October 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.

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October 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.

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OMAHA

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P: 402.496.8800

HASTINGS

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P: 402.462.4154

LINCOLN 

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Lincoln, NE 68508

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October 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.

For more important disclosure information, click here.

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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

July Retirement Plan Newsletter 2019

July Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

JULY RETIREMENT PLAN NEWSLETTER

SUMMER HOMEWORK FOR FIDUCIARIES

As you bask in the glory of summer over the next couple of months, don’t forget the three Fs that define this cherished season — fun, Fourth of July, and fiduciary! While you’re enjoying the fruits of summer, don’t forget your fiduciary responsibilities! Ask yourself the following questions to make sure you are on top of your responsibilities and liabilities.

  1.  Are you practicing procedural prudence when making plan management decisions?
  2. Do you clearly understand the DOL’s TIPS on selecting and monitoring your QDIA in order to obtain fiduciary protection?
  3. Are you documenting each plan management decision and its support?
  4. Are you familiar with current trends in fiduciary litigation?
  5. Are you certain that your plan is being administered in accordance with your plan document provisions?
  6. What fiduciary liability mitigation strategies are you following? (Fiduciaries are personally financially responsible for any fiduciary breaches that disadvantage participants.)
  7. Are you kept abreast of regulatory changes?
  8. Are you appropriately determining reasonableness of plan fees, services and investment opportunities?
  9. How do you define “success” for your plan and what metrics do you use to track progress?
  10. Is your current plan design communicating the appropriate messaging to encourage success for your participants and plan fiduciaries?
  11. Is your menu efficiently designed for benefit of participants and plan fiduciaries?
  12. Are you certain you are providing all required communications and distributions to plan participants (including former participants with account balances)?
  13. Are you handling missing participants appropriately?
  14. Are you appropriately monitoring and documenting your fiduciary activities and those of your service providers?
  15. Are you maintaining plan records appropriately?

Many fiduciaries are unaware of their fiduciary responsibilities or do not understand them. As you contemplate these important questions while staying cool this summer, if you need help uncovering the answers to any of these important questions, do not hesitate to ask your plan advisor.

 

About the Author, Morgan Davis

Morgan is responsible for guiding plan sponsors through the intricacies of investment analysis and innovative plan design and making it easy to understand. Blending employer and employee objectives, Morgan encourages plan design initiatives to create optimal retirement plan outcomes for participants. Morgan is a graduate of Michigan State University where she earned a Bachelor of Arts in marketing.

THE SECURE ACT

LEGISLATION TO HELP AMERICANS SAVE MORE FOR RETIREMENT

It’s no secret that Americans are not saving enough for retirement. The U.S. Government Accountability Office (GAO) recently reported that 48 percent of households aged 55 and over have no retirement savings.

To address this issue, a new retirement-related bill is making its way through Congress, The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Its purpose is to help Americans save more for retirement by creating new rules to expand and preserve retirement savings, improve the administration of retirement plans, provide additional benefits and create revenue provisions. Highlights of the Act include:

Increase Auto Enrollment Safe Harbor Cap

Qualified automatic enrollment arrangements (QACAs) would be able to auto increase employee deferrals up to 15 percent instead of the currently required 10 percent cap.

Pooled Employer Plans (aka Open MEPs)

The legislation will allow for a new type of plan whereby unrelated employers could pool their resources to optimize buying power in a new type of plan called a “pooled employer plan” (PEP). By and large, the PEP is what was previously referred to as an open multiple employer plan (open MEP). Open MEPs were an issue that PEPs are designed to remedy. PEPs would be treated as a single plan under ERISA. The legislation also purports to eliminate the “one bad apple” rule whereby the qualification issue of one adopting employer would not taint the qualified status if the entire PEP for the remaining adopting employers.

 

Increase Credit Limit for Small Employer Plan Start-Up Costs

To make it more affordable for small businesses to implement retirement plans, the legislation will increase the credit for small businesses by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.

