December Retirement Plan Newsletter

December Retirement Plan Newsletter

INSIGHTS

DECEMBER RETIREMENT PLAN NEWSLETTER

EXCHANGE YOUR OLD RETIREMENT SOLUTIONS FOR NEW ONES

JONATHAN COOMBS, INVESTMENT ANALYST

What is an Exchange?

An exchange is a turnkey solution for businesses that allows you to provide the benefit of a retirement plan while offloading much of the administrative and fiduciary responsibilities at a potential cost reduction. A team of professionals work together on your behalf so you can focus on running your business, not your retirement plan.

 

Retirement Readiness

An exchange is a great way to help your employees reach retirement readiness by providing them with a savings vehicle like a 401(k) plan, but with less administrative burden and by transferring certain risks.

 

Fiduciary Risk Mitigation

The fiduciary has a legal obligation to carry out its plan responsibilities with prudence, good faith, honesty, integrity, service and undivided loyalty to beneficiary interests – in this case, retirement plan participants. When joining an exchange, a fair amount of fiduciary responsibility is taken off your hands.

 

Administrative Relief

Employers oftentimes don’t have the resources to effectively manage the complex requirement of administering a qualified retirement plan. With an exchange all plan administrative duties can be outsourced – a benefit typically only available to very large companies.

 

Cost Effectiveness

There’s strength in numbers. By teaming up with other businesses in an exchange, you can benefit from economies of scale and seamless processing that help reduce the costs associated with operating and maintaining a retirement plan.

 

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

 

About the Author, Jonathan Coombs

Jonathan provides guidance to plan sponsors across the country on retirement best practices regarding fee benchmarking, investment analysis, plan design, fiduciary compliance and participant outcomes. As an asset allocation specialist, Jonathan project manages key business development initiatives in the custom solution arena. He also serves as a fixed income analyst. Jonathan attended The Julliard School, where he obtained a Bachelor of Science in music and a Master of Music.

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 I distribute the Fiduciary Investment Review to plan participants? – Generous in Georgia

 

Dear Generous,

I appreciate your desire to provide detailed information to your plan participants, but hold your horses. While there is nothing legally preventing the sharing of the Fiduciary Investment Review (FIR) with participants, we do not recommend it and, in fact, strongly discourage it. The FIR is designed for delivery to fiduciaries, not participants. This is not only because the fiduciaries are more sophisticated but because the report is better understood (I would even say, only understood) when presented/explained by an advisor that knows the data. The average participant may be alarmed by watchlisted funds and take inappropriate action (i.e., remove them from his/her portfolio when that’s not the recommendation.) Further, we fear that participants will move all their money into the funds scoring 9 or 10 and as you can imagine, doing so would ignore the critical strategy of diversification. Instead of sharing the report itself, I always recommend an employee communication from the plan sponsor. Something like – “Hey employees, the company has met with our plan advisor to review the plan investments and all is doing great. We take the monitoring seriously, we do it regularly and will let you know when/if a change is needed… Until then, don’t forget to join, increase your deferral, diversify, etc, etc.” No need to create alarm unnecessarily.

 

Always here to give advice,

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: HOLIDAY BUDGETING

Holiday Ballin' on a Budget

This month’s employee flyer gives participants tips for budgeting during the holiday season. Download the flyer from your Fiduciary Briefcase at fiduciarybriefcase.com. Please see an excerpt below.

The holidays are a time for giving, but often people can be a little overgenerous during this time of year and later find themselves in financial trouble. Consumer counseling agencies see a 25 percent increase in the number of people seeking help in January and February, mostly by people suffering from an influx of holiday bills.¹

Here are our top tips for saving money during the holiday season:

1. Create a Holiday Budget
Monthly Income – Monthly Expenses = Your Holiday Budget
Make a list of everyone you will buy for and how much you will spend on each person, then stick to it!

2. Pay with Cash
When you pay with cash, you can get a better handle on how much you’re spending. You’re forced to stick to your budget, because you can’t spend cash you don’t have!

3. Pay with Gift Cards
There are websites and stores where you can purchase gift cards at a discounted price. Shop with them and you’re automatically saving money. Shop for items on sale or at a discount store and save even more money!

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

Norby Joins Lutz Financial

Lutz, a Nebraska-based business solutions firm, welcomes Bailey Norby to the Lutz Financial division in the Omaha office. Bailey joins the team as a Client Service Associate. She is responsible for the preparation and filing of client data…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 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

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

November Retirement Plan Newsletter

November Retirement Plan Newsletter

INSIGHTS

NOVEMBER RETIREMENT PLAN NEWSLETTER

HOW AND WHEN TO PAY PLAN EXPENSES WITH PLAN ASSETS

How and when to pay plan expenses with plan assets

TOM BASTIN, JD, LLM, AIF, CEBS, MANAGING DIRECTOR, SOUTHEAST REGION

Some retirement plan expenses can be paid for with plan assets — but many can’t. Which are the “reasonable and necessary” retirement plan expenses that can be paid out of plan assets?

Generally, services required to maintain the plan’s compliance and administration can be paid from plan assets. Obvious examples include the annual nondiscrimination testing and preparation of the annual Form 5500. Another example is a plan amendment or restatement that is required because of a legislative change.

Optional services generally cannot be paid out of plan assets. One clear example is costs for projections that are optional and benefit the company, not the plan participants.

Some service fees may not be easy to classify. Fees for resolving plan corrections — such as delinquent deferral remittances or contributions determined with a definition of compensation not supported in your plan document.

In the event of an incorrect test result, regardless of who was at fault, the law ultimately holds the plan sponsor responsible for the proper maintenance of the plan. As a result, the plan sponsor cannot shift the financial burden for the corrections to the plan.

All in all, it’s perfectly acceptable and common to charge reasonable and necessary transaction-based and record-keeper administrative fees to participants. However, it is critical to ensure that similarly situated participants are treated the same. It would be discriminatory and, therefore not allowed, for non-highly compensated employees to pay administrative fees while highly compensated employees did not.

