds in certain circumstances but, questions remain, are they a good fit for your plan participants and what are the fiduciary liability implications?

The DOL guidance only covers allocation decisions made by the fund’s asset managers when private equity would be one of multiple categories of equity investments within the fund (e.g., target date funds). The guidance does not cover a defined contribution plan allowing individual participants to invest their accounts directly in private equity investments. Further, the guidance was clear that investments in private equity investments present substantial legal and operational issues for fiduciaries of ERISA individual account plans. One issue concerns the typical multiyear holding period for portfolio companies and the challenge in providing an accurate stock valuation before a sale.

The DOL letter states that plan fiduciaries considering a private equity investment option in multi-asset class funds should consider:

  • Whether the fund has managers with “the capabilities, experience, and stability” to handle
    private equity
  • Whether the proportion of the fund’s allocation to private equity investments is appropriate based on the “cost, complexity, disclosures, and liquidity” considerations
  • Whether the fund has “adopted features related to liquidity and valuation” that give participants the ability to move their investment allocations “consistent with the plan’s terms”
  • The fund suitability in light of the plan’s “participant profile,” including their ages, contribution and withdrawal tendencies

These considerations are somewhat interpretational and can lead to issues which create potential fiduciary liability.

When considering the inclusion of any investment the plan fiduciary must act with skill, care, and due prudence in determining the suitability for participants. This responsibility applies even more importantly for private equity investments, whether a single or multi-asset investment option.

COMMON FIDUCIARY ERRORS

An ounce of prevention is worth a pound of cure. This saying is universal, and certainly applies to fiduciary responsibility. Beginning the year with an eye towards avoiding some of the most common errors makes sense. Most fiduciary errors are unintentional or even well meaning. Here are some examples.

 

Following Plan Documents and Communicating Changes

Possibly the most frequent source of fiduciary breach, interpretation of plan provisions is not always intuitive. The remittance of participant deferrals “as soon as administratively possible” means as soon as possible, not as soon as convenient. A common response when a plan administrator is asked how they determined applicability of a specific plan provision (e.g., eligibility for employer match) is “the prior administrator told me how to do it”. This response does not necessarily instill confidence that it is being handled correctly. Many administrative errors go on for years, and every year not corrected is another fiduciary breach. A common example is the management of plan forfeitures (non-vested assets left in plan by a terminated participant). The rule is to allocate these assets annually at years end. This can be a costly and administratively cumbersome correction, but all too often it’s not accomplished annually which violates the rule forbidding plan unallocated assets.

The definition of compensation in the plan document may not be the same definition used by your payroll department/service. Furthermore, many plans and employers have different naming conventions for the various money types: deferrals, employer match, bonuses, pre-tax health insurance premiums, FBA plan, commissions and tips, or fees for professional services may be included as compensation. When plan documents are changed or updated, compensation administration needs to follow.  It is a good idea to check this periodically to ensure consistency.

Participant loans are another area that can cause issues, especially if more than one loan is allowed at a time or loan payback is allowed to continue post termination of service.

Often, plan operations do not match up with the plan terms. This includes the terms in plan documents, the summary plan description, loan procedures, and an Investment Policy Statement (IPS).

Changes in the plan should be communicated to plan participants. A summary of material modifications should be given to plan participants within 210 days after the end of the plan year in which the modifications were adopted.

 

Participant Eligibility

Plan documents should have a definition of employees (hours worked or elapsed time) and the requirement for eligibility to participate and employer contributions. The manner in which hours are calculated, hiring dates, or compensation calculations could be problematic. ERISA does not recognize the term “part-time employee.” It strictly takes into consideration hours worked or elapsed time to determine eligibility for deferrals and employer match. In addition, the SECURE Act just created additional requirements as regards long-term part-time employees’ eligibility.

 

ERISA Reporting and Recordkeeping

Employers are required to maintain records relating to employee benefit plans per ERISA. Record maintenance varies by type of document for both plan level and participant level records. Plans with 100 participants or more must file Form 5500 Annual Returns/Reports of Employee Benefit Plan and conduct an annual audit. Smaller plans must also file annual reports, with plans with less than 100 participants filing Form 5500-SF.

 

Investment Policy Statement

Maintaining and following an IPS is of utmost importance. There have been successful lawsuits where an employer acted in the best interest of participants, but IPS had requirements that the fiduciaries failed to follow to the letter and the result was costly to plan sponsors.

