December Retirement Plan Newsletter 2019

December Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

DECEMBER RETIREMENT PLAN NEWSLETTER

THE BENEFITS OF MATCHING RETIREMENT CONTRIBUTIONS

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

Competitive Hiring

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

Reduced Turnover

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

Tax Savings

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

Future Compliance

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

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

 

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

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

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

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

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

THE MORE YOU KNOW: AUTOMATIC ENROLLMENT NOTICES

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

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

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

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

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

TOP TEN FIDUCIARY RESPONSIBILITIES

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

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

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

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

 

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

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

 

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

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

 

4. Consider Hiring a Financial Advisor!

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

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

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

 

LUTZ BUSINESS INSIGHTS

 

new irs indexed limits for 2020

 

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

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

 

ITEM

2020

2019

2018

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

$19,500

$19,000

$18,500

Catch-Up Contribution Limit (age 50 or older)

$6,500

$6,000

$6,000

Annual Compensation Limit

$285,000

$280,000

$275,000

Defined Contribution Limit

$57,000

$56,000

$55,000

Defined Benefit Limit

$230,000

$225,000

$220,000

Definition of Highly Compensated Employee

$130,000

$125,000

$120,000

Key Employee

$185,000

$180,000

$175,000

IRA Contribution Limit

$6,000

$6,000

$5,500

IRA Catch-Up Contributions (age 50 and older)

$1,000

$1,000

$1,000

 

HIGHLIGHTS OF CHANGES FOR 2020

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

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

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

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

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

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

 

KEY LIMIT REMAINS UNCHANGED

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

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

Important Disclosure Information

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

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

December Retirement Plan Newsletter 2019

November Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

NOVEMBER RETIREMENT PLAN NEWSLETTER

KEEPING IN COMPLIANCE: IRS TIPS FOR PLAN SPONSORS

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

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

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

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

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

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

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

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

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

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

THE TOP THREE REASONS TO OUTSOURCE FIDUCIARY SERVICES

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

Reduced Risks.

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

Increased Objectivity.

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

Increased Service Level.

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

BEAT RISING HEALTHCARE COSTS WITH A FINANCIAL WELLNESS PROGRAM

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

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

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

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

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

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

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

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

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

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

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

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

December Retirement Plan Newsletter 2019

October Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

OCTOBER RETIREMENT PLAN NEWSLETTER

3(38) OR 3(21): WHICH FIDUCIARY SERVICE IS RIGHT FOR YOU?

Looking to reduce your fiduciary risk as a plan sponsor? A little outside help can yield big reductions in risk, provide the best for the people on your company’s payroll, and help you feel good about your qualified retirement plan. Remember though, what’s good for the plan participants isn’t always best for the company – and as the plan sponsor, the company takes on substantial legal and financial liabilities. If you’re listed as the plan administrator, some of those liabilities accrue to you as well. Best practices suggests that any plan sponsor who doesn’t possess the technical knowledge and experience to manage investments consider hiring an advisor – and your choice of advisor can significantly lower your fiduciary risk.

Why hire a fiduciary?

Hiring an outside fiduciary can reduce some or most of that liability by putting the plan in the hands of a professional that affirmatively accepts fiduciary responsibility in section 3(21) and 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). These 3(21) and 3(38) fiduciaries are not stockbrokers; instead of taking commissions on investments purchased for your plan, they’re compensated by a stated fee. This helps reduce potential conflicts of interest in constructing and managing your plan’s investments.

What’s the difference between a 3(38) Fiduciary and a 3(21) Fiduciary?

There are two types of fiduciaries recognized under ERISA standards. A 3(21) fiduciary advises and makes recommendations, but as the plan sponsor still have ultimate responsibility for the legal operation of the plan and making plan-level investment choices. A 3(38) fiduciary takes over management of plan investments, makes investment choices, executes investments and monitors their performance. The 3(38) advisor is solely authorized to make (and is responsible for) those decisions. Because they have this responsibility, they can often be in a position to act more quickly in terms of making any changes to the plan, since such decisions need not go through the plan sponsor’s committee for any approval process. A 3(38) fiduciary may also be advantageous for smaller firms with fewer resources in their benefits department. Hiring a 3(21) fiduciary relieves the plan sponsor of part of the labor and part of the investment fiduciary responsibility, and provides the plan fiduciary a professional opinion in decision-making. A 3(38) fiduciary relieves the vast majority of the labor and almost all of the responsibilities. In short, whereas a 3(21) fiduciary advises and assists; a 3(38) fiduciary can function in a broader role for plan sponsors.

Remember – even if you hire a fiduciary, you’re still involved.

With a 3(38) fiduciary, the sponsor is still required to provide oversight of the fiduciary. Also, hiring a 3(38) fiduciary doesn’t relieve the sponsor from liability for poor investment decisions made by participants. However, ERISA Section 404(c) does create a “safe harbor” for plan sponsors if they meet specific requirements that include stipulations regarding investment selection, plan administration and certain disclosures.

What about Full Service Fiduciaries?