 

Child Birth or Adoption Withdrawals

The SECURE Act would allow participants to take up to $5,000 from their plan or IRA for birth, or adoption, related expenses incurred within a year of the action. These could be taken on a penalty-free basis.

 

Small Employer Automatic Enrollment Credit

The legislation will create a new tax credit of up to $500 per year to small employers to provide for startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.

 

Allowing Long-Term and Part-Time Workers to Participate In 401(k) Plans

Under current law, employers are not required to include part-time employees (those working less than 1,000 hours per year) in their defined contribution plan. The legislation will require employers maintaining a 401(k) plan to have at least a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service, except in the case of collectively bargained plans. For employees that are eligible based solely on the second new rule, employers may exclude those employees from testing under the nondiscrimination and coverage rules and from the application of top-heavy rules. In addition, those employees that are eligible based solely on the second new rule may be excluded from employer contributions.

 

Other Changes

Other changes such as increased filing failure penalties, PBGC premiums, 529 plans, some tax implications to certain identified individuals, and church plans are also included in the legislation.

 

It’s important to note that the SECURE Act is not yet finalized and has not been signed into law. As always, we will stay abreast of the legislation and will inform you when any significant changes are made.

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,

One of my current employees recently received a notice from Social Security saying that they might be entitled to a retirement benefit. Is it my responsibility to track this money down? – Investigating in Illinois

 

Dear Investigating,

Employers are required to file Form 8955-SSA with the IRS each year to report former participants with balances remaining in the plan. The information is provided to the Social Security Administration, which in turn notifies retirees of benefits.

While the form does allow employers to “un-report” these participants once they take distributions, it is common practice to only list newly terminated employees without ever removing those who have received their benefits.

I suspect that the employee in question here recently filed a claim for Social Security benefits and that the Social Security Administration (SSA) sent them a letter stating that they MAY be entitled to pension benefits under the plan. But, I also suspect that the plan paid the employee their account balance back when they terminated employment. But, without clear records showing that the employee already received their benefits, it may be difficult for the employer to convince the employee that the letter they received from the SSA is incorrect.

So, what is an employer to do? Here are my general thoughts.

  1. Check and see if someone at the employer has kept Form 1099Rs for plan distributions.
  2. Check with the prior recordkeepers and see if they still have any participant records for the plan that would show distributions.
  3. I don’t think the Form SSA is available to look up online, and as noted earlier, most employers do not “un-report” participants after they have received their benefits. But, if the employer does have past Form SSAs they can access, it would not hurt to at least take a look and see if the form lists previously reported participants who have received their benefits.
  4. If the employer cannot come up with any records that show the employee previously received their benefits from the plan, the employer could advise the employee that a) the employer has no records showing that the employee is owed money from the plan, b) they may have been listed on a Form SSA way back in 2003 showing that they had an account balance under the plan, and c) the employee likely previously received their benefit from the plan sometime following termination of employment. The employer should include a copy of the plan’s SPD along with the following note: “Attached is a copy of the plan’s Summary Plan Description, which includes a description of the plan’s claims procedure. The claims procedure outlines what the plan requires for you to file a claim and information on where to file, what to file, and who to contact if you have questions.”
  5. Going forward, the employer should put in place a system to retain all participant distribution forms and Form 1099Rs.

 

Dispelling Scrutinizing,

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: SUMMER HOMEWORK FOR PARTICIPANTS

This month’s employee memo gives participants “Summer Homework” encouraging them to do routine checks on their plan details to ensure that everything is in line. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

Summer can serve as a preview of your retirement — long days in the sun and spending time with your loved ones!  So, what better time to do a routine check-up on your retirement plan! Protect your loved ones and ensure you are keeping up to date with your retirement plan with our summer homework assignments!

 

Update/Assign Beneficiaries

Did you experience a major life change this year, such as marriage, divorce, birth or death? It’s important to consider updating your beneficiaries when you go through a major life change.