If you are unsure whether a specific fee can be paid from plan assets, please contact your advisor. We’ll happily talk through the particulars of your situation to help you arrive at an appropriate decision.

 

About the Author, Tom Bastin

Tom BastinTom uses his expertise in plan design, administration, recordkeeping, compliance, investment analysis, fee analysis, vendor benchmarking, fiduciary governance and participant education to help plan sponsors and participants reach their retirement goals. PlanAdvisor ranked Tom one of the “Top 100 Retirement Plan Advisers” in 2013 and 2015. Financial Times ranked him one of the “Top 401 Retirement Advisers” in 2015. Tom earned a Bachelor of Arts at Purdue University, a Juris Doctor at Nova University and an LL.M. in Taxation Law from the University of Miami.

 

DON'T LET YOUR RETIREMENT PLAN TURN FROM BENEFIT TO LIABILITY

A retirement plan is important to your business — and to all the employees relying on it for income later in life. However, mistakes and confusion can turn retirement plans from an attractive benefit into a liability.

A properly administered retirement plan avoids unnecessary costs and administrative problems, and ultimately mitigates liabilities for plan fiduciaries. The IRS recommends periodic plan reviews as part of proper administration and recently released a short bulletin with helpful tips and information about how to create and implement a retirement plan check-up.

A plan checkup should include a review of your plan documents and communications. A comprehensive review will confirm that the plan’s current terms are being administered correctly and that the current plan language still makes sense and isn’t unnecessarily limiting based on practical administrative considerations.

Unintentional fiduciary breaches typically involve administration issues like delinquent deferral remittances, a definition of compensation that’s inconsistent with the definition expressed in the plan document, missed participant notifications or misinterpreted eligibility provisions (such as confusing “hours of service” with “elapsed time”).

These errors can be time-consuming and costly to resolve — but when recognized early, it’s easier and less costly to resolve them. The IRS and the DOL offer voluntary correction programs to help you. Under certain circumstances, a company may self-correct administrative errors internally without informing the IRS, based on their self-correction program.

There is no substitute for proper administration of your retirement plan, but some document language is cryptic. Accidents can go unnoticed, and most plans can benefit from assistance in interpretation to ensure proper administration of the provisions in their plan document.

A second perspective can be invaluable. For assistance reviewing your plan, please contact your advisor.

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,

Can I avoid an audit by splitting my employees into two plans? – Fingers Crossed in Florida

 

Dear Florida,

There are some organizations out there promoting this approach. Here is the problem: There is no regulation indicating a situation in which two separate plans would be acceptable so you can avoid an audit. There are plenty of regulations regarding control groups, affiliated service groups, etc., indicating this is not acceptable. Upon audit by either the IRS or DOL you have zero guarantee they won’t disallow all 5500s filed without an audit subjecting both companies to penalties (IRS $25 per day, DOL $1,100 per day) for late filing since no audit was included. Both the IRS and DOL will ask questions pertaining to ownership of all entities by the owners of the company that is audited. In other words, they are going to discover there is a second plan.

In addition, under the Prudent Man Standard of Care you will need a strong reason for separating plans and exposing participants to higher costs as a result (all the 403(b) fee lawsuits center around record-keeper consolidation in order to achieve cost savings in addition to fund consolidation to obtain lower cost share classes). Thus, I would not go this route receiving a legal opinion the plan sponsor can rely upon given the potential for thousands of dollars of fines. The legal opinion should be made out to the plan sponsor and not the TPA or advisor marketing the approach. The plan sponsor needs someone they can turn around and sue when this blows up on them.

 

Uncrossing Fingers,

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: TIPS TO WEATHER A TURBULENT MARKET

Tips to Weather a Turbulent Market

This month’s employee memo reminds participants that market volatility is normal and provides tips on steps they should be taking in both up and down markets. Download the flyer from your Fiduciary Briefcase at fiduciarybriefcase.com. Please see an excerpt below.

With the recent market volatility, it’s understandable that you may be concerned about your investments. Volatile markets can make you wonder if you’re on track to meet your retirement goals. Don’t be discouraged and most of all, don’t panic. Instead, be proactive! Consider the following steps you should be taking in both up and down markets:

  1. Review Your Portfolio. Know your investment mix and be sure you are invested in the appropriate asset classes (based on your risk tolerance and time horizon to retirement). Times like these reinforce the need to diversify (while diversification does not guarantee against loss of principal, it can help spread your risk among different asset classes and market segments).
  2. Check Your Contribution Rate. How much you contribute each month can directly impact how much you will have at retirement. Have you done a retirement needs calculation? Do you know how much you should be contributing each month to reach your goal? Are you increasing that amount each year or more often based on your income and age?
  3. Rebalance. This will readjust your portfolio back to your original investment strategy attempting to “sell high and buy low.” Essentially, when you rebalance, you tend to sell some appreciated assets and purchase others with lower valuations. Regular rebalancing (as a rule of thumb, at least once a year) may increase the overall return of your portfolio over time.
  4. Consult with a Professional. Don’t go it alone. Financial planning resources are available through our retirement plan advisor.

Remember, staying invested in times of market turbulence will help you participate fully in potential market gains. While there is never any certainty in the market, it is worth noting that some of the sharpest market declines were followed by steep rebounds. History has taught us that volatility is to be expected. The implications surrounding the current turmoil should call on plan participants to focus on what they should otherwise be doing on a regular basis.

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

Norby Joins Lutz Financial

Lutz, a Nebraska-based business solutions firm, welcomes Bailey Norby to the Lutz Financial division in the Omaha office. Bailey joins the team as a Client Service Associate. She is responsible for the preparation and filing of client data…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 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

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

October Retirement Plan Newsletter

October Retirement Plan Newsletter

OCTOBER RETIREMENT PLAN NEWSLETTER

HOW DO YOU MONITOR A DASH? EVALUATING CASH EQUIVALENT FUNDS

How Do You Monitor a Dash? Evaluating Cash Equivalent Funds

RYAN HAMILTON, INVESTMENT ANALYST

Evaluating cash equivalent funds

As you read your plan’s lineup, you see the scores listed in the chart above.