Firms that offer both 3(21) and 3(38) fiduciary services may also provide professional investment advice through staff or partnerships along with educational services to help meet the section 404(c) safe harbor standards. With the help of these outside professionals, you can lower your fiduciary risk by doing right by your employees while addressing all applicable regulations.

For more information about hiring a fiduciary, or questions regarding 3(21) or 3(38) fiduciaries reach out to your plan advisor.

THE IMPACT OF AUTO-ENROLLMENT INTO RETIREMENT PLANS

Americans are saving more for retirement, according to a survey released by the Plan Sponsor Council of America.1 In fact, employees put 6.8 percent of their paychecks into 401(k) and profit-sharing plans in 2018 compared to 6.2 percent of their salaries in 2010. Why the increase? One reason may be that 57.5 percent of retirement plan sponsors have included an automatic enrollment feature in their plans.

An automatic enrollment feature in a retirement plan allows employers to enroll eligible employees in their retirement plans unless the employee chooses to opt out of the plan. It’s often used for 401(k) plans, but can also be included in 403(b) plans, 457(b) plans for government employees, Salary Reduction Simplified Employee Pension plans (SARSEPs), and Savings Incentive Match Plans for Employees (SIMPLE) IRA plans. Automatic enrollment clearly boosts retirement plan participation.

Automatic enrollment taps into a basic psychological trait, inertia. The field of behavioral finance suggests that people tend to resist change and don’t always take action even when the action is clearly beneficial. However, behavioral finance can turn that weakness into a strength. Retirement plan sponsors that use automatic enrollment are taking action for their employees, and then that same inertia keeps employees from opting out of the retirement plan.

https://www.psca.org/PR_2018_60thAS 

FOUR WAYS TO INCREASE EMPLOYEE RETIREMENT CONTRIBUTION PARTICIPATION

As a retirement plan sponsor how can you encourage your employees to save and save more? Improving both employee participation and their saving rates is easy when you’re prepared. Here are four simple ways you can help your employees start building a confident retirement.

1. Boost employee participation with automatic enrollment.

Choosing to automatically enroll all new employees in your retirement plan can dramatically improve your participation rates. According to the Center for Retirement Research (CRR) at Boston College, in one study of automatic enrollment, participation increased by 50 percent, with the largest gains among younger and lower-paid employees. While auto-enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled.

2. Set the initial default contribution rate higher. 

Many companies who use auto-enrollment set their default contribution rate relatively low at three percent, according to the CRR, which is lower than the typical employer match rate of six percent. Workers who might have contributed more to their savings passively accept the lower default rate, which means they’re sacrificing employer matching funds along with saving less of their own pay.

3. Adopt auto-escalation.

Plans that use auto-escalation automatically increase their participants’ contribution rate every year, typically by one percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers that the majority of workers who experienced automatic increases simply accepted them, and savings rates dramatically increased.

4. Automate investment decisions with target-date investment products.

Investing is complicated, and many employees don’t want to take the time to learn how to manage their portfolios. Target-date strategies automatically adjust an employee’s investment allocations over time, shifting them to a more conservative asset mix as the target date (typically retirement) approaches. The ease of use of target-date funds means their popularity is increasing. The CRR notes that in 2014, nearly 20 percent of all 401(k) assets were in target-date funds, and about half of plan participants used target-date funds.

PARTICIPANT CORNER: RETIREMENT READINESS - PLANNING FOR THE FIRST DAY OF THE REST OF YOUR LIFE

MUCH HAS BEEN MADE OF THE CURRENT STATE IF THE AMERICAN WORKER as it pertains to their retirement savings. According to a recent study by the General Accountability Office, 29% of Americans 55 and older do not have any retirement savings or pension plan and those who have saved are woefully behind with 55-64 year olds averaging $104,000 in retirement assets.

The bleak outlook can largely be attributed to a lack of education when it comes to retirement planning – and more specifically investment allocation. With a growing number of millennials feeling ill equipped to make investment related decisions – even within their own retirement plans, the numbers prove that ignorance is not bliss. 61% of millennials say they want to invest but are deterred because they don’t know how.2

These numbers alone should serve as a call to action for younger workers who are increasingly finding themselves behind the eight ball when it comes to saving for retirement. A sound, long term, roadmap to retirement can be centered on three key areas.

Develop healthy financial habits.

In a society that has become increasingly driven by social media it is very easy to fall prey to a “keeping up with the Jones1” philosophy toward spending. Do you have “friends” that tweet and share every purchase and activity in their lives? Believe it or not, this subconsciously drives the temptation to spend on things we don’t need! Finding a balance and delaying gratification on purchases can single handedly make or break your financial wellbeing and it starts with making tough budgeting decisions.

Live below your means.

Try contributing an extra one or two percent to your company’s retirement plan, or open up an IRA.  You won’t miss the contribution and your standard of living will adjust accordingly.  Seek to live below your means today to ensure a strong financial future tomorrow.

Reduce your debt.