 

Review cyber Security Best Practices

Retirement plans are a major target for cyber attacks. Retirement plan participants often have weak passwords and can unknowingly fall for phishing schemes. It’s important to educate yourself on cyber security best practices to ensure you are keeping your information and assets safe.

 

Increase Contribution

Raise your contributions once a year by an amount that’s easy to handle, on a date that’s easy to remember – for example, 2 percent every Fourth of July. Thanks to the power of compounding (the earnings on your earnings), even small, regular increases in your plan contributions can make a big difference over time.

 

Revisit Asset Allocation

Rebalance your portfolio back to the original asset allocation that took into account your risk tolerance and time horizon, this ensures you adhere to your investment strategy. You rebalance by selling assets that make up too much of your portfolio and use the proceeds to buy back those that now make up too little of your portfolio.

 

Remember Sunscreen!

Wearing sunscreen reduces your risk of developing skin cancer, it keeps your skin looking younger and protects you from UVB rays. What other reasons do you need to wear it?

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

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

July Retirement Plan Newsletter 2019

June Retirement Plan Newsletter 2019

 

LUTZ BUSINESS INSIGHTS

 

JUne RETIREMENT PLAN NEWSLETTER

MILLENNIALS KNOW IT ALL. BUT, ARE THEY SAVING FOR RETIREMENT?

Millennials

Millennials – they’ve infiltrated the workplace and bring expertise in social media, individuality, technology and hipster bars. But, what do they know about saving for retirement? Typically, younger people don’t make retirement savings a priority. Living expenses, student debt, rent or house payments, and other day-to-day expenses mean that retirement savings take a back seat. In fact, a Franklin Templeton Investments survey from January 2016 says that 40 percent of millennials don’t have a retirement plan in place, and 57 percent haven’t started saving.1 That attitude, however, will make it much more difficult to have a secure retirement later,  according to seasoned retirement plan advisors.

The main thing that millennials are sacrificing by not saving now is time. Time allows funds to grow through compounding, and that can turn relatively modest savings into much larger nest eggs. For example, saving $50 each month in a retirement account earning 6.5 percent annually and compounded monthly would generate retirement savings of $226,781 over 50 years. A millennial who starts saving the same amount 30 years later, allowing it to only compound for 20 years, would have only $24,525 at the end of the 20 years.2

And $50 each month isn’t a huge amount, even for a cash-strapped millennial. Some other retirement savings tips you can share with your millennial employees are:

  • Take full advantage of employer-sponsored retirement plans, like 401(k) or 403(b) plans. Funds contributed to these tax-advantaged programs grow free of taxes, which means more money stays in the account to generate interest.
  • Contribute at least as much as your employer is willing to match. If your employer matches three percent of your salary, you should start by contributing that much.
    • Otherwise, you’re “leaving money on the table.” Your employer match instantly increases your contribution, and your money grows faster.
  • Don’t worry about not being an investment expert. Many retirement plans now offer target-date funds (TDFs). Also known as lifecycle or age-based funds, TDFs automatically adjust your investment assets as you age, so you don’t need to balance your funds yourself.

One common objection millennials have about contributing to an employer-based retirement fund is that they may not stay with that employer. Actually, very few people stay with a single employer for their entire careers, and they should be reminded that retirement plan funds can be rolled over into a new employer’s plan or rolled over into an IRA if they leave their job.

 

¹http://money.usnews.com/money/personal-finance/articles/2016-05-27/who-needs-a-retirement-plan-apparently-not-millennials

2http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx

 

About the Author, Jamie Hayes

Jamie has over 10 years of experience in employer retirement plan fiduciary services and corporate pension consulting. Jamie works extensively with matters pertaining to the financial operation of employer-sponsored retirement plans. Jamie combines powerful behavioral finance strategies with the maximization of fiduciary risk management to help promote retirement confidence for both employers and employees. Jamie graduated with a Bachelor of Science degree in economics and high honors from University of Michigan.

THE EVOLVING WORKSCAPE

Longevity, demographic changes and technological innovation have revolutionized the world of work.

