July Retirement Plan Newsletter 2021

July Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: JULY 19, 2021

JULY RETIREMENT PLAN NEWSLETTER

BITCOIN: COMING TO A 401(K) PLAN NEAR YOU?

Our 2018 report on Bitcoin (BTC), and the conclusions therefrom, remain relevant today. In short, the prudence in adding Bitcoin to a retirement plan is questionable, at best. Please see our past Retirement Times article on BTC (link here) discussing the cryptocurrency and its supporting technology. Greater media coverage has caused BTC interest to grow exponentially, as has its meteoric rise in price.

Currency, let alone cryptocurrency, lacks intrinsic value, and does not provide dividends or income. The absence of intrinsic value, dividends, or income makes currency a less than ideal investment option because price becomes more a function of supply verses demand. Thus currencies are difficult to value and develop a long-range return forecast.  Newer currencies like BTC contain elements of speculation because their approaches, adoption and technology are unproven. This can lead to tremendous volatility (see this discussion in our previous article), making them risky options for even the most sophisticated investors. U.S. Department of Treasury Secretary Janet Yellen recently issued a warning, stating that “(BTC) is a highly speculative asset, and you know I think people should be aware it can be extremely volatile and I do worry about potential losses that investors can suffer.”

BTC had taken early root among a variety of communities. Some saw it as a means of independence from governed societies’ financial systems while others believed it to have more diverse uses such as a way for an alternative currency to reach emerging markets, an opportunity for more seamless electronic payments, and the facilitation of anonymous transactions. The anonymity use-case which has driven BTC’s adoption is in turn subject to significant sustainability risk as more federal governments and nation states look to exert more control and regulation over these currencies. In fact, this may be the only way for cryptocurrency to be adopted en masse.

When it comes to building sound retirement portfolios, investing in assets that have intrinsic value and produce dividends and income continue to be the best strategies for those looking for outcomes that are more consistent and predictable. This not only applies to defined benefit investors looking to achieve some level of return or target a certain funded status, but to participants in defined contribution plans as well. If a plan decided to add cryptocurrencies to their fund offering, most participants do not possess the knowledge or expertise to make an informed and prudent allocation to this option. This would potentially open the door to fiduciary liability on behalf of plan sponsors who are responsible for monitoring designated investment alternatives made available to participants. Furthermore, from an administrative standpoint a lot of grey area persists. The infrastructure required to custody this type of asset is something most plan administrators lack at present.

To reiterate our conclusion from our first BTC article; while the innovative technology and recent returns can make this an exciting story to follow, the fiduciary considerations, wild valuation swings and uncertainty on several fronts make it clear: in building retirement portfolios it’s best to continue to watch BTC, and cryptocurrencies in general, from the sidelines, for now.

7 WAYS TO REDUCE FIDUCIARY LIABILITY

In 2020, nearly 100 lawsuits alleging breach of fiduciary duty were filed. And with the number of 401(k) lawsuits on the rise targeting plans both large and small, sponsors are well-advised to consider taking additional measures to mitigate fiduciary risk where practicable. Here are a few to consider.