 

Understanding and Discharging ERISA Fiduciary Responsibilities

Many plan sponsors and fiduciaries are not fully aware of their roles/responsibilities. ERISA law pertaining to DC plans is quite complex and sometimes unintuitive and unclear (What does “procedural prudence” really mean?). Our Fiduciary Fitness Program is designed to gauge the fiduciary health of your plan, explain applicable fiduciary mitigation strategies, and to remedy, and hopefully avoid, fiduciary breaches. It is quite comprehensive, clear, and includes the ERISA required documentation

 

Correcting ERISA Compliance Mistakes

Many ERISA compliance problems can be corrected through voluntary compliance programs, when detected early by the plan, to reduce the potential for fines and penalties. The Department of Labor has the Delinquent Filer Voluntary Compliance Program (DFVCP) and the Voluntary Fiduciary Correction Program (VFCP). Through these programs, Plan Administrators can file delinquent annual reports through the DFVCP, and the VFCP allows fiduciaries to take corrective measures resulting from certain specified fiduciary violations for relief from enforcement actions. In addition, the Internal Revenue Service (IRS), through the Employee Plans Compliance Resolution System (EPCRS), has both the Voluntary Compliance Program (VCP) and Self Correction Program (SCP) which allow plan sponsors and other plan fiduciaries to correct failures in the plan’s operational compliance prior to being discovered by the IRS.

The best answer to these concerns is to avoid fiduciary breaches. Financial professionals can often detect the possible emergence of potential fiduciary breaches before they manifest and consult on options to avoid these breaches altogether.

PARTICIPANT CORNER: DON'T SKIP THE MATCH

This month’s employee memo encourages employees to conduct a regular examination of their retirement plan to determine whether any changes need to be made. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com.

Participant Memo: Don't Skip the Match

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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April Retirement Plan Newsletter 2021

January Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: JANUARY 13, 2021

January RETIREMENT PLAN NEWSLETTER

3(38) ADVISORY SERVICES - SHOULD FIDUCIARIES OUTSOURCE RETIREMENT PLAN INVESTMENT RESPONSIBILITY?

Department of Labor (DOL) enforcement recoveries are on the rise. A recent DOL report indicates that DOL recoveries have doubled since 2018 and tripled since 2016 (https://www.investmentnews.com/dol-retirement-plan-recoveries-198660).  As a result, fiduciary liability premiums have increased 35% since last year (https://www.investmentnews.com/fiduciary-insurance-costs-401k-litigation-198407).

Fiduciaries are personally responsible for participant losses resulting from a fiduciary breach. Plan sponsor fiduciaries who handle plan investments themselves, or use advisors who do not assume fiduciary status, face potential exposure for both investment performance and all plan fees.

The Employee Retirement Income Security Act of 1974 (ERISA) specifies that any plan fiduciary level decision must be informed by expertise. Most plans do not have a credentialed investment expert on committee (if they do, that individual is typically not amenable to accepting the responsibility and liability involved). Plan sponsors who are wont to mitigate this liability for investment decisions (investment menu structure, selecting and monitoring plan investment options) have specific options available under ERISA.

 

ERISA 3(21) Investment Advisor

The most utilized mitigation option and perhaps most suitable for many plans is hiring an ERISA 3(21) investment advisor. An advisor acting in a 3(21) capacity is responsible for delivering unbiased prudent investment recommendations regarding the selection, and ongoing monitoring of plan investments. The DOL has made clear that it is the responsibility of the plan investment fiduciaries that the final selection be commensurate with their participants’ needs. Your advisor has access to a Qualified Default Investment Alternative (QDIA) selection tool. This tool is used to determine and document the participant demographic investment appropriateness for a QDIA, thus eligible for a fiduciary “QDIA safe harbor”. This same tool can also aid in making an appropriateness determination for individual investments as well.

 

ERISA 3(38) Investment Advisor

Section 402 of ERISA allows plan fiduciaries to delegate investment responsibilities to, what ERISA calls, a “named fiduciary.” This named fiduciary is a 3(38) investment advisor who assumes all responsibilities for selection, monitoring, and participant demographic appropriateness for plan investments. The company is then left with only monitoring that the advisor retains a prudent analytic process (e.g., their analytic process does not deteriorate substantially from its original prudent level). The 3(38) advisor needs to work with the client to determine investment appropriateness on issues such as risk, expense, and style appropriateness, but once accomplished, substantially more meeting time is available for other important topics like fiduciary education, plan success, participant retirement readiness, and more.