Periodically you review your plan’s fund lineup; you place some funds on Watchlist, you replace under-performers and you continue to monitor those funds that score acceptably. But, you see a dash next to your cash fund and wonder, what should you do? Traditional evaluation metrics can be difficult to apply to cash funds. You can look at returns, but without

an appropriate benchmark or a way to directly measure the risk taken by the fund, the market value performance number can be difficult to interpret. Perhaps fees can provide the answer, but there are wrap fees, investment management fees and trustee fees, all assuming there is a stated fee to review in the first place. What is a fiduciary to do?

While cash fund due diligence can be intimidating, there are key differentiators among stable value funds that fiduciaries can review to document that a fund is a good fit for their participants. Ultimately stable value funds are not too different from other funds within a plan lineup and the strategies to evaluate them are similar. There exists an established methodology incorporated into your IPS for evaluating these standard funds. Let’s evaluate how well that framework can be applied to the stable value universe.

The first component for evaluation of the RPAG Scorecard is a fund’s style. Does the fund stick to its professed asset class? Do the same for a stable value fund’s portfolio. Is it allocating to assets and securities that are appropriate for a high-quality, short-term fixed income fund? Also evaluate the fund’s diversity of allocation. Monitoring its allocating across a variety of subsectors of fixed income (treasuries, corporate bonds, mortgage backed securities, etc.).

The next criteria is evaluation of risk and return. There are a plethora of data points for evaluating stable value fund risk and return. With regard to return, examine a fund’s crediting rate or its yield relative to the stable value universe to evaluate this fund’s performance. Similar to traditional funds, performance needs to be examined relative to the risk taken. For evaluating risk the underlying portfolio is important. Review the credit ratings of the underlying securities, verify the average duration or maturity relative to the funds’ peers, and evaluate the asset managers investing the underlying portfolio. Also review the number of wrap providers for the portfolio and their credit rating.

The final quantitative component of the RPAG Scorecard is peer group review. Once again a stable value fund’s evaluation can follow this same methodology. Evaluation of a fund’s market-to-book ratio, relative to its peers, is a key component of portfolio health and to identify potential issues early.  Cash flows in and out of a fund relative to the universe give valuable insight to how quickly the portfolio can react to changing market conditions.

For qualitative components, look at the same key characteristics that are evaluated for standard funds, as well as a few unique characteristics to stable value. A long tenured and constant management team is important no matter the type of fund. Also, while there are additional fees in the stable value universe, evaluating them relative to the universe is still important. Unique to stable value is a fund’s exit provisions (is there a put, and if so how long) and the fund’s high yield policy to ensure both align with participant best interests.

Stable value funds seem unique, and they do have peculiar challenges when evaluating them, it’s still a crucial task for fiduciaries.  The same process that has been established within the plan’s IPS to evaluate the core line-up, can be adapted to evaluate stable value funds in a similar manner.

All the data points identified as key components of evaluation can be found on the RPAG stable value fund factsheets.

Stable Value Fund Terminology Cheat Sheet

 

About the Author, Ryan Hamilton

Ryan HamiltonRyan works closely with advisors and plan sponsors on investment due diligence and in-depth analysis of manager performance and platform and provider benchmarking. Prior to joining RPAG, Ryan worked for a third-party administrator as an associate administrator managing annual compliance for defined contribution and defined benefit plans.  He earned a Bachelor of Arts degree from UCLA and is a CFA Level III Candidate.

 

BEWARE OF THE IRS AND DOL: FOUR RED FLAGS THEY SEEK ON FORM 5500

The Form 5500 is an ERISA requirement for retirement plans to report and disclose operating procedures. Advisors use this to confirm that plans are managed according to ERISA standards. The form also allows individuals access to information, protecting the rights and benefits of the plan participants and beneficiaries covered under the plan.

 

Make sure you are compliant. Be aware of red flags that the IRS and DOL look for on Form 5500 filings:

  1. Not making participant deferral remittances “as soon as administratively possible” is considered a fiduciary breach and can make the plan subject to penalties and potentially disqualification. Delinquent remittances are considered to be loans of plan assets to the sponsoring company.
  2. An ERISA fidelity bond (not to be confused with fiduciary insurance) is a requirement. This bond protects participant assets from being mishandled, and every person who may handle plan assets or deferrals must be covered.
  3. Loans in default for participants, not continuing loan repayments or loans that are 90 days in arrears, are a fiduciary breach that can make the plan subject to penalties and disqualification.
  4. Corrective distributions, return of excess deferrals and excess contributions, along with any gains attributed must be distributed in a timely manner (typically two and a half months after the plan year ends). In some cases, these fiduciary breaches can be self-corrected if done within the same plan year in which they occurred, and may be considered additional breaches if they extend beyond the current plan year.

 

This is a partial, non-exhaustive list of common Form 5500 red flags. If you’re concerned about ERISA compliance, contact your advisor sooner, rather than later.

For more background on the Form 5500, visit the Society for Human Resource Management online. See “Regulatory 5500: What is Form 5500, and where are instructions for completing it?”