  1. Create and follow an IPS. While not an ERISA requirement, an investment policy statement (IPS) is considered a best practice according to Department of Labor (DOL) guidance. Among other things, it outlines how the organization will maintain and follow prudent processes for selecting and monitoring investments and oversee the performance of third-party providers. However, be advised that failure to follow IPS provisions can also expose an organization to increased risk, so careful crafting of IPS language is crucially important.
  2. Outsource fiduciary responsibilities. While a 3(21) fiduciary acts in an advisory capacity, plan sponsors can hire a 3(38) fiduciary to maintain full authority and discretion over investments and take on the liability for managing them on a regular basis. Sponsors, however, must still conform to ERISA standards and follow a prudent process when engaging a 3(38) fiduciary (including monitoring them on an ongoing basis).
  3. Obtain fiduciary liability insurance. This type of coverage is designed to protect companies from investment mismanagement claims and fiduciary legal liability. Such policies can protect both the organization as well as named fiduciaries, covering legal costs in the event of a 401(k) lawsuit. With the recent escalation of litigation, fiduciary liability insurance costs have also been on the rise, along with greater limitations in coverage.
  4. Document, document, document. Keep detailed records of the prudent processes your company follows, from investment selection to fee benchmarking to ongoing fiduciary education and training. This documentation can strengthen your case in the event of a lawsuit.
  5. Meet the safe harbor requirements of ERISA Section 404(c). This provision offers a “safe harbor” which if met relieves plan sponsors and fiduciaries from liability for losses arising from participant-directed investment. But to qualify, the plan must satisfy several a myriad of requirements pertaining to matters such as investment options, plan design and administration, as well as participant disclosures. Luckily the majority of these responsibilities are taken care of by top tier recordkeepers and/or third party administrators.
  6. Take advantage of QDIA protections. In Section 624 of the Pension Protection Act of 2006, the DOL established the qualified default investment alternative (QDIA) safe harbor that allows for default investments to be made on behalf of participants who fail to make investment elections. QDIAs can include a target date fund, balanced fund or professionally managed account. Other regulatory requirements must also be satisfied to enjoy safe harbor relief from fiduciary liability for QDIAs, including the use of prudent QDIA selection criteria, participant notification, and regular monitoring of investment performance.
  7. Class-action waivers and arbitration agreements. These plan document provisions require participants to undertake fiduciary breach litigation on an individual basis and prohibit the filing of legal actions in court (versus arbitration). Ideally, such clauses are included at the inception of the plan, as when added as amendments, the sponsor may have to later demonstrate that participants were made aware of the change. In cases where employees have already separated from the company, this may prove difficult.

Don’t assume your plan is too small to be vulnerable to litigation risk. Creating layers of protection based on plan design features, documentation and adherence to prudent processes, fiduciary outsourcing and insurance coverage can help mitigate fiduciary liability.

 

Sources

https://www.investmentnews.com/401k-lawsuits-explode-2020-200121

https://sponsor.fidelity.com/pspublic/pca/psw/public/library/manageplans/invest_policy_considerations.html

https://money.usnews.com/financial-advisors/articles/guide-to-fiduciary-liability-insurance

https://401kspecialistmag.com/4-key-steps-plan-sponsors-can-take-to-guard-against-401k-lawsuits/

https://www.investmentnews.com/fiduciary-liability-unclear-when-selecting-and-monitoring-default-retirement-investments-65247

TO BUNDLE OR NOT TO BUNDLE - WHAT'S BEST FOR YOUR BUSINESS IS THE QUESTION

Whether to use bundled or unbundled service providers is an important decision for your retirement plan. A fully bundled arrangement provides an easy, one-stop shop for services, while unbundling separates functions and uses a third-party administrator (TPA), distinct from the recordkeeper. While there is no right or wrong answer to this question, weighing the advantages of each option against the needs of the organization is essential.

 

The Benefits of Bundling

Convenience and simplicity.

Often less complicated than dealing with multiple vendors, bundling may be a better choice when convenience is key. Bundling offers a comprehensive all-in-one solution, which can make it a more efficient and easier-to-manage option for many businesses.

Cost-effectiveness.

Organizations can realize significant savings by bundling services when the cost of administrative and recordkeeping services is offset by management fees. But this is not always the case, so be sure to compare the “all in” costs when deciding.

Time savings.

With a bundled arrangement, you do not have to take time to research and engage multiple providers since all services are consolidated under one umbrella. And you never need to spend time figuring out who to call when you have concerns about your plan — you will have a single point of contact for all your questions.

 

The Upside of Unbundling

Greater flexibility and choice.

Bundled providers do not allow you to select experts for each service individually, while unbundling gives you the freedom to choose the ones best suited to your organization’s particular needs. A bundled provider may be strong in one area, but not perform across all services equally. While engaging vendors independently can involve a bit more work, you may find doing so well worth the time and effort.

More complex and customizable plan design.

Third-party administrators generally have a greater capacity to craft a plan tailored to meet an organization’s specific goals — one that can better adapt to changing business conditions while complying with regulatory requirements. A TPA made-to-order plan can be particularly helpful when an employer’s needs are more complex and require more sophisticated plan design features. Bundled providers, on the other hand, may use more of a boilerplate approach, resulting in a plan that doesn’t fully align with all business objectives.