FORMER EMPLOYEES WITH PLAN ASSETS ARE STILL PLAN PARTICIPANTS

Plan Sponsors should understand that terminated employees who left their account balance in your plan, are still considered participants under ERISA. As such, they have the same rights as current employees. They cannot contribute to their account under the plan but otherwise they have the same ERISA protected rights as plan participants.

One protected right is to receive all ERISA required notices that current participants receive. The distribution of notices to former employees can be challenging. With online notice distributions now allowed, it may ease this problem a bit, but losing track of former employees through undeliverable mail or emails can be troubling.

Participant direction of investments and notice of investment changes is another obligation that is more difficult with terminated employees. A fundamental fiduciary responsibility is to provide sufficient investment information such that participants can make consistently informed investment decisions. In the event the stock market goes through a bear market cycle, former employees may become disgruntled if they did not receive proper and required investment information based on which they may have prevented financial losses.

Small account balances belonging to former employees can be problematic for plan providers as well as plan fiduciaries. This can lead to greater administrative recordkeeper costs. In addition, having terminated employees in your plan may cause your plan to be subject to an annual plan audit at a potential cost of around $15,000.

One step many plans take to mitigate this exposure to some extent is to adopt a cash-out limit (usually $1,000 or $5,000). With a cash-out limit, terminated participant accounts may be distributed after communicating that they need to take a distribution directly or a rollover to an Individual Retirement Account or another qualified plan. For participant accounts in excess of $5,000 you must obtain consent from employees requesting to take their account balances out of the plan. It is advantageous for plan sponsors to persistently reach out to former employees to request they take their money out.

The Department of Labor (DOL) has been focused on missing participants with dormant accounts. As with any fiduciary task as part of your annual request that former employees take their money it is advisable that all correspondence (both sent and returned) be documented to evidence your communication efforts. Internet searches can be helpful to find those who leave no forwarding address.

SHOULD YOU ADOPT A PLAN COMMITTEE CHARTER?

Yes!

The primary purpose of a committee charter is to document overall plan governance. It is not dissimilar to how your Investment Policy Statement (IPS) acts as a “roadmap” for managing your plan investments. The charter also documents delegation of fiduciary responsibilities from the plan’s “named fiduciary” to
co-fiduciaries. Even small plans with a single fiduciary who makes all plan management decisions can benefit from having a plan governance document.

But simply having a committee is not sufficient. Per ERISA, a retirement plan governance committee charter sets out the committee’s goals and responsibilities. It should include certain specific fiduciary principles, such as managing the plan for the exclusive benefit of participants; practicing ERISA’s procedural prudence; adhering to the plan document; and ensuring proper diversification of investment options.

Committee members should sign the charter initially stating that they understand and accept responsibilities as a plan fiduciary, and resign when retiring from the committee if they remain with your company.

 

What is a Named Fiduciary?

Every plan document is required to identify the plan’s “named fiduciary”. This can be a specific individual, an entity, or most frequently, “the company” can be the named fiduciary. “The company” as the named fiduciary denotes the main decision-making person or entity (e.g., the party with authority to adopt the plan). For a “C Corporation” this would be the board of directors. The board of directors, as the named fiduciary, can never delegate all its fiduciary responsibility, but via committee charter it can delegate nearly all plan fiduciary responsibilities (except the responsibility of prudently selecting and monitoring the plan’s committee members, who serve as fiduciaries) to co-fiduciaries (e.g., committee). As a result of this monitoring requirement, the committee needs to keep the board (named fiduciary) informed of its activities and to approve its recommendations on key items which may not have been delegated.

 

Who, What, When and Why of the Committee

Given the high level of the committee’s responsibility, a representative of top management should play a key role on the committee.

The number of committee members varies, but one should consider having an uneven number of committee members to avoid any voting ties. Typically, medium, and larger plans committees will have 3, 5, or 7 members. Some plans will have a separate investment committee if in-house investment knowledge is available in house. It is important that committee members can make a contribution, and are agreeable, to participating in committee activities.

Most medium and larger plan committees will meet with their plan advisor on a quarterly basis discussing and documenting topics covered such as: investments, participant behavior/retirement readiness, funding, administration, plan goals/objectives, plan administrative processes and general plan management. Committees may occasionally invite a third party to a meeting who represents a specific plan function (plan administration, representing a specific employee group, CEO, etc.).

It is expected that all committee members attend meetings regularly. Those that do not, or otherwise demonstrate a lack of commitment to their role, should be considered for potential removal and or replacement. If a member with specific expertise important to the plan leaves the committee, they need to be replaced by someone with the same expertise.