The average American household carries a whopping $15,762 in credit card debt. According to a study this year, the average household is paying a total of $6,658 in interest per year3 – translating to lost dollars that could be pumped in to retirement savings and wealth accumulation. In some situations debt, such as a mortgage or a student loan, can improve one’s financial position long term – however, credit card debt in particular carries the highest interest rates and should be paid off as quickly as possible. Try working with an independent financial planner if necessary to consolidate debt and come up with a game plan to attack it head on.

At the end of the day there’s no magic bullet the can singlehandedly solve the retirement shortfall for millions of Americans. Only you can take steps to educate yourself and make prudent, financially savvy choices in your day to day life which will translate in a significantly healthier financial standing. Don’t just hope that the retirement picture in your life becomes clearer as the day gets closer, because the opposite is true. Take measured steps to build confident savings and investment solutions for your household by starting 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.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

December Retirement Plan Newsletter 2019

September Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

SEPTEMBER RETIREMENT PLAN NEWSLETTER

INDEX FUNDS - LOOKING BEYOND FEES

The flow to passive management is one of the biggest talking points of the decade. With this shift came the daunting task, and responsibility, to better evaluate the abundance of index funds offered by the marketplace. Index funds seek to replicate the performance of a benchmark, making the idea of comparing returns appear counterintuitive.

 

This notion has led many to focus almost entirely on fees. During this time period the industry experienced significant fee compression, with the difference between a few of the most commonly utilized index funds as small as 0.002%. This amounts to $2 for every $100,000 invested. Relative to the administrative burden to switch funds, investment cost is not the best method of selecting funds especially considering that shortly after, a different fund may be the new lowest-cost option.

 

How else can an index fund differentiate itself from its competitors – If not fees, what should be evaluated? The best index fund managers provide tight benchmark tracking at a reasonable price, and two techniques they can incorporate into their investment process are cross trading and securities lending.

 

Through the application of certain trading techniques, index managers can reduce cost and improve tracking. Over time the composition of indexes change, yet the process funds undergo to match these changes are complex. For example, as companies grow, they may move from the small cap index into the large cap index. For the index, this is a simple process. One day the company is in the small cap index and the next day they are in the large cap index. No trading needs to occur, no commissions paid, no bid-ask spreads crossed, no trades routed – yet funds must overcome these hurdles if they want to match the index’s performance.

 

One technique to overcome these challenges is through the use of cross trading. Suppose a fund company offers a small cap index fund and a large cap index fund and “company X” is being moved from the small cap index to the large cap index. The fund company could sell all their shares of “company X” in the small cap fund. This incurs cost and drives the price down as they sell. Then they buy all the shares back in their large cap fund, driving the price up as they buy. Through cross trading, this process is more streamlined. The fund company transfers their shares of “company X” from their small cap fund to their large cap fund without incurring costs. This leads to reduced tracking error and improved performance. To conduct due diligence on an index manager’s cross trading capabilities examine the index fund company’s cross trading process and review percentages of trades crossed.

 

The second method by which an index fund can be evaluated is through their use of securities lending. Securities lending refers to the temporary lending of a stock, derivative, or bond by one party to another in exchange for collateral. The collateral can be reinvested to produce income for the lender. Securities lending is important to short sellers who profit when securities drop in value. If an active investor is looking to short “stock ABC”, currently worth $100, they can borrow “stock ABC” from an index fund, offering the fund $103 as collateral. The index fund can invest this cash until the stock is returned, generating extra return, helping offset the costs the fund faces.

 

It is important to remember this is not risk-free money for the fund. This process exposes the fund to counterparty risk – which is when the active investor does not return the stock owed. The second is reinvestment risk – when the fund invests the $103 and it loses value. To mitigate this risk many fund companies have adopted SEC or OCC money market guidelines that outline the maturity, credit ratings, and liquidity restrictions on the collateral investment. Well established index providers will furnish information on their counterparty and collateral guidelines.

 

How much extra return can securities lending generate? Looking at the graphs below we can see significant additional return through securities lending, sometimes in excess of the management fee charged by the fund.

 

500 INDEX FUND

Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT

6.1%

50/50

0.016%

Fidelity

0.9%

90/10

0.002%

State Street CIT

1.8%

70/30

0.004%

Vanguard

0.13%

95/5

0.001%

 

SMALL CAP INDEX FUND

Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT

29.2%

50/50

0.015%

Fidelity

18.9%

90/10

0.20%

State Street CIT

18.8%

70/30

0.15%

Vanguard

1.96%

95/5

0.10%

 

INTERNATIONAL INDEX FUND

Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT

2.4%

50/50

0.023%

Fidelity

1.3%

90/10

0.015%

State Street CIT

1.2%

70/30

0.021%

Vanguard

1.32%

95/5

0.067%

 

BOND INDEX FUND

Fund Company

% on Loan

Revenue Split (fund/lending agent)

Yield to Fund

BlackRock CIT

37.8%

50/50

0.063%

Fidelity

<0.1%

100/0

0.0015%

State Street CIT

10%

70/30

0.029%

Vanguard

0%

N/A

N/A

 – 2018 Securities lending information

 

These complex features, prevalent amongst passive managers explain why RPAG tailored the scorecard to evaluate passive managers on analytics and metrics specific to, and important for, passive funds. On the surface it might seem counter intuitive to include an analytic on return rank for a passive fund designed to match the performance of a benchmark. However, by including return rank we evaluate a fund’s effectiveness in securities lending and cost reduction through cross trading.