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,

My prospect is a 501(c)(3) organization that is not affiliated with a church or school. Are they eligible for a 401(k) plan? Are there any benefits over a 403(b) plan? – Contemplating in Kansas

Dear Contemplating,

Contemplate no more! A 501(c)(3) organization is a nonprofit organization and can sponsor either a 401(k) plan or a 403(b) plan. In 1996, the law changed allowing nonprofit organizations to choose either the 401(k) or 403(b) plan for their employees. Here are some key differences between the two types of plans:

  • Unlike 401(k) plans, 403(b) plans are not subject to nondiscrimination testing requirements for salary deferral contributions. The nondiscrimination testing rules that apply to 401(k) plans sometimes require that salary deferral contributions be returned to highly compensated employees due to the results of nondiscrimination testing. This does not happen with 403(b) plans.
  • Annual limits are the same for both a 401(k) plan and 403(b) plan, except that the 403(b) plan may elect an additional form of catch-up contribution for participants who have 15 years of service, giving participants more flexibility.
  • 403(b) plans must follow the “universal availability” rule for eligibility to defer salary, meaning that if an employer permits one employee to defer salary into a 403(b) plan, they must extend the offer to all employees.
  • Some nonprofit organizations have established 401(k) plans in recent years, as the 401(k) is more well-known to their employees.

 

Hopefully, that sheds some light on the differences between a 401(k) plan and a 403(b) plan.

The ERISA Wizard,

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: SKIP THE LINE, BUT DON'T SKIP THE MATCH

This month’s employee flyer encourages participants to meet their employer match and not leave money on the table. Hang the memo in your lunchroom or distribute to employees along with their paychecks. Download the flyer from your Fiduciary Briefcase at fiduciarybriefcase.com. Please see an excerpt below.

Skip the Line, But Don't Skip the Match!

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

Norby Joins Lutz Financial

Lutz, a Nebraska-based business solutions firm, welcomes Bailey Norby to the Lutz Financial division in the Omaha office. Bailey joins the team as a Client Service Associate. She is responsible for the preparation and filing of client data…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 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

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

September Retirement Plan Newsletter

September Retirement Plan Newsletter

SEPTEMBER RETIREMENT PLAN NEWSLETTER

USE PLAN ANALYTICS TO EVALUATE YOUR RETIREMENT PLAN

Use Plan Analytics to Evaluate Your Retirement Plan

MICHAEL VILJAK, SENIOR PLAN ADVISOR

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

 

Plan analytics you should explore:

  • Median age, tenure and savings rates of plan participants

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

 

  • Participants not contributing sufficiently to receive all eligible employer match

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

 

  • Participants, by age, in each target date fund

Another demographic that can be helped by focused participant communications.

 

  • Participants taking loans

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

 

  • Loan default rates

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

 

  • Dollar amounts of employee contributions by type and source

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

 

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

For assistance in analyzing your plan analytics, please contact your plan advisor.

 

About the Author, Michael Viljak

Michael Viljak joined RPAG in 2002 and has over 30 years of experience in the pension field, on both the wholesale and retail levels, focusing on 401(k) 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.

HEALTH MODIFICATION CAN INCREASE RETIREMENT DOLLARS

A top concern for individuals nearing retirement is out-of-pocket healthcare costs. A recent study revealed that 74 percent (of 1,316 U.S. adults aged 50 or older) admit that one of their top fears is out-of-control healthcare costs, and 64 percent are terrified of what healthcare costs may do to their retirement plans (up from 57 percent in 2015).

Although fear is clearly real, there is something people can do to mitigate future healthcare costs. Personal care and healthy lifestyle choices can reduce healthcare costs and increase retirement dollars.

Many organizations are initiating wellness programs to promote healthy living among their employees. These programs focus on employee engagement and correcting the health epidemics facing Americans today. Eighty-seven percent of the world’s workers are disengaged. Additionally, sedentary office culture is being linked to lifestyle-related conditions such as diabetes and heart disease.

A case study conducted by HealthyCapital follows a typical 45-year-old male (John) diagnosed with high blood pressure. The study showed that John will spend $1,591 more annually out of pocket today versus a healthy person. With a few simple lifestyle adjustments (exercising, limiting alcohol intake, choosing healthy fats and limiting dietary salt) he could save an average of $3,285 annually over his lifetime, extend life expectancy by three years and reduce his pre-retirement (age 50-64) healthcare costs by $65,697. If he invested his annual savings into a typical retirement portfolio, John could generate an additional $100,348 for retirement by age 65.

 

Annual Out-Of-Pocket Healthcare Costs

Annual Out of Pocket Healthcare Costs

 

Moving from an average lifestyle to well-managed living is a clear win – not only does the well-managed person feel better, they also have additional income in both pre-retirement and retirement.

Encouraging employees to live a well-managed life through wellness programs is not only a benefit for employees, but employers as well through reduction in medical-related employee absence and increased productivity and morale.

To learn about implementing a wellness program for your employees, please contact your plan advisor.

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,

I volunteer on the Board of Directors, so I don’t have liability right? – Can’t Touch This in Colorado

Hey Can’t,

Liability is a complicated topic. If the plan is an ERISA plan, then state law is immaterial. Compensation has zero impact on whether an individual is a fiduciary. It is role and control that are the determinants. If you can exercise control or authority over the assets or management of the plan, you are a fiduciary. Ultimately the terms of the plan document will govern, but 90 percent of the time the organization is the named fiduciary or plan administrator. Because the board controls the organization, and thus can control the plan, the members thereof are typically fiduciaries.

If you sit on a committee and partake in fiduciary decisions, you have potential liability. I would recommend fiduciary liability insurance and specifically make sure it covers all committee members regardless of their employee status.

 

2 legit 2 quit,

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: BACK TO SCHOOL

This month’s employee flyer encourages participants to ask questions and be educated about their retirement plan. Hang the memo in your lunchroom or distribute to employees along with their paychecks. Download the flyer from your Fiduciary Briefcase at fiduciarybriefcase.com. Please see the flyer below.

School's In Session! Are You Asking the Right Questions?

 

DISCLOSURE INFORMATION

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

For more important disclosure information, click here.