As many employers face a coming wave of baby-boomer retirements, the resulting gaps in unique skills, experience and institutional knowledge may be difficult to fill. Keeping mature workers engaged may help ensure that your company retains the employee knowledge necessary to compete.1 Going forward, successful workplaces will not only leverage the skills and institutional knowledge of mature workers, but also ensure that the expertise mature workers possess is shared with other employees.

Here’s how:

  • Offer educational opportunities
  • Be flexible
  • Promote collaboration

Offer Educational Opportunities

More than 80 percent of workers age 45 to 64 say the opportunity to learn something new is critical to them, and over 70 percent say that job training is an essential element of that ideal employment.1

Experienced workers are eager to get additional training so they can keep their skills sharp and make themselves more employable.

While large employers with abundant resources may already be providing this training, smaller companies can still manage to do this and reap the benefits. Assess your company’s existing training model and determine opportunities for bolstering your employees’ skillsets.

  1. Use free or low-cost options

Highly skilled employees might be your best trainers. Ask them to pass on their skills and knowledge to others.

  1. Promote internal learning opportunities

Don’t limit your training offerings. Host a variety of training and business building sessions and engage with your employees to find out what they like, don’t like, and what they want to learn more about.

  1. Subsidize training programs

Thanks to modern technology, there are more educational opportunities than ever before, such as online courses and tuition reimbursement programs.

 

Be Flexible

Workplace flexibility is a way to attract talent because it accommodates active lifestyles and child or eldercare. One study revealed that 77 percent of millennials think that flexibility is not only desirable but also is key to productivity. The idea is also appealing to baby boomers, who are seeking flexibility as they near their retirement years.2

  1. Evaluate your company’s existing policies. Which aspects do you currently offer?
  • Flexible hours
  • Working remotely
  • Job sharing
  1. Consider offering part-time work or a phased retirement

Promote Collaboration

Employees of all ages can benefit from a sense of community in the workplace. Sharing ideas is one way to foster this feeling. Whether it’s informal with shadowing and project partnerships, or formal with mentorship and reverse mentorship programs, generational and experiential differences are a learning opportunity.

  1. Brainstorming

Brainstorming brings employees together to work toward a common goal by offering various perspectives and solution.

  1. Create a reverse-mentorship program

In this program, older employees can pick up something fresh from their younger counterparts. For example, those who are less skilled at using technology might rely on another employee to teach them how to use a certain application or tool. Conversely, more experienced employees can teach younger ones how to develop business and share valuable insights.

  1. Provide spaces that support all of the above

Employees are more likely to be happy and collaborative when they have places to meet together comfortably, participate in training or seminars, or work independently when necessary.

In the workscape of tomorrow, employees of traditional “retirement age” want more, and workplaces must adapt if they want their business to succeed. In order to retain and attract the best talent across generations, including would-be retirees, it is critical to:

  • Offer educational opportunities for employees hungry to learn;
  • Be flexible to accommodate the employees with different lifestyles; and
  • Promote collaboration to foster a community and creative thinking.

People are living longer, better lives. And the happiest, most productive workplaces are those that are adapting to support these lifestyle changes.

 

1Employers Need To Train Their Older Workers, Too. Forbes.com. Oct. 17, 2017.

2More Than Avocado Toast: How Millennials Will Make Retirement Better For Baby Boomers. Forbes.com. Jan. 29, 2018.

This article was contributed by our valued partner, Hartford Funds, with minor edits made for spacing reasons.