All committee topics and decisions should be thoroughly and carefully, in accordance with ERISA procedural prudence, and then documented in committee meeting minutes. If the decisions have an ongoing impact on the plan those decisions should be reviewed periodically to insure their continued prudence.

All committee members should receive training on their fiduciary responsibilities under ERISA, their liabilities (and mitigation strategies), plan operations and plan administration. During an annual plan audit (required for plans with 100+ participants) or a DOL investigation, it is typical for evidence of the frequency of fiduciary training for committee members be requested.

ERISA requires retirement plan fiduciaries to exercise their authority “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” This standard of “…a prudent person acting in a like capacity and familiar with such matter…” means having or obtaining expertise pertaining to each matter under consideration. As an example, when considering an investment decision, credentialed investment expertise is a best practice whether in-house or with a credentialed fiduciary plan investment advisor.

 

Personal Financial Fiduciary Liability Mitigation

As a plan fiduciary you may become personally financially liable for any breach of duty that causes financial detriment to your plan participants. Retirement plans that operate without a coherent governance structure are susceptible to mismanagement potentially incurring personal financial legal liability for imprudent or ill-informed decisions. There are effective strategies for mitigation this potential liability. Understanding your ERISA fiduciary responsibilities, liabilities, clearly and administering your plan document accurately are most important.

Obtaining ERISA fiduciary liability insurance and/or company indemnification should be considered.

By creating an effective plan governance committee, including ongoing fiduciary education, your plan management can operate effectively for the benefit of plan fiduciaries and plan participants.

PARTICIPANT CORNER: RETIREMENT PLAN FACTS

Your employer provides you with a retirement plan for you to save money in, tax-deferred, for the day you bid your career farewell and enter into retirement. It’s important for you to know the facts about your plan, so you can maximize its saving potential. Here are essentials to know about your retirement plan:

 

What is it?

A defined contribution plan designed to help you finance your retirement. As a participant in the plan, you own an individual account within the plan that you contribute money to for your retirement.

 

What are the limits?

For the year 2021, you can contribute a total of $19,500 towards your retirement plan. Individuals age 50 and over can contribute an additional $6,500.

 

Salary deferral advantages.

By participating in the plan you receive the benefit of saving via payroll deduction on a tax-deferred basis. Tax deferral on both savings and asset growth via payroll deduction helps you save more money and pay less tax upon distribution at retirement.

 

Tax-deferred growth.

Not being taxed on the growth of your assets helps accumulations during your working years. With your qualified retirement savings plan, you not only defer taxes on the amount you save, but earnings on your savings is also tax deferred until distribution.

 

Employer contributions.

If offered, they help you accumulate assets for retirement and can add considerably to your retirement account balance. You are also not taxed on your employer’s contributions until distribution.

 

Portability.

If you change employers at some point in your career, you typically can keep your assets in the current plan, roll your assets over to your new employer’s plan or roll your assets into an IRA.

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.

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Chris Wagner Awarded NAPA’s 2021 Top Retirement Plan Advisors Under 40

Chris Wagner Awarded NAPA’s 2021 Top Retirement Plan Advisors Under 40

 

LUTZ BUSINESS INSIGHTS

 

chris wagner awarded napa’s 2021 top retirement plan advisors under 40

Lutz, a Nebraska-based business solutions firm, is excited to announce that Chris Wagner, Investment Adviser at Lutz Financial, has been selected as one of the National Association of Plan Advisors (NAPA)[1] 2021 Top Retirement Plan Advisors Under 40![2]

The NAPA Top Retirement Plan Advisors Under 40 award, nicknamed the “Aces,” was established in 2014. Since then, it has grown to become a standard-setting industry list. The recipients of this award are widely viewed as the future leaders in the retirement plan advisor industry.[3]

This year, NAPA received a record number of nominations, more than 600, designated by the NAPA Broker-Dealer/RIA Firm Partners. Each candidate was vetted by a blue-ribbon panel of senior advisor industry experts based on a combination of quantitative and qualitative data submitted by the nominees, as well as a broker-check review.[4]

“We are proud to congratulate Chris on this outstanding achievement! Chris’s leadership, along with the growth and success of our Retirement Plan Services department at Lutz Financial, have been driving factors in achieving this award. This recognition is a testament to the value of his expertise and the work he does. We are grateful to have Chris as part of our team and applaud this well-deserved accomplishment,” said Jim Boulay, Investment Adviser and Managing Member of Lutz Financial.