 

Two analytics dedicated to tracking error may seem unnecessary, however performance matching is a primary objective of passive funds. It is critical for managers to utilize every tool in their toolbox. An emphasis on tracking error allows for better assessment of how well managers are meeting this objective. While fees are an important component of evaluating a passive manager, it is not the only data point, and the RPAG scorecard incorporates all significant components into the analysis.

 

For more information about cross trading and securities lending, reach out to your plan advisor.

 

About the Author, Ryan Hamilton

Ryan is an investment analyst for RPAG. He works closely with advisors and plan sponsors on manager due diligence and conducting market and fund research. Ryan is also a member of the RPAG Investment Committee, where all quantitative and qualitative aspects of the investment due diligence process are vetted and discussed when providing manager recommendations at the firm level for the firm’s entire client base. Ryan specializes in fixed income, cash vehicles, and alternative investments. Ryan graduated magna cum laude with a Bachelor of Arts from UCLA, and is a CFA Level III Candidate.

STUDENT LOAN CONTRIBUTION PROGRAMS: THE NEW WAY TO RECRUIT AND RETAIN MILLENNIALS IN TODAY'S WORKPLACE

As human resource managers begin working on updating their benefits package, it’s important to remember that millennials are quitting their jobs faster than employers can hire them1 – which is especially problematic considering millennials now make up 50 percent of the workforce 2.

 

The reasons for resignations vary widely, but one retention solution may be to consider offering a student loan contribution program. In 1999, the amount of outstanding student loan debt was approximately $90 billion. In 2019, that amount that has grown to nearly $1.6 trillion – held mainly by millennials. It’s fair to say that this population is desperately looking for some relief from this heavy debt burden – which offers a unique opportunity for employers to recruit and retain millennial talent.

 

A recent survey by Laurel Road found that millennials who were offered a student loan contribution program in their benefits package stayed at companies five years longer than those who were not. Some surveys even concluded that a student loan contribution program can be more desirable than vacation days3.

 

A byproduct of the student debt problem is that millennials may not be saving enough for retirement. A recent study from Boston College’s Center for Retirement Research, found that college graduates with student debt, accumulate 50 percent less retirement wealth in their retirement plan by age 30 than those without4.

 

Many employees believe they must choose between paying off their loans and saving for retirement; however, a student loan repayment program allows employees to make considerable contributions to both their debt and retirement savings accounts.

 

Student loan contribution programs are offered at little to no cost by different providers, are fully tailored to most benefit programs and most importantly, may offer a solution to the student loan debt crisis. A majority of these innovative plans are set up in three unique ways:

  1. Refinancing Resources, which offer financial wellness tools as well as access to third-party loan refinancing.
  2. Loan Contribution Programs offer employer monthly contributions to employee student loans in addition to refinancing resources.
  3. Match Contributions, where employers make a retirement plan match when employees make a tuition loan payment. Again, refinancing resources are included.

 

These programs vary in shape and size, allowing companies to integrate this benefit with little interruption to company operations. The more competitive programs will offer refinancing, allowing workers to make smaller payments at less of an interest rate, with little to no cost to the employer. At its core, this program increases employee retention by reducing the financial strain brought on by student loans.

 

Consider implementing a student loan contribution program into your benefits strategy. You may find that your ability to recruit and retain millennial talent increases immensely!

  1. https://www.inc.com/robbie-abed/more-people-are-quitting-their-jobs-than-ever-before-heres-why.html
  2. https://www.inc.com/peter-economy/the-millennial-workplace-of-future-is-almost-here-these-3-things-are-about-to-change-big-time.html
  3. https://www.integrity-data.com/3-reasons-a-student-loan-repayment-benefit-is-a-good-choice-for-employers/
  4. https://crr.bc.edu/briefs/do-young-adults-with-student-debt-save-less-for-retirement/
WHY WE USE RUSSELL INSTEAD OF S&P

Ever wondered why we use Russell instead of S&P for benchmarks in the RPAG system? Here are four important reasons:

  • Russell ranks each company in the investable universe according to its total market capitalization while S&P uses a committee to make these decisions. Market cap is the primary indicator to determine where a company belongs in the Russell Index.
  • Using a float adjustment methodology, Russell creates benchmarks that most accurately reflect the market, and Russell’s indices adjust each company’s capitalization ranking to eliminate closely held shares that aren’t likely to be traded.
  • By updating index holdings on a regular basis and reconstituting them annually, Russell provides a truer representation of the market.
  • Russell indices objectively allow the market to determine the index composition according to clear and published rules. The market determines which companies are included, not the subjective vote of a selection committee.