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,

Should stable value information be included in our investment policy statement? – Paranoid in Portland

Hey Paranoid,

The cash or principal preservation alternatives can be quite varied in scope. As a result it is extremely difficult to create language that would be widely applicable to all vehicles available for such plan goals. Money market funds, stable value funds, guaranteed income contracts, and general accounts are very different in their design, tertiary goals, holdings, and regulatory aspects. Thus one set of standard specific criteria would be unwise for an IPS.  The primary goal of these vehicles in an efficient plan investment menu is the preservation of principal and minimization of risk. Thus focusing on the credit quality and stability of the provider are appropriate as primary criteria. Note that our IPS template states that criteria should include “credit quality, diversification and stability of insurance provider” but, it also states that criteria “should not be limited to” those items. Thus other criteria are well within the scope of what fiduciaries may, and perhaps should, be reviewing depending on the type of vehicle being utilized. As a result our team of former practicing ERISA attorneys is confident in this language. Supporting that confidence is the fact that over 40 independent ERISA attorneys have reviewed our IPS template and provided comment and none of them provided any additional recommended language or edits in regards to this particular language.

 

Dispelling Paranoia,

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: MILLENNIALS START SAVING NOW!

This month’s employee memo informs young participants, particularly millennials, about the benefits of saving early. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

Typically, younger people don’t make retirement savings a priority. Living expenses, student debt, rent or house payments, and other day-to-day expenses mean that retirement savings take a back seat. In fact, a Franklin Templeton Investments survey from January 2016 says that 40 percent of millennials don’t have a retirement plan in place, and 57 percent haven’t started saving.1 That attitude, however, will make it much more difficult to have a secure retirement later, according to seasoned retirement plan advisors.

The main thing that millennials are sacrificing by not saving now is time. Time allows funds to grow through compounding, and that can turn relatively modest savings into much larger nest eggs. For example, saving $50 each month in a retirement account earning 6.5 percent annually and compounded monthly would generate retirement savings of $226,781 over 50 years. A millennial who starts saving the same amount 30 years later, allowing it to only compound for 20 years, would have only $24,525 at the end of the 20 years.2

And $50 each month isn’t a huge amount, even for a cash-strapped millennial. Some other retirement savings tips include:

  • Take full advantage of employer-sponsored retirement plans, like 401(k) or 403(b) plans. Funds contributed to these tax-advantaged programs grow free of taxes, which means more money stays in the account to generate interest.
  • Contribute at least as much as your employer is willing to match. If your employer matches 3 percent of your salary, you should start by contributing that much.
    • Otherwise, you’re “leaving money on the table.” Your employer match instantly increases your contribution, and your money grows faster.
  • Don’t worry about not being an investment expert. Many retirement plans now offer target-date funds (TDFs). Also known as lifecycle or age-based funds. TDFs automatically adjust your investment assets as you age, so you don’t need to balance your funds yourself.

One common objection millennials have about contributing to an employer-based retirement fund is that they may not stay with that employer. Actually, very few people stay with a single employer for their entire careers, and retirement plan funds can be rolled over into a new employer’s plan or rolled over into an IRA if you leave your job.

 

1http://money.usnews.com/money/personal-finance/articles/2016-05-27/who-needs-a-retirement-plan-apparently-not-millennials

2http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

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OMAHA

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P: 402.496.8800

HASTINGS

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Hastings, NE 68901

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LINCOLN 

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Lincoln, NE 68508

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GRAND ISLAND

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Grand Island, NE 68803

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July Retirement Plan Newsletter 2019

May Retirement Plan Newsletter

 

LUTZ BUSINESS INSIGHTS

 

MAY RETIREMENT PLAN NEWSLETTER

FOUR WAYS TO INCREASE EMPLOYEE RETIREMENT CONTRIBUTIONS

 As a retirement plan sponsor, you want your employees to save the most they can in order to reach their maximum retirement potential. A significant amount of research says that you can improve both employee participation and their saving rates. Here are four 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.1 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 3 percent, according to the CRR, which is lower than the typical employer match rate of 6 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 1 percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers where 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.2

1http://crr.bc.edu/wp-content/uploads/2016/08/IB_16-15.pdf

2http://crr.bc.edu/wp-content/uploads/2017/01/IB_17-2.pdf

 

About the Author, Michael Viljak

Michael joined RPAG in 2002 and has over 30 years of experience in the retirement plan industry, on both the wholesale and retail levels, focusing on retirement plans ever since their inception in 1981. Michael has an interest in fiduciary-related topics and was part of the team that created RPAG’s proprietary Fiduciary Fitness Program. He also authors many of the firm’s newsletter articles, communication pieces and training modules.