RECENT LUTZ FINANCIAL POSTS

Norby Joins Lutz Financial

Lutz, a Nebraska-based business solutions firm, welcomes Bailey Norby to the Lutz Financial division in the Omaha office. Bailey joins the team as a Client Service Associate. She is responsible for the preparation and filing of client data…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 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

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

August Retirement Plan Newsletter

August Retirement Plan Newsletter

AUGUST RETIREMENT PLAN NEWSLETTER

COLLECTIVE INVESTMENT TRUSTS - THE FASTEST GROWING INVESTMENT VEHICLE WITHIN 01(K) PLANS

Collective Investment Trusts

ALEX KAHN, INVESTMENT ANALYST

For almost a century, collective investment trusts (CITs) have played an important role in the markets. They were originally introduced in 1927. A 2016 study showed that they are the fastest growing investment vehicle within 401(k) plans, with 62 percent of asset managers believing their clients will shift from mutual funds to CITs.

For the vast majority of their existence, CITs were available only in defined benefit (DB) plans. In 1936 CIT use expanded in DB plans when Congress amended the Internal Revenue Code to provide tax-exempt (deferred) status to CITs. CITs then gained widespread adoption in the 1950s when the Federal Reserve authorized banks to pool together funds from pensions, corporate profit-sharing plans and stock bonus plans. The IRS also granted these plans tax-exempt status.

In the 1980s, 401(k) plans became primary retirement plans and mutual funds became the primary investment vehicle, due to daily valuation. In the 2000s, CITs gained significant traction in defined contribution (DC) plans due to increased ease of use, daily valuation and availability. During this time CITs were also named as a type of investment that qualifies as a qualified default investment alternative (QDIA) under the Pension Protection Act of 2006.

The history of CITs

From 2009 to 2014, the use of target-date CITs nearly doubled as a percentage of target-date assets, from 29 percent to 55 percent.

The advantages of CITs are plentiful:

  • Lower operational and marketing expenses
  • A more controlled trading structure compared to mutual funds
  • They’re exempt from registration with SEC, thereby avoiding costly registration fees

 

On the other hand, CITs are only available to qualified retirement plans, and they may have higher minimum investment requirements.

While CITs have traditionally only been available to large and mega-sized plans, continued fee litigation – as well as increased CIT transparency, reporting capabilities and enhanced awareness – has amplified the allure of CITs to plan sponsors across all plan sizes. However, CITs haven’t been widely available to all plans — until now.

Through your advisor’s strategic partnership with RPAG, a national alliance of advisors with over 35,000 plans and $350 billion in retirement plan assets collectively, they can provide their clients with exclusive access to actively managed, passively managed and target date CITs, featuring top-tier asset manager at a substantially reduced cost.

 

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

 

About the Author, Alex Kahn

Alex KahnAlex is an investment analyst for RPAG. He consults top-tier advisors and plan sponsors across the country on investment due diligence, with a focus on target date funds. He provides pragmatic insight on market trends and developments. Alex is also an international equity analyst for the RPAG Investment Committee and advises clients on this custom target date solution. Alex graduated with a Bachelor of Arts in economics from the Wharton School of Business at the University of Pennsylvania.

 

 

THIS WON'T HURT A BIT: IT'S TIME TO INCLUDE HEALTH CARE IN A HOLISTIC RETIREMENT STRATEGY

Health care expenses are one of the most critical issues that workers and employers face today. Historically, both health care and retirement savings have largely been kept separate, but that conversation is changing. As health care is increasingly considered through the lens of financial wellness, employers need to understand the savings options. Pretax and Roth retirement account contributions, along with HSAs, are three common ways that many employees can save for health care expenses in retirement. It’s important to consider the advantages of each.

 

Understanding the Differences in Health Care Savings Options

Understanding the Differences in Health Care Savings Options

Reflects Roth and pretax employer-sponsored plans (as opposed to IRAs) unless noted. Advantages of account type (relative to the others) shown in blue. All three types grow tax-deferred. These are not the only options when it comes to saving for healthcare and/or medical-related expenses in retirement. Note that while HSAs are structured for the individual to save or invest for health costs, this is not the intended primary purpose of a defined contribution plan or IRA. Individuals should evaluate their health coverage needs and other factors before seeking tax benefits of an HAS. Source: IRS documents.

 

HSAs paired with a high-deductible health plan (HDHP) can be part of a competitive benefits package The old mantra of offering a competitive benefits package to “recruit, retain, and reward” needs updating. With an emphasis on financial wellness and health care flexibility, the “three R’s” should now shift to “recruit, retain, and retire.” Remember, fiduciary responsibility and liability extends to terminated employees with assets in the plan. This responsibility includes delivery of all required distributions and all fiduciary prudence responsibilities. Stay in touch with this important group.

RECRUIT

Depending on your organization’s size, offering an HSA could be seen as a differentiator, or merely table stakes, versus your competition.

  • 87% of jumbo employers,
  • 72% of large employers, and
  • 34% of small employers

…plan to offer HSAs by 2019.  

RETAIN

HSAs can support retention efforts for key employee demographics (e.g., healthy millennials who prefer the ability to save for their own health care expenses and executives who appreciate an HSA’s tripletax advantage).

  • $4,129 is the average cost of onboarding a new hire.

RETIRE

Comprehensive benefits all add up to providing employees with financial support that allows them to retire when they want to rather than when they have to. 64% of employees think health care costs will impact their retirement. HSAs may help you bring value to your employees. We suggest that you:

  1. Arrange for fair and balanced reviews of health care savings options, strategies, and benefits to employees
  2. Review educational materials to ensure that they are clear and comprehensive
  3. Connect the health care conversation to retirement and financial wellness
  4. Evaluate adoption and usage data
  5. Explore ways to provide employees with HAS investment education or guidance

HSAs may make sense for certain employers, especially since the average cost of an HAS-eligible plan is 22% LESS than a traditional PPO.

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 there regulatory guidance that would indicate whether forcing out terminated participants is favorable to keeping them in? What fiduciary liabilities are absolved by forcing them out (assuming this is consistent with the plan document)? – Responsible in Rhode Island

 

Dear Responsible,

Great question! Assuming consistency with the plan document, there is no expanded fiduciary liability in forcing them out of the plan, as this is an allowable plan provision. As to whether cashing participants out is favorable to keeping them in, that depends on benefit to the plan or benefit to the participants.