For more information the importance of a benchmark, contact your plan advisor.

PARTICIPANT CORNER: BORROWING AGAINST YOUR RETIREMENT PLAN: MORE COSTLY THAN YOU THINK

This month’s employee memo informs participants about taking money out of their retirement plan. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

 

PARTICIPATING IN THE COMPANY’S RETIREMENT PLAN is a smart and important decision. Smart because you are putting away small amounts today for a comfortable retirement later.

 

As your account begins to grow, it may be tempting to “dip into” your retirement savings by taking a loan against your  retirement plan to pay your annual taxes, repair a leaking roof, catch up your everyday pile of bills, and so on. And while the decision to take a plan loan is yours to make, we want to make sure that you consider what it will really cost.

 

With a retirement plan loan, you pay yourself back the amount plus interest. But the true cost can be shown with the loss in your retirement savings. You lose money when you borrow from your retirement account for several reasons:

  • You lose making money on the earnings, or compounding of those earnings.
  • You repay the loan with after-tax dollars.
  • There is (typically) an initial set-up and quarterly loan fee.
  • Most employees decrease or cease the amount they are contributing to compensate for the loan payment.
  • You may not be paying yourself back the same amount you would have earned if you left the money invested.

 

To further illustrate the costliness of taking a plan loan, consider the following hypothetical example*: Jane took a $10,000 loan at 7% interest from her retirement account; her account balance before the loan was $20,000. She previously made contributions of $150 per paycheck (including the employer match). Because she had to repay the loan, she decreased her contribution to $50. Additionally, prior to the loan, she was earning a 10% return. Now she will repay the loan over five years. If you take into account loss of interest, compounding, and tax on repayments, the actual retirement plan loan is costing Jane 13.77%! And don’t forget about those decreased contributions, which can add up to hundreds of thousands of dollars over many years.

*This example is hypothetical and intended for illustrative purposes only.

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.

Q3 FIDUCIARY HOT TOPICS

WILL 2019 BE THE YEAR OF RETIREMENT REFORM - THE SECURE ACT

It has been 13 years since Congress enacted the Pension Protection Act of 2006, the last piece of major legislation affecting retirement plans. Significant provisions affecting retirement plans were included in various versions of President Trump’s tax reform bill enacted in 2017, but Congress ultimately punted, and none of them made it into the final bill.

 

This past May, the House passed, by a near unanimous vote (417 – 3), the “Setting Every Community up for Retirement Enhancement Act” (The “SECURE Act”). Such strong support in the House suggests this legislation has an excellent chance of becoming a law before the end of the year. This is now contingent on Senate action. Although many of the provisions in this bill have strong support in the Senate, under the Senate’s arcane procedural rules, a single Senator could tie this legislation up in committee.

 

 A number of important provisions in this bill have appeared in past bills and have strong bipartisan support. Thus, regardless of whether the House bill becomes law this year, it is almost certain that the majority of these provisions will be enacted at some point in the not too distant future.

 

Some of the more important provisions of this bill include:

  • Multiple Employer Plans (“MEPs”) for Unrelated Employers – The bill would overturn Department of Labor guidance, preventing unrelated employers from establishing multiple employer plans. Many small employers do not sponsor retirement plans and this is yet another attempt by Congress to encourage them to do so by offering them a more efficient alternative to establishing individual plans.

 

  • Notice of Lifetime Income – Sponsors of defined contribution plans would be required to provide participants with an annual notice disclosing the estimated monthly annuity income their account balance could generate at retirement. The intent is to ensure that participants are better informed about how much they need to save for their retirement. Nationally, the average participant in a 401(k) plan is currently saving enough to replace less than 50 percent of his/her projected income at retirement, even when social security benefits are included.

 

  • Safe Harbor for Lifetime Income Option – Few defined contribution plans offer an annuity option that provides a lifetime income stream to participants commencing at retirement. One of the major reasons for this is plan sponsors’ concerns about fiduciary liability in the event that the insurance company becomes insolvent at a future date. In 2008, the Department of Labor published a safe harbor for selecting an annuity provider, but this was not viewed as providing sufficient protection to plan fiduciaries. The bill would specify the steps plan sponsors must take in selecting an annuity provider. If these steps are taken, the plan sponsor would be deemed to have satisfied its fiduciary responsibilities.

 

  • Part Time Employees – Current law permit plan sponsors to exclude part-time employees from retirement plans. The bill would require sponsors to allow long term part-time employees to participate. Long term part-time employees are defined as employees who work at least 500 hours in three consecutive years.

 

  • Tax Credit Increased for Plan Start-Up Costs – The bill would increase the existing tax credit for plan startup costs for small employers with no more than 100 employees. The credit will increase from $500 to $5,000 over three years. There would be an additional $500 credit if the plan includes an auto enroll feature.

 

  • Remove Age Limit for Traditional IRAs – Under current law, individuals cannot make deductible contributions to a traditional IRA after reaching age 70 1/2. There is no age restriction for Roth IRAs. The bill would repeal this age restriction.