HOW MANY INVESTMENT OPTIONS SHOULD YOU OFFER?

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

In a study on retirement plan options, researchers concluded that it is possible to present plan participants with too many options.1 The researchers began by offering people selections of jams and chocolates. Some were offered a wide variety, while others received less choices. The wide variety of jams attracted more attention from people, but more people purchased jams when offered limited choices. When sampling chocolates, people enjoyed choosing from the larger selection more, but also were more dissatisfied with the choices. Those who sampled from a smaller selection were more satisfied and more likely to buy chocolates again. In other words, as the number of options increased, people became more concerned by the possibility of making the “wrong” choice–they became uncertain that they had made the best choice possible. 

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

In addition, more plan options can increase costs both for participants, in the form of fees, and for plan sponsors, who may face additional administrative charges from third party administrators for additional options. Further, auditing and other costs may increase, since the number of options could increase the time necessary to conduct audits.

It’s important to balance choice overload against the requirements of ERISA Section 404(c) which requires plan sponsors to have at least three diversified investment options with different risk and return characteristics.

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

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,

What’s the appropriate number of members and positions for a retirement plan committee? – Plannin’ in Pennsylvania

Dear Plannin’,

There is no specific guidance on the appropriate number of committee members. It’s important to have committee members who can contribute to the topics to be focused on. When there is one committee, as opposed to separate committees (for investments, plan design, employee communications, etc.) perhaps a CEO and/or CFO, an administrative executive and a participant communications representative would be appropriate committee members.

Ideally, these would be people who want to be on the committee to make a contribution to plan success and who are willing to accept fiduciary responsibilities, not the least of which is personal financial liability in event of a fiduciary breach. (Our Fiduciary Fitness Program (FFP) is designed to substantially mitigate this liability if followed appropriately.)

You can also have, as a regular or a non-voting member (guest with no intent as fiduciary), someone who can represent an employee base.

Most importantly, when setting up a committee, is to determine who the “named fiduciary” for the plan is. The named fiduciary will be identified in the plan document and this person or entity is the primary fiduciary for the plan. Note, if the named fiduciary is listed as “the Company” this is interpreted to mean the board of directors (if a C corporation or managing partners, if a partnership). The named fiduciary is expected to be the entity who has the authority to decide to have a retirement plan. The named fiduciary can delegate the majority of their fiduciary duties to co-fiduciaries (e.g., a retirement plan steering committee). Typically they would be anxious to do so as they likely would not want to be responsible for day-to-day management of the plan. The Committee Charter and ancillary paperwork (in our FFP) is designed expressly for this purpose.

 

The Committee Planner Extraordinaire,

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: TEN REASONS TO ROLL INTO YOUR EMPLOYER'S PLAN VERSUS AN IRA

This month’s employee memo informs participants about the benefits of joining their employer’s plan versus an IRA. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com and distribute to your participants. Please see an excerpt below.

Do you have retirement plan assets with a former employer’s plan that you’re not sure what to do with? Review the pros and cons of consolidating into your current employer’s retirement plan versus an individual retirement account (IRA).

1. Performance results may differ substantially.

 As an institutional buyer, a retirement (401(k), 403(b), 457, etc.) plan may be eligible for lower cost versions of most mutual funds. Cost savings with institutional share classes can be considerable and can have significant impact on long-term asset accumulation, which benefits you.

 One recent study by the Center for Retirement Research indicated that the average return retirement plan participants experienced was nearly 41 percent greater than other investors. Share class savings likely contributed to this result.

2. The IRA rollover balance may be too small to meet minimum investment requirements.

 Many of the low expense mutual fund share classes available to investors outside of retirement plans have minimum investment requirements in excess of $100,000. Some are $1 million or more. As a result, the average retirement plan participant who rolls a balance into an IRA may not have access to certain investments and/or will often end up investing in one of the more expensive retail share classes.