Increased agility.

Even if you think the approach you have settled on is ideally suited to your needs, those needs may change over time. Or you may discover that an aspect of the overall service fails to meet expectations. With an unbundled arrangement, you can change up individual providers as needed, without having to upend your plan and start over from scratch, enabling an organization to be nimbler.

 

Decisions, Decisions

While the trend has been decidedly in favor of unbundling services in recent years, particularly among larger plans, which arrangement works best varies depending on the organization. Choose the option that provides the flexibility and customization — or ease and convenience — best suited to your situation.

 

Sources

https://www.plansponsor.com/partial-bundling-overtakes-full-bundling-retirement-plan-services/

http://www.401khelpcenter.com/401k_service_models.html#.YLDori2ZOog

PARTICIPANT CORNER: ARE YOU SABOTAGING YOUR RETIREMENT?

Saving for retirement can be intimidating, but it doesn’t have to be. Finding reasons not to contribute to your retirement plan will hurt you in the future.

Do any of these excuses sound familiar?

If you think… Then Consider…
“I don’t make enough money.” Tax Savings. Your contribution is taken out before taxes, so the amount you pay taxes on is lower.
“I’m too young to worry about it right now; time is on my side.” The magic of compounding. 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.
“I’m too old, it’s too late.” It’s never too late. If you’re 50 years old or older, you can contribute a catch-up deferral of up to $6,500 for 2021.You still have time to put your money to work for you.
“Stock, bonds…it’s too confusing!” There is an easier way! Your plan may have the option to invest your money in a “pre-set” asset allocation or lifestyle model that takes into account your expected retirement date or age. It’s a “set it and forget it” approach and works well for the less sophisticated investor.
“I’ll still have my Social Security.” Don’t count on it. A dwindling workforce means fewer tax dollars down the road. In just a few years there will be two workers per every one retiree.
“I just don’t know how to get started.” Help is available. Understand how to being saving for retirement might be overwhelming, but it’s easier than you think. Contact Human Resources for an enrollment form or call our Retirement Financial Professionals, [FIRM], at [Phone] for more information.
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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July Retirement Plan Newsletter 2021

June Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: JUNE 7, 2021

JUne RETIREMENT PLAN NEWSLETTER

WHAT IS THE STATUS ON ALLOWING 401(K) MATCH FOR STUDENT LOAN PAYMENTS?

A newly proposed Senate bill by Senate Finance Chairman Ron Wyden, would enable participants to continue saving for retirement while repaying their student debt even in the event that they can’t afford to make their own contributions to a 401(k) plan. This feature could be offered at the option of the employer and would apply only for expenses pertaining to higher education.

Also, student loan payments would be eligible to earn “matching” 401(k) retirement contributions from employers under a bill introduced on Thursday, April 29 by Senate Finance Chairman Ron Wyden.

You may recall that last year, the U.S. froze payments and interest for all federal student loans in response to the coronavirus pandemic. Those protections are expected to remain in place at least through the end of September.

CAVEAT GUARANTOR

Retirement income products, or in-plan annuity options, have been available for over a decade but their utilization has been stagnant due to concerns about price, portability, and convertibility. With the recent market volatility in 2020 and recent passing of the SECURE Act, we have seen an industry push towards the research, development, and implementation of what are now referred to as “guaranteed income products.”

 

How should plan fiduciaries select and monitor these products?

Guaranteed income products bridge the gap between defined benefit and defined contribution plans. The last point of interest for these types of products occurred circa 2012, when the Department of Labor (DOL) last released guidance and brought this need to the surface. While there was little uptake at the time due to high prices and participant risk in the case of plan conversion, we are now able to revisit these concerns with some alleviation from the SECURE Act. At present fiduciaries are waiting with bated breath for the safe harbor guidance to be issued by the Department of Labor.

 

How do Retirement Income products work?

Many large recordkeepers and insurance companies offer, or are beginning to offer, retirement income products in one of three major categories: guaranteed lifetime withdrawal benefit (GLWB), immediate income annuities, and managed payout products.