 

  • Age for MRDs Pushed Back – The age at which minimum required distributions must commence would be pushed back from age 70 ½ to 72. This is a popular change, but it has been criticized as only benefitting wealthy tax payers with relatively large amounts of deferred tax savings who do not need to make withdrawals to cover living expenses.
SON OF LATE SUPREME COURT JUSTICE, ANTONIN SCALIA, NOMINATED TO BE NEXT SECRETARY OF LABOR

President Trump has nominated Eugene Scalia to be the next Secretary of Labor. On July 12th, Alexander Acosta was forced to resign due to the controversy over a plea deal for Jeffery Epstein, who was recently charged with sex-trafficking crimes by the US Attorney for the Southern District of New York. At the time, Mr. Acosta was the US Attorney. The plea deal has been controversial because many viewed it as too lenient.

 

Mr. Scalia has held several government posts including Solicitor of Labor in the second Bush administration. This is the top legal position in the Department of Labor. He is viewed as more conservative than Mr. Acosta.

 

Before Mr. Acosta’s departure, the Department had announced that it is on track to publish a new fiduciary rule by year’s end, to replace the original rule struck down by the Fifth Circuit of the Federal Court of Appeals. The Fiduciary Rule was a complex regulation where persons working with retirement plans and participants are fiduciaries and may only make investment recommendations that are in the best interests of their clients. If Mr. Scalia is confirmed as the next Secretary of Labor, the possibility of a new fiduciary rule may be in doubt.

PROPOSED NEW PROGRAM ADDRESSES THE FINANCIAL WOES OF MULTIEMPLOYER PLANS

The House is considering a program of government loans and grants for financially troubled Taft Hartley multiemployer plans. Many multiemployer plans are on the verge of insolvency. The American Society of Actuaries estimates that by 2023, 21 multiemployer plans covering about 95,000 participants will be unable to continue paying benefits. The financial troubles of multiemployer plans are longstanding. The primary causes are:

  • most multiemployer plans cover employees in the smoke stack industries that have been in decline, meaning fewer and fewer contributing employers;
  • benefit liabilities have often been calculated using unrealistic actuarial assumptions; and
  • negotiated employer contributions have rarely been sufficient to fund the promised benefits.

 

In 2014, Congress attempted to address this problem by making an exception for multiemployer plans to ERISA’s longstanding rule that plan sponsors can never cut back on accrued benefits. In some cases, plans were permitted to cut benefits by more than 30 percent. However, this relief has not been sufficient. Under the proposed legislation, plans would be allowed to apply for 30-year loans along with outright grants. The most distressed plans would be required to participate in the program. Support for this legislation is sharply divided along party lines. Democrats see this as a necessary and temporary backstop. Republicans see this as a taxpayer funded bailout that does not address the underlying problems, especially mismanagement by plan trustees.

 

If Congress fails to act soon, the Pension Benefit Guarantee Corporation (“PBGC”) will be on the hook for benefits that multiemployer plans are unable to pay. The PBGC is a government agency established by ERISA that guarantees payment of all private pensions. The PBGC’s assets are insufficient to cover the liabilities of multiemployer plans. Thus, if Congress fails to come up with a legislative solution, it will be faced with the ugly choice of bailing out the PBGC to the tune of billions of dollars or standing by and watching a federal agency collapse.

GROWING INTEREST IN VOLUNTARY AFTER-TAX CONTRIBUTIONS TO 401(K) PLANS

Voluntary after-tax contributions are just what it sounds like. These contributions are made in after-tax dollars and the taxes on the earnings are deferred until the year of distribution. Most 401(k) plans do not allow voluntary after-tax contributions because there has been little interest from participants. However, interest in after-tax contributions is growing due to a recent Internal Revenue Notice that allows the rollover of after-tax contributions from a 401(k) plan to a Roth IRA while the earnings on such contributions are rolled to a traditional IRA.

 

After-tax contributions are generally of interest only to highly compensated employees bumping up against the annual limit on deferrals and Roth contributions (for 2019, $19,000 / $25,000 if 50 or older), and whose income level prevents them from contributing to a traditional or Roth IRA. The only remaining opportunity for such individuals to save on a tax-advantaged basis is nondeductible IRA contributions (annual limit is $6,000 / $7,000 if 50 or older). In a 401(k) plan that permits voluntary after-tax contributions, such individuals may contribute on an after-tax basis up to the annual limit on all contributions (for 2019, $56,000 / $62,000 if 50 or older). Thus, if an individual elects pretax deferrals up to the annual limit of $19,000, there is still an opportunity to make up to $37,000 in after-tax contributions.

 

When the individual is eligible for a distribution, the after-tax contributions may be rolled to a Roth IRA and their future earning may escape all taxation. However, there is a significant limit on the ability of highly compensated employees to contribute after-tax because these contributions are included in the actual contribution percentage test (“ACP test”) that applies to matching contributions. Since non-highly compensated employees rarely make after-tax contributions, most plans will fail the ACP test if more than a few highly compensated employees make significant after-tax contributions. Failing this test forces the return of much of the after-tax contributions.