View the full list of Top Retirement Plan Advisors Under 40 at https://www.napa-net.org/2021-aces-top-100-retirement-plan-advisors-under-40.

Learn more about Lutz’s Retirement Plan Services by visiting https://www.lutz.us/services/lutzfinancial /retirement-plan-services/.

 

[1] The National Association of Plan Advisors is a non-profit professional society and an affiliate organization of the American Retirement Association created by and for retirement plan advisors.  Read more about what differentiates NAPA from other trade associates here: https://www.napa-net.org/about-us.

[2] Established in 2014, the NAPA Top Retirement Plan Advisors Under 40 (unofficially, “young guns”) list, rebranded “ACES”, “is based upon applications received from nominees designated by NAPA Broker-Dealer/RIA Firm Partners”.  See, https://www.napa-net.org/2021-aces-top-100-retirement-plan-advisors-under-40

[3] https://www.napa-net.org/2021-aces-top-100-retirement-plan-advisors-under-40

[4] https://www.napa-net.org/2021-aces-top-100-retirement-plan-advisors-under-40

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April Retirement Plan Newsletter 2021

December Retirement plan newsletter 2020

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: DECEMBER 14, 2020

DECEMBER RETIREMENT PLAN NEWSLETTER

MESSAGE FROM JOEL SHAPIRO

Every year around this time I sit down to craft a letter wishing you joy and happiness around the holidays and the shift to a new year. This year feels substantially different. This year feels like it requires something deeper, and perhaps even more personal, than mere wishes of good tidings. 2020 feels like it requires recognition.

Please know that I recognize that you’ve had to make personal, professional, or business sacrifices this year. I understand that this year may have included physical, mental and emotional stress. That it may not have been the year of joy and happiness that I wished for you at this time last year. Let me also recognize that you and your organization are still here. And that I recognize the efforts all have made to be so. If you did have to sacrifice, allow me to wish that the sacrifice pays off down the road.

2020 has been a year of change, of pivoting, of evolution.  I recognize that all of those elements may at times be maddening. We have all conducted ourselves in a manner to best adapt to the changing landscape. I wish that the changes be recognized for newly created efficiencies and growth, for where they’ve spurred creativity within our lives and businesses, and for prosperity to blossom out of the necessity therefor.

Finally, I recognize the continued trust you place in us as your trusted advisors.  I recognize the importance of your partnership in an increasingly volatile world. The value of your people, and the sanctity of the job we perform to help keep you and your team safe, as well as to help your employees strive for retirement with dignity. I appreciate the friendships our teams have built and continue to foster. And I recognize your desires, hopes for your career, your employer, and your family.  Thus, on behalf of all of us, I renew my wishes from prior years for health, happiness, prosperity, and safety.

 

I wish you all warm holidays and a strong 2021.

Best, 

Joel B. Shapiro

POST-ELECTION INVESTMENT COMMENTARY

Stock markets abhor uncertainty. Currently, investment prognosticators are interpreting the election results to create a relatively “stagnant” legislative environment. This opinion is based primarily on the Senate remaining in Republican control with the presidency Democratic. The anticipated stagnation connotes a more predictable investment environment. Clearly, the stock market has recently responded overwhelmingly positive (as of 11/10/20), to the reduced potential of increased taxation along with the greater likelihood of additional COVID-19 aid and economic stimulus.

This leaves some investors with an instinctual response to grow their equity exposure. However, the biggest risk investors face at this time is changing their investment course and getting it wrong. It remains important to keep focus on the long-term horizon, which no one can predict with much accuracy. The potential future variables that can impact markets are limitless. The impact of the pandemic and potential ensuing lockdowns is clearly one significant unknown.

What is a prudent investor to do? Assuming you are appropriately diversified, remaining so may be your best response.

Those initiating portfolio changes now based on campaign rhetoric should consider that the proposed policy changes may not materialize in current proposed form. If some do, it is difficult to assess which policies may be implemented and how they may affect the markets both US and internationally.

Long-term investing success is a function of innovation, economic growth, interest rates, productivity, and factors we may not currently foresee. Maintaining an appropriately diversified, low cost investment strategy which is properly funded, may not be exciting or pacifying today, but it most likely will provide financial success in the long term.

CYBER SECURITY ISSUES FOR PLAN SPONSORS

The Department of Labor is working on a guidance package addressing cybersecurity issues as they relate to plan sponsors and third-party providers.