                                    

 

Guaranteed Lifetime Withdrawal Benefit (GLWB)

GLWB products, true to their name, guarantee a participant to receive fixed payments for the span of their lifetime. In common practice, these products are linked to a target date series and overlayed with insurance contracts that guarantee the payout, regardless of market conditions. Participants who opt into a GLWB will make per-pay-period contributions to the product and will see it grow in coordination with the associated target date fund. The participant contributions and growth are aggregated and referred to as an income base, in which the value of the insurance contracts is then compared. At the time the participant enters retirement, the current income base is used to set fixed distributions for life.

 

Immediate Income Annuities

An immediate income annuity is a qualified plan distribution that allows a participant to convert their vested assets into a termed payout. This structure does not have any linkage to underlying investments but give participants the option to roll their assets directly from their target date series, or other investments, into the product to realize the fixed distribution benefit.

 

Managed Payout

Managed payout products, like the other two products, offer ongoing distributions to invested participants, but these payments can vary. There are two types of managed payout products. In the first type, the total assets contributed to the product will be invested and, for the agreed term, a portion of the principal and growth will be paid out as the distribution. The second type of managed payout product offers fixed payment amounts but will pay distributions up until the remaining assets are zero.

PARTICIPANT CORNER: ONLINE SECURITY TIPS FROM THE DEPARTMENT OF LABOR

You can reduce the risk of fraud and loss to your retirement account by following these basic rules: 

REGISTER, SET UP AND ROUTINELY MONITOR YOUR ONLINE ACCOUNT

  • Maintaining online access to your retirement account allows you to protect and manage your investment.
  • Regularly checking your retirement account reduces the risk of fraudulent account access.
  • Failing to register for an online account may enable cybercriminals to assume your online identify.

USE STRONG AND UNIQUE PASSWORDS

  • Don’t use dictionary words.
  • Use letters (both upper and lower case), numbers, and special characters.
  • Don’t use letters and numbers in sequence (no “abc”, “567”, etc.).
  • Use 14 or more characters.
  • Don’t write passwords down.
  • Consider using a secure password manager to help create and track passwords.
  • Change passwords every 120 days, or if there’s a security breach.
  • Don’t share, reuse, or repeat passwords.

USE MULTI-FACTOR AUTHENTICATION

  • Multi-Factor Authentication (also called two-factor authentication) requires a second credential to verify your identity (for example, entering a code sent in real-time by text message or email).

KEEP PERSONAL CONTACT INFORMATION CURRENT

  • Update your contact information when it changes, so you can be reached if there’s a problem.
  • Select multiple communication options.

CLOSE OR DELETE UNUSED ACCOUNTS

  • The smaller your on-line presence, the more secure your information. Close unused accounts to minimize your vulnerability.
  • Sign up for account activity notifications.

BE WARY OF FREE WI-FI

  • Free Wi-Fi networks, such as the public Wi-Fi available at airports, hotels, or coffee shops pose security risks that may give criminals access to your personal information.
  • A better option is to use your cellphone or home network.

BEWARE OF PHISHING ATTACKS

  • Phishing attacks aim to trick you into sharing your passwords, account numbers, and sensitive information, and gain access to your accounts. A phishing message may look like it comes from a trusted organization, to lure you to click on a dangerous link or pass along confidential information.
  • Common warning signs of phishing attacks include:
    • A text message or email that you didn’t expect or that comes from a person or service you don’t know or use.
    • Spelling errors or poor grammar.
    • Mismatched links (a seemingly legitimate link sends you to an unexpected address). Often, but not always, you can spot this by hovering your mouse over the link without clicking on it, so that your browser displays the actual destination.
    • Shortened or odd links or addresses.
    • An email request for your account number or personal information (legitimate providers should never send you emails or texts asking for your password, account number, personal information, or answers to security questions).
    • Offers or messages that seem too good to be true, express great urgency, or are aggressive and scary.
    • Strange or mismatched sender addresses.
    • Anything else that makes you feel uneasy.