An example would be if the plan is of significant size to have competitive expenses and access to sufficiently diverse investments including appropriately selected TDFs, it should typically benefit most participants to remain in the plan from an investment perspective.

From the viewpoint of the plan, if participants leaving the plan leave it in a less competitive pricing structure, it would benefit the plan to keep them in. Since these are low account balances, this is unlikely to be the case.

There are potential positives and negatives for both plan and participant interests, therefore it is best determined on a case-specific basis, but most typically it benefits the plan to cash out low account balances as if assets remain in the plan, the plan fiduciaries remain responsible for all prudence requirements including distributions to terminated participants. So, small account balances can be an inconvenience to the plan and fiduciaries.

 

Always weighing both sides,

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: RETIREMENT PLAN CHECK-UP

Is it time for a retirement plan check-up?

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

It’s important to conduct regular check-ups on your retirement plan to make sure you are on track to reach your retirement goals. Below are a few questions to ask yourself, at least annually, to see if (and how) they affect your retirement planning.

 

1. Review the past year

Did you receive a raise or inheritance?

If yes, you may want to increase your contributions.

Did you get married or divorced?

If yes, you may need to change your beneficiary form.

Are you contributing the maximum amount allowed by the IRS?

In 2018 you can contribute up to $18,500 ($24,500 for employees age 50 or older).

Did you change jobs and still have retirement money with your previous employer?

You may be able to consolidate your assets with your current plan. (Ask your human resources department for more details)

 

2. Set a goal

What do you want your retirement to look like? Do you want to travel? Will retirement be an opportunity to turn a hobby into a part-time business? Will you enjoy simple or extravagant entertainment?

Take time to make out your specific goals for retirement. Participants that set a retirement goal today, feel more confident about having a financially independent retirement down the road.

 

3. Gauge your risk tolerance

Understanding how comfortable you are with investment risk can help you determine what kind of allocation strategy makes the most sense for you. Remember, over time, and as your life changes, so will your risk tolerance.

 

4. Ask for help

If you have questions about your retirement plan or are unsure of how to go about saving for retirement, ask for help. Your retirement plan advisor can help you evaluate your progress with your retirement goals, determine how much you should be saving and decide which investment choices are suitable for you.

FIDUCIARY HOT TOPICS: THIRD QUARTER 2018

Fiduciary Hot Topics

DOL Fiduciary Rule Now Dead in the Water

The Department of Labor elected not to appeal to the Supreme Court from the Fifth Circuit of the U.S. Court of Appeal’s March decision vacating the new Fiduciary Rule (the Rule) in its entirety. Several parties, including AARP and several states’ attorney generals, attempted to join this law suit in order to continue a defense of the Rule. The Fifth Circuit did not grant these requests.

The primary elements of the Rule and prohibited transaction exemptions are that any person making investment recommendations to plans, their participants or IRA holders, is acting as a fiduciary and may only make recommendations that are in the “best interests of the client” and to broaden the scope of the Department of Labor’s jurisdiction. The rule is complex (the regulation runs 176 pages) and generated much controversy.

Some commentators have argued that this decision does not apply outside the Fifth Circuit (parts of Texas, Louisiana and Mississippi) in light of a decision by the Tenth Circuit upholding the Rule. However, others have taken the position that it does. The Department appears to concede this point in a bulletin regarding enforcement relief issued following the Fifth Circuit’s decision. In any event, in light of the Department’s decision not to appeal, it seems that under the Trump administration, there will be no serious enforcement efforts.

This notwithstanding, the Rule may have a lasting impact. Many broker-dealers, including some of the largest players in the business, have adopted policies and procedures reflecting the standards in the Rule. Many of these firms have stated they intend to leave these policies and procedures in place. Also, the Securities and Exchange Commission’s recent decision to beef up its own standards for brokers seems to have been prompted by the Department of Labor’s foray into this area.

 

Securities and Exchange Commission Picks Up the Ball

In April, the Securities and Exchange Commission issued a package of proposed advice standards. Sharing the Department of Labor’s tendency to be somewhat verbose, the package runs to about 1,000 pages.  It includes a “Regulation of Best Interest.” Comments on these proposed standards were due to the Commission by August 7th. It is important to note that even with the issuance of this package the SEC was split internally in regards to support for the package

In its essence, this regulation will require brokers to put their clients’ needs ahead of their own desire to maximize revenue when making a recommendation. This is a much higher bar than the current long standing rule that requires brokers to make only recommendations that are “suitable” to the client’s investor profile, but does not address fees. That the Commission is taking this step is not surprising. It has always led the way among government agencies in regulating the financial services industry and it has, on more the one occasion, stated it believes the Department of Labor was stepping onto its turf in promulgating a rule governing the actions of brokers and advisors.  Earlier this year Jay Clayton, chairman of the Commission, stated that a fiduciary rule was at the top of the Commission’s agenda for 2018.

Broker-dealers will be required to establish policies and procedures designed to identify and disclose conflicts of interest that may result from financial incentives. Significantly, where conflicts are identified, broker-dealers must take steps to mitigate the conflict.

 

Due to Their Low Costs, CITs Continue to Grow in Popularity

Collective investment trusts (generally known as CITs) long used by defined benefit plans, are now the fastest growing investment vehicle in 401(k) plans. As of the end of 2015, over $2 trillion in assets were invested in CITs and over 70% of 401(k) plans now include at least one CIT in their investment lineup.

Like mutual funds, CITs are designed to facilitate investment management by pooling investors’ assets into a single portfolio, thereby reducing costs through economies of scale and giving investors exposure to strategies they cannot access individually.

The chief advantage CITs have over mutual funds is lower costs. This is due primarily to the fact that CITs are not subject to the expensive process of registering with and reporting to the Securities and Exchange Commission. For this reason, flexPATH is offered through CITs and by utilizing CITs, and NFP is able to give clients access, at significant savings, to top performing investment managers in major asset classes.