3. IRA investment advisors may not be fiduciaries.

 In a 401(k) or 403(b) plan (and even many 457 plans), both the employer and the plan’s investment advisor may be required to be a fiduciary. This means that investment decisions they make must be in the best interests of plan participants. This is the golden rule of fiduciary behavior and if not explicitly followed can lead to heavy economic impact to those organizations.

 A non-fiduciary IRA broker or advisor is not necessarily required under law to act in the client’s best interests, and as a result, there is the possibility that their recommendations may be somewhat self-serving.

4. Stable value funds are not available.

 While money market funds are available to IRA investors, they do not have access to stable value funds or some guaranteed products that are only available in qualified plans. Historically money market fund yields have often been below that of stable value or guaranteed interest fund rates.

5. IRAs typically apply transaction fees.

 Many IRA providers require buy/sell transaction fees on purchases and sales. Retirement plans typically have no such transaction costs.

6. Qualified retirement plans (like 401(k), 403(b), and 457) offer greater protection of assets against creditors.

 Retirement plan account balances are shielded from attachment by creditors if bankruptcy is declared. In addition, retirement balances typically cannot be included in judgments.

7. Loans are not available in IRAs.

Loans from an IRA are not allowed by law, unlike many qualified retirement plans which may allow for loans. Although we do not generally recommend you take loans from your retirement plan, as they may hinder savings potential, some individuals prefer having such an option in the event they run into a financial emergency. Also, as a loan is repaid through payroll deduction, participants pay themselves interest at a reasonable rate.

8. Retirement plan consolidation is simple and convenient.

It is easier and more convenient for you to manage your retirement plan nest egg if it is all in the same plan rather than maintaining multiple accounts with previous employers or among multiple plans and IRAs.

9. Retirement savings via payroll deductions are convenient and consistent.

The convenience of payroll deductions is very helpful for consistent savings and achieving the benefit of dollar cost averaging.

10. For present retirement savings strategies, retirement plans can provide greater savings than IRAs.

The law allows you to make a substantially larger contribution to many retirement plans than you can save with an IRA.

 

Although personal circumstances may vary, it may be a good idea for you to rollover your balance in a former employer’s retirement plan into your current employer’s plan rather than an IRA. Your savings potential will not be as limited as with an IRA.

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

Q2 FIDUCIARY HOT TOPICS

RETIREMENT IS A LONG WAY OFF UNTIL IT'S NOT - SHOULD I SUPPLEMENT MY RETIREMENT SAVINGS WITH AN IRA?

IRAs are an effective way for individuals covered by employer-sponsored retirement plans to supplement their retirement savings. Anyone can make IRA contributions up to the annual limit. For 2019, this limit is $6,000, plus an additional catch-up contribution of $1,000 for taxpayers 50 and older. For traditional IRAs, contributions are tax deductible in the year made. Taxes are deferred on both contributions and earnings until the year withdrawn. For Roth IRAs, contributions are after tax and withdrawals (if certain requirements are satisfied) are completely tax free, including earnings.

While everyone with income can contribute to an IRA, there are phase-outs for high earners. These phase-outs reduce or eliminate the ability to make deductible or Roth contributions. The phase-outs for deductible contributions only apply to individuals covered by an employer-sponsored retirement plan.  The phase-outs for Roth contributions apply to all high earners.