Tim Hauser, Deputy Assistant Secretary for DOL’s Employee Benefit Security Administration (EBSA) has indicated that we should expect more focus in the department’s investigations of the adequacy of various cybersecurity programs to confirm that service providers plan sponsors hire are practicing effective cybersecurity practices.

Mr. Hauser also indicated that the forthcoming guidance would be informal, and not a formal notice and comment.

Plan Sponsor Considerations

The DOL expects there to be questions asked when hiring a TPA or record-keeper.

  • What practices and policies do the service provider have to ensure their systems are secure?
  • Does the service provider have regular third-party audits by an independent entity?
  • How does the third party validate their systems cybersecurity?
  • Is there any history of cybersecurity incidents?  If so, what is their track record?
  • What did they learn from any prior incidents, and how have they improved their defensive processes?
  • Do they indemnify their clients in event of security systems breaches that result in losses?
  • Do they have insurance policies to make you whole and cover breaches, or do they have all sorts of waivers and exculpatory clauses in their contracts? 

In the event a security breach is identified and an offender has achieved access to confidential information, the plan sponsor should produce a documented response, including notifying law enforcement, the FBI, the plan and their participants. Once an official final guidance package is made available, we will share that information with you.

ANNUAL RETIREMENT PLAN NOTICES

 It is that time when plan sponsors need to send annual notices to participants. The 401(k) safe harbor, qualified default investment alternative (“QDIA”), and automatic enrollment notices must all be sent to plan participants between 30-90 days before the beginning of the plan year (i.e., no later than December 2nd for calendar year end plans), and may be combined into a single document.

401(k) Safe Harbor

Plan sponsors of safe harbor matching contribution plans can retain the flexibility to reduce future contributions by issuing “maybe not” language in their annual 401(k) safe harbor notice.

Prior to this year, safe harbor non-elective contribution plans had to be in place as of the first day of the plan year and were subject to the safe harbor notice requirements. Effective beginning January 1, 2020, not only can a 401(k) plan be converted into a safe harbor non-elective plan at any time during the plan year or even during the following plan year, but the notice requirement has been eliminated. Generally, safe harbor plans can make a mid-year reduction or suspension of a safe harbor contribution, but only if the employer is either (1) operating at an economic loss, or (2) had already provided a “maybe not notice”. As a result of the economic downturn created by COVID-19, the IRS issued temporary relief from this limitation on suspensions.

QDIA

If your plan contains a QDIA, you must provide an annual notice to all participants who were defaulted or may be defaulted into the QDIA in order to retain this fiduciary protection. Many plan sponsors send the notice to all plan participants.

Automatic Enrollment

If your plan contains an automatic enrollment feature, you must send an annual notice describing the automatic enrollment to all participants who have been or will be automatically enrolled and haven’t made an affirmative election to change their deferral percentage.

PARTICIPANT CORNER: THE 10% SAVINGS GOAL

Most people need to save more — often a lot more — to build a nest egg that can meet their needs. Many financial experts recommend putting away 10 to 15 percent of your pay for retirement. There’s a relatively painless way to reach that goal.

Take small steps

  • Begin by contributing enough to receive your employer’s matching contribution
  • Consider gradually raising your contribution amount to 10 percent or higher
  • Raise your plan contributions once a year by an amount that’s easy to handle, on a date that’s easy to remember—say, 2 percent on your birthday. Thanks to the power of compounding (the earnings on your earnings), even small, regular increases in your plan contributions can make a big difference over time.

A little more can mean a lot

Let’s look at Minnie and Maxine. These hypothetical twin sisters do almost everything together. Both work for the same company, earn the same salary ($30,000 a year), and start participating in the same retirement plan at age 35. In fact, just about the only difference is their savings approach:

Minnie contributes 2 percent of her pay each year. Her salary rises 3 percent a year (and her contributions along with it), and her investments earn 6 percent a year on average. So, after 30 years of diligent saving, Minnie will reach retirement with a nest egg worth $68,461.

Maxine gets the same pay raises, saves just as diligently, and has the same investments as her sister—except for one thing: She starts contributing 2 percent, but raises her rate by 1 percent each year on her birthday until she reaches 10 percent. She will keep saving that 10 percent for the next 22 years, until she retires by Minnie’s side.

Maxine tells Minnie that she’s never really noticed a difference in take-home pay as her savings rate rises. Instead, she looks forward to having $285,725 in her retirement fund by age 65.

Think ahead and act now. To increase your deferral percentage, contact your HR department today.

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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