USE ANTIVIRUS SOFTWARE AND KEEP APPS AND SOFTWARE CURRENT

  • Make sure that you have trustworthy antivirus software installed and updated to protect your computers and mobile devices from viruses and malware. Keep all your software up to date with the latest patches and upgrades. Many vendors offer automatic updates.

KNOW HOW TO REPORT IDENTITY THEFT AND CYBERSECURITY INCIDENTS

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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July Retirement Plan Newsletter 2021

May Retirement Plan Newsletter 2021

 

LUTZ BUSINESS INSIGHTS

 

PUBLISHED: MAY 10, 2021

MAY RETIREMENT PLAN NEWSLETTER

ERISA DEFINITIONS AND FINANCIAL DESIGNATIONS AND WHAT THEY MEAN FOR PLAN SPONSORS

Plan sponsors and retirement plan committees are likely to encounter a myriad of industry-related naming devices and designations. It is important that they understand what each means in terms of definition, background, and practical impact/importance to the plan, the plan’s fiduciaries, and the plan’s participants.

 

ERISA Definitions

For instance, a number of ERISA sections are commonly used by plan service providers.  ERISA stands for the Employee Retirement Income Security Act of 1974 and provides not only the rules that govern, in part, retirement plans, but definitions as well.  The following definitions are commonly used by service providers within the industry:

ERISA Section 3(21) Fiduciary Advisor

A 3(21) investment fiduciary is a paid professional who provides investment recommendations to the plan sponsor/trustee or plan participant, alternate payee or beneficiary. The plan recipient of the recommendation retains ultimate decision-making authority for the investments and may accept or reject the recommendations. Both share the fiduciary responsibility and are held to the same standard of care under ERISA.

ERISA Section 3(38) Fiduciary Advisor (Investment Manager)

A 3(38) investment manager takes on the full responsibility of managing the investment lineup and has discretion to make necessary changes. In doing so, the 3(38) Investment Manager takes on the primary fiduciary responsibility for investment decisions. But the plan’s named fiduciary (or its delegate(s)) retain the fiduciary responsibility for the selection and ongoing monitoring of the 3(38) investment manager. ERISA identifies the 3(38) advisor as an investment manager.

ERISA Section 3 (16) Fiduciary

A 3(16) fiduciary, as used by service providers, is typically an organization that takes fiduciary responsibility for the administration of a retirement plan. A 3(16) fiduciary partner acts as a plan administrator for some, or all depending on the engagement, of the plan’s administration and expressly accepts certain fiduciary responsibilities for doing so. It is important to review the 3(16) contract to ensure they accept the fiduciary responsibilities you are interested in delegating. And the plan sponsor still retains the fiduciary responsibilities of prudently selecting and monitoring the 3(16) fiduciary.

 

Financial Industry Designations

In addition to the above ERISA-defined fiduciary roles it is common for individual representatives of retirement industry service providers to carry certain financial designations.  These designations represent a broad spectrum of time commitment and education in addition to having different focuses in terms of industry-related expertise. The following are some of the more broadly utilized designations in the retirement industry (in no particular order):

CFA® – Chartered Financial Analyst®

The Chartered Financial Analyst® or CFA® designation is an internationally recognized certification issued by the CFA Institute. It is earned by completing an arduous self-study program and three separate 6-hour exams increasing in difficulty over several years. These studies typically take about 700-950 hours to complete, and then a CFA® charterholder must complete four years of relevant work experience.

A CFA® charterholder is educated and tested on a wide array of topics including investments, statistics, and statistical analysis, along with economics, financial modeling, and corporate finance. A CFA® charterholder must also follow all prescribed ethical guidelines.

Someone with this designation often works in the corporate investing field and provides a high level of investment counsel, working with clients on investment and financial analysis.

CIMA® – Certified Investment Management Analyst

The Certified Investment Management Analyst or CIMA certification indicates an advisor with skills in evaluating investment managers and others who provide financial products and services. A CIMA professional can consult with clients by helping to determine what products and investments are in their best interest.

A CIMA designation indicates knowledge and interest surrounding investments, portfolio management, behavioral finance, and economics focusing on asset allocation and investment consulting. A CIMA professional typically advises high net worth companies or individuals, assessing risk and making decisions for the individual or entity it serves.