There are some important differences between CITs and mutual funds:

  • CITs are sponsored by banks and are regulated by the Office of the Comptroller of the Currency and state banking authorities, mutual funds are regulated by the Securities and Exchange Commission
  • Because CITs are subject to ERISA, they are also regulated by the Department of Labor and must file an annual return (form 5500), mutual funds are exempt from ERISA
  • CITs can only be offered to retirement plans, mutual funds are open to all investors
  • One disadvantage of CITs is that when compared to mutual funds, less information about CITs is publically available via use of ticker symbols, but plans that utilize them have the same fund fact sheets available on their websites for CITs as they do for mutual funds

 

Pension Benefit Guaranty Corporation’s Multiemployer Program Looks to be in a Tail Spin

The Pension Benefit Guaranty Corporation’s (the PBGC) is a government insurance program that guarantees all private defined benefit pensions. There is no comparable insurance for defined contribution plans. The PBGC now pays benefits to almost a million participants covered by 4,800 failed pension plans and is responsible for future payments to another half a million individuals.

The PBGC’s program for multiemployer plans now has liabilities for benefit payments that exceed assets by $65 billion. This program is on track to run out of cash in 2025.¹ Senator Sherrod Brown of Ohio has proposed a legislative fix, known as the Butch Lewis Act. It will prop up the PBGC by establishing a legacy fund within the PBGC. This will be funded by closing “tax loopholes that allow the wealthiest Americans to avoid paying their fair share of taxes.”

Congress began looking at pension funding after Studebaker Motors failed in 1963 and left 4,000 employees with little or no pension benefits. This ultimately led to the enactment of ERISA in 1974. A key component of ERISA was the creation of the PBGC.

When the sponsor of a pension plan becomes insolvent and goes into bankruptcy, the PBGC is required to assume responsibility for the plan going forward. The Agency takes control of plan assets and assumes responsibility for future benefit payments. Companies that go through reorganization in bankruptcy court are sometimes permitted to terminate their pension plans, thereby forcing the PBGC to assume responsibility. The record to date is the United Airlines bankruptcy in 2005. The bankruptcy court allowed United to dump $7.5 billion in unfunded pension liabilities onto the PBGC.

The PBGC is funded primarily through a per participant annual premium paid by pension plans. These premiums have grown significantly over the years and are now a major detractor to establishing or maintaining a pension plan. For single employer plans, the premium varies depending upon the amount of underfunding. For 2018, the premium can run as high as $597 per participant.² This compares to a 50 cent premium when ERISA was enacted in 1974.³

 

¹Pension Benefit Guaranty Corporation. PBCG Fiscal Year 2017 Annual Report. https://www.pbgc.gov/news/press/releases/pr17-10

²Pension Benefit Guaranty Corporation. Premium Rates. https://www.pbgc.gov/prac/prem/premium-rates

³Pension Benefit Guaranty Corporation. MPRA Report. https://www.pbgc.gov/documents/MPRA-Report.pdfPension

 

LITIGATION UPDATE 

The Dust Has Largely Settled Around Stable Value Lawsuits, Plaintiffs Have Experienced Little Success

It is ironic that one of the most conservative investment offerings in 401(k) plans has been a flash point of class action litigation.

Stable value funds are relatively low risk investments intended to protect against interest rate volatility. The primary objective is preserving capital. These funds are often the most conservative offering in the investment lineups of 401(k) plans. While the returns for stable value funds are low, they tend be higher than money market and short-term bond funds.

The lawsuits involving stable value products have generally fallen into one of three categories:  the portfolio was either too risky or too conservative resulting in anemic returns; the declared interest rate on insurance products was too low; and the failure of a plan sponsor to include a stable value option in the plan’s investment lineup.

By and large, plaintiffs have not fared well. Some of the allegations made in the complaints give the impression that the attorneys bringing the suit did not fully understand stable value investments. True to past decisions involving ERISA and retirement plans, the courts tended to favor the defendants where the plaintiffs challenged widely accepted industry practices.

 

Portfolio too risky:

  • JPMorgan – Settled parties agreed to $75 million settlement. One of the plaintiffs’ allegations was that the use of mortgage-backed securities was too risky. It is notable that at the outset of this law suit, JPMorgan announced it would no longer include mortgage-backed securities in its stable value portfolios.

 

Portfolio too conservative:

  • FidelityDismissed – Upheld on appeal. Court noted preservation of capital is a key concern.
  • CVSDismissed – Court noted that a portfolio must meet its stated objectives and does not have to conform to industry averages.
  • Union Bond & TrustDismissed – No opinion accompanied the dismissal order. At one point in the proceedings, the judge noted that the named plaintiff stood to gain less than one cent if the suit succeeded.

Failure to offer stable value option:

  • ChevronDismissed – Court stated that the plaintiffs’ allegations were too broad and not tied sufficiently to any facts.
  • AnthemDismissed – Court noted that ERISA does not require that fiduciaries offer any particular type of investment.
  • Insperity Dismissed – Court noted that plaintiffs’ allegations were based entirely on hindsight.

 

Declared interest rate too low:

  • Prudential – Class action status denied.
  • PrincipalDismissed – No opinion accompanied the dismissal order.
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

Norby Joins Lutz Financial

Lutz, a Nebraska-based business solutions firm, welcomes Bailey Norby to the Lutz Financial division in the Omaha office. Bailey joins the team as a Client Service Associate. She is responsible for the preparation and filing of client data…

read more

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 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

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

July Retirement Plan Newsletter

July Retirement Plan Newsletter

INSIGHTS

JULY RETIREMENT PLAN NEWSLETTER

EXCHANGE YOUR OLD RETIREMENT SOLUTIONS FOR NEW ONES

JONATHAN COOMBS, INVESTMENT ANALYST

What is an Exchange?