  • Individuals subject to these phase-outs can still make nondeductible contributions. Nondeductible contributions to an IRA are advantageous as taxes are deferred on earnings until the year withdrawn. This can be especially attractive for individuals who expect to be in a lower tax bracket after retirement.
  • For 2019, if covered by a retirement plan, the phase-outs for deductible contributions are:
    • Single taxpayers: $64,000 – $74,000
    • Married filing jointly:
      • For the spouse covered by a plan: $103,000 – $123,000
      • For the spouse not covered by a plan: $193,000 – $203,000
  • For 2019, for all individuals, the phase-outs for Roth contributions are:
    • Single taxpayers: $127,000 – $132,000
    • Married: $193,000 – $203,000

WELLS FARGO - PRINCIPAL AGREES TO BUY RETIREMENT BUSINESS

Wells Fargo sold off a number of business units in an effort to better focus on its core banking business. In the latest deal, Principal Financial Group agreed to purchase Wells Fargo’s retirement and trust services business for $1.2 billion. This is a substantial acquisition. This business represents $827 billion in retirement plan assets with 7.5 million participants. This transaction will increase Principal’s footprint in the mid-size market as the majority of Wells Fargo’s plans range from $10 million to $1 billion in assets. In terms of assets, Principal will become the third largest recordkeeper, trailing only Vanguard and Fidelity. It is possible significant layoffs will occur as this transaction is obviously attractive to Principal because of the opportunity to achieve economies of scale.  This is part of an ongoing wave of consolidation in the industry that includes a number of significant acquisitions: Empower- JP Morgan, John Hancock – New York Life, and One America – Bank of Montreal.

DOL'S NEW FIDUCIARY RULE & THE SEC'S BEST INTERESTS RULE - IS NO NEWS GOOD NEWS?

 Neither the Department of Labor (DOL) nor the Securities & Exchange Commission (SEC) has given any indication of how they are progressing with their new respective fiduciary rules. Last year, both agencies said they would publish their respective rules in September of this year. At this point, it seems unlikely either agency will meet this deadline. Additionally, it is possible these rules may never materialize due to the current administration’s general view on regulations.

In March of last year, almost 10 years after the DOL’s Fiduciary Rule was first proposed, the Fifth Circuit of the U.S. Court of Appeals vacated the rule in its entirety. The DOL elected not to appeal to the Supreme Court. Quickly following this decision, and to no one’s surprise, the SEC issued a package of its own proposed advice standards. This includes a “Regulation of Best Interest.” The Commission indicated that a final rule would be forthcoming this fall.

In October, DOL released its regulatory agenda for 2019 which includes plans to issue a revised Fiduciary Rule in September of 2019.  The essence of the DOL’s original Fiduciary Rule was that persons advising plans, participants or IRA holders, are acting as fiduciaries and may only make recommendations that are in the “best interests of the client.” The SEC’s new rule goes beyond the existing rule of suitability and requires that brokers and advisors put the best interests of their clients ahead of their desire to make money. Both rules have generated controversy. They have been criticized as unnecessary and overly complex (DOL’s rule is 176 pages long and the SEC’s proposed rule is almost 1,000 pages). The DOL’s rule experienced challenges in the courts on the grounds that the attempt to regulate the financial services industry went beyond the Department’s statutory authority. Although the aims of these two agencies are similar, they have made no attempt to coordinate their efforts.

LITIGATION UPDATE: ABB SETTLES FOR $55 MILLION

ABB recently announced the settlement of a lawsuit involving its 401(k) Plan. This settlement is another victory for the law firm of Schlichter, Bogard & Denton in St. Louis. Earlier this year, it obtained a $10 million settlement in a suit brought against Duke University. Filed in 2013, this suit has now dragged on for almost 13 years. It was one of the first class action suits against a retirement plan under ERISA. As in all such class actions, the plan in question is substantial. ABB has 24,000 employees and about $2 billion in plan assets. The alleged fiduciary violations are typical for these kinds of suits – poor investment choices and excessive fees that, in this case, were used to subsidize services provided to other plans. The case went to trial in 2010, resulting in a $36 million judgment for the plaintiffs. On appeal, the judgment was overturned and the case remanded for further proceedings.  The Schlichter firm has obtained large settlements in other class actions including $57 million against Boeing and the largest settlement to date in these types of suits – $62 million against Lockheed Martin. Attorney’s fees and other details of the settlement have yet to be announced.

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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