CFP – Certified Financial Planner

A Certified Financial Planner certification (CFP) indicates that the financial planner has significant expertise in personal financial planning, portfolio management, budgeting, estate planning, and taxes. Financial planners are typically work with individuals to build a financial plan.

There is also an ethical component to the certification process, in that each CFP professional must meet ethical fitness standards and agree to always put the client’s needs first.

ChFC – Chartered Financial Consultant

The Chartered Financial Consultant (ChFC) certification is similar to the CFP but doesn’t require completing a board exam. The ChFC certification focuses on all aspects of financial planning like investments, tax, estate planning, and insurance.

A ChFC professional typically works on comprehensive financial planning and consulting like employee benefits planning, asset protection, and tax planning, estate tax, transfer tax, and gift tax.

A financial advisor’s certifications indicate their expertise, specialties, and interests. Be sure to inquire about their clientele in order to determine if they have experience and expertise dealing with plans like yours in terms of size, complexity, and breadth of services you require.  It’s also important to understand how an advisor is compensated.

WFH (WELLNESS FROM HOME) CHALLENGES BOTH PARTICIPANTS AND PLAN SPONSORS

 COVID-19 has posed a duel set of related challenges for plan sponsors and participants. For employees, the pandemic has pitted more immediate financial needs against prioritizing planned savings — and shifted the traditional focus of employee-sponsored financial wellness programs from the future to the present. And sponsors face the difficulty of effectively engaging remote workers showing increased demand for financial wellness programs. Prudential’s 2020 Plan Sponsor Pulse Survey data shows 72% of sponsors reporting greater utilization, with 28% indicating a significant increase.

With that in mind, plan sponsors can use several strategies to help weary workers engage with the organization’s financial wellness program — no matter where they are.

 

Bite-size is better.

Gear your educational content toward shorter, more focused personal finance topics. Modular programming will help accommodate the many interruptions and divided attention that’s increasingly common among remote workers.

 

Make it fun.

Presentations don’t have to be “Dancing With The Stars” production numbers, but take steps to keep the subject matter fresh and engaging to compete with 9 to 5+ computer time. Use gamification to counteract screen fatigue. If employees can earn points, digital badges, certificates or rewards, they may be more apt to tune in and participate.

 

Gentle reminders.

You used to post notices about educational events on the company bulletin board that remote workers no longer see. Email reminders and text notifications can help keep those working from home in the loop — be sure, however, to ask employees about their contact preferences, and don’t blow up their inbox or cell phone.

 

Diversify. Diversify. Diversify.

Useful for more than just investing, format diversification helps accommodate the different ways people like to learn. Some may digest written content better. For others, an infographic or video is more effective. Use analytics to track usage and see what’s preferred. Why not create a financial wellness podcast that employees can listen to during their treadmill workout?

 

Track down the tech averse.

You may have a segment of your employee population who showed up reliably for one-on-one meetings and live events to receive information, but haven’t logged in for a single webinar. You don’t want these folks to fall through the cracks now. Consider phone calls and even snail mail reminders to make sure they don’t disconnect.

 

Rethink programming.

You may want to shift content toward more immediate participant concerns such as debt management, emergency savings, budgeting or any other areas of interest identified. Track engagement with your wellness program and double down on the topics and tactics that perform best.

Remote work has challenged traditional financial wellness programming delivery methods, but it’s also an opportunity to reach an audience with a newfound interest in new ways. Take advantage of their attention while you have it.

 

Sources

https://news.prudential.com/content/1209/files/2020PSPulseSurveyCovid19.pdf

https://news.gallup.com/poll/321800/covid-remote-work-update.aspx

https://www.pewresearch.org/social-trends/2020/12/09/how-the-coronavirus-outbreak-has-and-hasnt-changed-the-way-americans-work/

5 TACTICS TO INCREASE RETIREMENT PLAN PARTICIPATION

Employees fail to enroll in their retirement plan for a variety of reasons. They may be intimidated if it’s their first time around or they might not fully understand and appreciate the benefits (or the downside of not participating). Some could be concerned about “locking up” their money — and others might worry so much about making the “wrong” investment decision that they procrastinate making any decision at all.