RECENT LUTZ FINANCIAL POSTS

New IRS Indexed Limits for 2020

New IRS Indexed Limits for 2020

The Internal Revenue Service today announced that employees in 401(k) plans will be able to contribute up to $19,500 next year. The IRS announced this and other changes in Notice 2019-59 (PDF)…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

December Retirement Plan Newsletter 2019

August Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

august RETIREMENT PLAN NEWSLETTER

FOUR REASONS TO INTEGRATE HEALTH SAVINGS INTO YOUR RETIREMENT PLAN

As Americans look into the future and towards retirement, many understand that maintaining their health will be an important part of their overall quality of life after they stop working. However, uncertainty around healthcare costs – both now and in retirement – is a major financial worry among Americans preparing for retirement. So how can you help your workers reduce financial anxiety about retirement preparedness and increase the likelihood that they will be able to meet their healthcare costs in retirement?

Health savings accounts (HSAs) present retirement plan sponsors a unique opportunity to address both the wealth and health of employees planning for retirement. HSAs are a popular way for individuals to save for medical expenses while reducing their taxable income – in effect, using their

HSA as a long-term investment vehicle. And though HSAs typically are introduced to employees as part of their high deductible healthcare plans (these are the only plan types which currently offer HSAs), many recordkeepers are beginning to offer them in an integrated platform where that can be reviewed alongside retirement savings.

Here are four reasons to integrate HSAs into your retirement plan offering:

1. Health Savings Accounts Address Concerns About Future Costs

In today’s retirement plan marketplace, holistic approaches increasingly feature a multi-faceted program that offers numerous features, all aimed at improving retirement readiness. While in the past it was sufficient to offer employees a straight-forward savings vehicle and trust that they would responsibly go about making contributions, today’s plan sponsors have seen that the introduction of sophisticated plan design features such as automatic enrollment, automatic escalation and financial wellness consultation go a long way towards boosting outcomes for their employees. With healthcare being such an important factor in quality of life, we see HSAs as one more tool you can wield in improving overall plan health.

HSAs are designed to assist individuals in paying for healthcare expenses both now and in the future. Today, a healthy 65-year-old male retiree can expect to pay $144,000 to cover healthcare expenses during retirement, and many studies show that we can expect health costs to rise at a rate that outpaces inflation, meaning this number will only grow over time. As HSAs are designed to provide a savings vehicle dedicated to covering qualified healthcare expenses, their ability to grow contributions tax-free helps defray the effect of future cost increases.

 

2. Health Savings are Triple Tax-Free Now and in Retirement

HSAs are unique in that they are designed specifically for healthcare expenses yet act more like an individual retirement account (IRA). HSAs are the only triple-tax advantaged savings vehicle of its kind. Participants with an HSA make contributions with pre-tax income, earnings and interest grow tax-free, and withdrawals are tax-free when used to pay for qualified medical expenses. Once in retirement, HSAs include no minimum required distributions and no Social Security or Medicare tax on contributions.

 

3. HSAs Can be Easily Integrated into an Existing Plan

You may be concerned about the administrative burden of incorporating an HSA into an existing plan, but in reality it can be done with little added administrative effort. In fact, it is possible for you to reduce administrative complexities with a single platform for both defined contribution plans and HSAs (as mentioned previously, many major recordkeepers offer their own HSA programs). With one portal that handles enrollment, retirement plan management, financial wellness programs, and HSA management, participants and sponsors can enjoy the added benefits of having these additional features seamlessly incorporated into their existing accounts. To improve the overall implementation of HSAs into a plan, we also encourage plan sponsors to incorporate HSA education into the front end of employee training, alongside other educational efforts for defined contribution plans and healthcare benefits.

 

4. Health Savings Accounts can Boost Employee Recruiting and Retention

If American workers are as anxious about medical expenses in retirement (and financial wellness in general) as surveys indicate, then a holistic retirement plan offering can be leveraged for marketing to potential new hires. A retirement plan that alleviates an employee’s concerns about the future will help employers retain existing workers and help attract new talent. By integrating an HSA into a robust retirement plan, your company signals that it understands the challenges to retirement preparedness and is ready to offer benefits that do the most to prepare them. The HSA account also rolls over in the same way a retirement account does, even if they choose to change jobs later on, making the benefit to the employee portable.

 

Conclusion

With the ultimate goal of providing a holistic retirement plan that prepares participants for financial security in retirement, you may want to consider adding HSAs to your plan offering. As a unique vehicle designed to reward savers with triple-tax benefits, HSAs can be seamlessly integrated into existing retirement plans while helping employee recruitment and retention. With healthcare costs continuing to increase with each passing year, HSAs provide a welcome sense of financial preparedness for Americans planning for their retirements.

For more information on HSAs, please contact your plan advisor.