An exchange is a turnkey solution for businesses that allows you to provide the benefit of a retirement plan while offloading much of the administrative and fiduciary responsibilities at a potential cost reduction. A team of professionals work together on your behalf so you can focus on running your business, not your retirement plan.

 

Retirement Readiness

An exchange is a great way to help your employees reach retirement readiness by providing them with a savings

vehicle like a 401(k) plan, but with less administrative burden and by transferring certain risks.

 

Fiduciary Risk Mitigation

The fiduciary has a legal obligation to carry out its plan responsibilities with prudence, good faith, honesty, integrity, service and undivided loyalty to beneficiary interests – in this case, retirement plan participants. When joining an exchange, a fair amount of fiduciary responsibility is taken off your hands.

 

Administrative Relief

Employers oftentimes don’t have the resources to effectively manage the complex requirement of administering a qualified retirement plan. With an exchange all plan administrative duties can be outsourced – a benefit typically only available to very large companies.

 

Cost Effectiveness

There’s strength in numbers. By teaming up with other businesses in an exchange, you can benefit from economies of scale and seamless processing that help reduce the costs associated with operating and maintaining a retirement plan.

 

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

 

About the Author, Jonathan Coombs

Jonathan provides guidance to plan sponsors across the country on retirement best practices regarding fee benchmarking, investment analysis, plan design, fiduciary compliance and participant outcomes. As an asset allocation specialist, Jonathan project manages key business development initiatives in the custom solution arena. He also serves as a fixed income analyst. Jonathan attended The Julliard School, where he obtained a Bachelor of Science in music and a Master of Music.

TIPS FOR PREVENTING UNCASHED RETIREMENT CHECKS

Managing uncashed retirement checks may be considered a nuisance by plan administrators. Nevertheless, the employer still has fiduciary responsibility when a former employee fails to cash their distribution. Search efforts to locate a missing plan participant consume time and money and may fail to locate the participant. Likewise, going through the process of turning over dormant accounts to the state can also consume time and resources.

 

Decrease the burden of uncashed checks by:

  1. Discussing with terminating employees during the exit interview the options for their retirement plan. Employees may forget they have a company-sponsored retirement plan, or don’t know how to manage it.
  2. Reminding departing employees that they can roll over their retirement assets into their new employer’s plan. Your plan’s service provider or the new employer can answer questions the former employee may have about the rollover process.
  3. Letting employees with an account balance of $1,000 or less know they should expect to receive a check in the mail after a certain amount of time.
  4. Having the employee verify their current address to where the check can be sent.

 

Remember, fiduciary responsibility and liability extends to terminated employees with assets in the plan. This responsibility includes delivery of all required distributions and all fiduciary prudence responsibilities. Stay in touch with this important group.

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,

When does the five-year clock start for Roth withdrawals? – Tick Tock in Tennessee

Hey Tick,

For most investors, it’s important to know that there is a five-year waiting period for tax-free withdrawals of earnings, and it is applied differently, depending on if you made Roth IRA contributions, converted a traditional IRA to a Roth, rolled over Roth 401(k) assets or inherited the Roth account.

The five-year clock starts with your first contribution to any Roth IRA—not necessarily the one from which you are withdrawing funds. The clock rule also applies to conversions from a traditional IRA to a Roth IRA. (Rollovers from one Roth IRA to another do not reset the five-year clock.) Once you satisfy the five-year requirement for a single Roth IRA, you’re done. Any subsequent Roth IRA is considered held for five years.

If you have a Roth 401(k), those have their own clock (Treasury Regulation 1.402A-1, Q&A-4(b)). If you open a new 401(k) with a new employer, that Roth 401(k) has its own clock. If you move an older 401(k) to a newer 401(k) with a new employer, the old clock is the one that counts. In other words, I would keep the Roth money from a 401(k) plan separate from other ROTH IRAs to avoid issues over whether the five-year clock has expired.

 

The Count,

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: GOOD HEALTH IS THE BEST WEALTH

This month’s employee memo encourages employees to make small lifestyle changes to reduce their out-of-pocket health costs. The memo shows the difference in savings between an average-managed patient and a well-managed patient. Download the memo from your Fiduciary Briefcase at fiduciarybriefcase.com. Please see an excerpt below.

Believe it or not, staying healthy just might make you wealthy. With small lifestyle changes and healthy choices, you may reduce your annual healthcare costs and increase your income. These lifestyle changes can be as simple as limiting your salt intake or taking your prescribed medication regularly.

 

For example:

Alisha:

The average managed patient

  • Blood pressure of 150/95
  • Sometimes forgets medications
  • Sometimes doesn’t follow her suggested diet
  • Occasional smoker and drinker

 

Jasmine:

The well-managed patient

  • Takes prescribed medication
  • Exercises 30 minutes/day, 5 days/week
  • Moderate alcohol intake
  • Chooses healthy fats
  • Limits dietary salt
  • Quit smoking

 

For purpose of the case study, Alisha and Jasmine are compared in two levels of care: average managed (loosely follows physician recommendations) and well managed (fully complies with physician recommendations).

 

Alisha and Jasmine are both 45 years old and both sought medical treatment for high blood pressure. Alisha doesn’t follow the lifestyle changes her doctor suggested, whereas Jasmine diligently follows her doctor’s recommendations. With Jasmine’s small changes she saves more than $1,000 in out-of-pocket healthcare costs. Additionally, Jasmine’s combined pre-retirement and in-retirement savings will be $89,456 more than Alisha, as shown in the table below.

 

Annual Out-of-Pocket Healthcare Costs:

Alisha Jasmine Jasmine’s Savings in Health Expenditures
Age 45 $2,477 $1,286 $1,192
Age 64 $13,936 $7,343 $6,592
Total Pre-Retirement $138,288 $72,591 $65,697
Total In Retirement $51,790 $28,031 $23,759
Grand Total $190,078 $100,622 $89,456

For illustrative purposes only.The hypothetical case study results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments. No representation is made as to the accurateness of the analysis.

DISCLOSURE INFORMATION

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

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