As a plan sponsor, you know the advantages of offering a retirement plan for you, including: employee recruitment, increased retention, reduced worker stress, higher productivity and tax benefits. Higher participation and contribution rates can also reduce the chance the plan will fail discrimination testing and be subject to financial consequences if needed corrections aren’t made on time.

But the key to unlocking all the retirement plan benefits for both you and your employees is not simply having a plan, but making sure that enough workers actually use it. Here are 5 things you can do to grow your participant ranks.

 

1. Enroll everyone.

A recent Vanguard survey of 8,900 small business retirement plans found a dramatic effect of automatic enrollment on employee participation rates: 83% with automatic enrollment versus 58% without. And if you need more convincing, Vanguard’s How America Saves 2019 Report found that contribution rates were also higher in automatic enrollment plans versus voluntary plans: 7.1% to 6.7%.

 

2. Offer a Roth.

For employees who want to enjoy tax-free income in retirement, providing a Roth option may motivate enrollment. And with no income cap, this move may also be appreciated by highly-compensated employees who earn too much to qualify for a Roth IRA. Additionally, you may tempt younger workers with a longer timeline to retirement who want to take advantage of the lower tax rate they’re paying now as opposed to what they believe they might face later on.

 

3. Go multimedia.

Offer retirement plan information to participants across a variety of modalities. Some may prefer in-person meetings, while others would rather watch a YouTube-style video at their leisure. And still others might prefer scribbling notes in the margins of a pamphlet. Provide education about retirement plan benefits in a way that’s accessible for everyone, no matter their degree of financial sophistication. Answer questions in short- and long-form, at basic and more advanced levels — and in as many media formats as possible.

 

4. Simplify. Simplify. Simplify.

It should be easy and straightforward for participants to sign up or make changes to their retirement plan elections or contributions. Changes should only take a few clicks, whether from a laptop, mobile phone or tablet. Optimize a seamless web experience for each platform.

 

5. Why wait?

Shorter waiting periods allow new employees to start a saving habit straight out of the gate. It can also be an attractive feature when recruiting seasoned candidates who don’t want to interrupt their retirement savings. So, consider shortening — or even eliminating — waiting periods altogether. Want to take the notion of instant gratification one step further? Consider allowing immediate vesting, which can help make your organization more competitive to draw top talent and further encourage participation in the plan.

 

Sources

https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/InvComHASsmallBusinessInsights

https://pressroom.vanguard.com/nonindexed/Research-How-America-Saves-2019-Report.pdf

https://scholar.harvard.edu/files/laibson/files/plan_design_and_401k_savings_outcomes.pdf

https://hbr.org/2020/10/employers-need-to-reinvent-retirement-savings-match

https://www.psca.org/PR_2020_63rdReport

PARTICIPANT CORNER: WHAT'S AN HSA AND IS IT RIGHT FOR YOU?

Health savings accounts (HSAs) have grown tremendously in popularity over the past few years. You’ve probably heard of them or maybe your employer offers one. This memo will uncover answers to common questions you may have about HSAs.

 

What’s an HSA?

A type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses.

 

Can anyone get an HSA?

In order to open an HSA, an individual must first enroll in a qualified high deductible health plan (HDHP).

I’ve heard HSAs have triple-tax advantages, what are they?

  1. Contributions are tax-deferred and eventually even possibly tax free (see #3).
  2. Contributions can be invested and potentially grow tax free (see #3).
  3. Withdrawals aren’t taxed, if used for qualified medical expenses.

 

If I change employers, what happens to my HSA?

HSAs are completely portable for employees, meaning you may take it with you if you change employers.

 

Do I lose my HSA funds at the end of the year?

No. The balance can grow and carry from year to year and can also be invested.

 

What can I pay for with my HSA?

Generally, HSA funds can be used to pay for anything that your insurance plan considers a “covered charge,” including charges not paid by your health insurance because they were subject to a co-pay, deductible or coinsurance.

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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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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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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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.

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