 

About the Author, Kameron Jones

Kameron provides extensive knowledge of the provider marketplace to help reduce plan-related costs and improve plan-related services. He has assisted hundreds of mid- to large-market 401(k), 403(b), 457(b), 401(a), NQDC, Cash Balance, and DB plans. Kameron was also voted as a National Association of Plan Advisors (NAPA) top advisor under 40. Kameron graduated from the University of Pennsylvania with a Bachelor of Arts in philosophy, political science and economics and played outside linebacker on UPenn’s football team.

ANTHEM SETTLEMENT AWARDS PARTICIPANTS MORE THAN $23M

Recently the Bell vs. ATH Holding Company, LLC (a subsidiary of Anthem, Inc.) lawsuit settled. This is frequently referred to as the “Anthem Settlement” (the “Settlement”). The Settlement received quite a bit of attention from both the industry and mainstream press for a number of reasons, not the least of which include the size of the 401(k) plan ($5.1 billion), the size of the monetary settlement ($23,650,000), as well as inclusion of somewhat unusual non-monetary terms.

The Anthem 401(k) is considered a “jumbo” plan with over $5.1 billion in plan assets.  All but two of the plan’s investments were Vanguard mutual funds.  Vanguard mutual funds have a reputation for being low-cost investment alternatives.

Plaintiffs made the following allegations:

  • The plan’s fiduciaries breached their duties to the plan by using more expensive share classes of investments than was necessary. For example, the plan offered the Vanguard Institutional Index Fund with an expense ratio of 0.04%, but a lower share class was available at 0.02%.
  • Less expensive vehicles should have been explored for the same investment strategies, for example utilization of collective investment trusts (CITs) or separate accounts (SAs).
  • The plan should have offered a stable value investment instead of a low-yielding money market fund.

In discussing the Settlement it is important to remember that the case has not actually been adjudicated.  In other words, no court has ruled on the merits of the allegations made against, nor the actions taken by, the plan’s fiduciaries.  Also, it would be incorrect to state that any inferences can be made about the prudence, or lack thereof, of the fiduciaries’ actions or inactions in regards to any of the allegations.  Rather, what may be gleaned from the Settlement are concepts that fiduciaries should understand to best protect themselves from similarly targeted lawsuits.

Settlement Terms

The following are monetary, and some of the more interesting non-monetary, settlement terms:

  • $23,650,000 – split amongst two classes of participants. One class contains participants with account balances greater than $1,000 as of a certain date.  The other class contains participants who would have experienced a reduction of their account at a rate of $35/year due to revenue sharing for a certain period of years.
  • The plan’s committee will provide a targeted communication to participants invested in the money market that includes a fund fact sheet (or something similar that explains the risks of the money market fund), the historical returns of the money market over the past 10 years, and the benefits of diversification.
  • The plan’s fiduciaries must conduct an RFP for recordkeeping services within 18 months of the Settlement period. The RFP must explicitly request a fee proposal based on total fixed fee and on a per participant basis.
  • The fiduciaries must engage an independent investment consultant, review said consultant’s recommendations, and make decisions based on those recommendations, taking into account the lowest-class share class available, whether or not revenue sharing rebates are available, and alternative investment vehicle (CIT or SA) availability. 

Takeaways

Fiduciaries should take away the following concepts from the Settlement:

  • Plaintiff’s counsel seems to have a preference for per participant fee structures. This is not legally required, and in fact may not always be the most cost efficient fee design. Plaintiff’s counsel’s actions are a sober reminder that fiduciaries should, at a minimum, educate themselves regarding available fee structures and choose prudently among them.
  • Pushing for the lowest share class seems to be a recurring theme in lawsuits and settlements. Again, this is not a requirement under the law.
  • The desire to see more plans use investment vehicles that may be less expensive than their mutual fund counterparts is increasing. CITs and SAs are designed for institutional use, such as qualified retirement plans. Fiduciaries need to be educated on their availability and when it may be prudent to offer them in their plans.

As always, we will keep you abreast of significant industry developments and provide you with practical applications for your roles as a plan sponsor and fiduciary.

HEY JOEL!

Welcome to Hey Joel! This forum answers plan sponsor questions from all over the country by our in-house former practicing ERISA attorney.

Hey Joel,

Is it ok to use the same company for my plan’s recordkeeping, 3(38) advisory services, and administration? – Consolidating in California

Dear Consolidating,

It may seem logical to bundle all of your retirement plan’s services with one provider – recordkeeping, 3(38) advisory services, and administration. How easy would it be to have a one-stop-shop for everything? However, this might not be as good of an idea as you would think.

Having an independent 3(38) or 3(21) adviser is critical in monitoring the providers that are working on your plan. Without an independent expert on your side, how will you know whether, 1) mistakes are being identified, and 2) if mistakes are identified, are they being properly dealt with? An independent adviser will ensure providers are taking proper actions even if it costs them money.

You wouldn’t want the fox guarding the hen house, would you?

 

Expanding Horizons,

Joel Shapiro

 

About Joel Shapiro, JD, LLM

As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.

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

This month’s employee memo gives participants answers to common questions on HSAs. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

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 free.
  2. Contributions can be invested and grow tax free.
  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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