LUTZ BUSINESS INSIGHTS
JULY RETIREMENT PLAN NEWSLETTER
ARE YOUR PARTICIPANTS EXPERIENCING A FEE IMBALANCE?
Subsequent to the 2012 implementation of ERISA fee reporting regulations (ERISA 408(b)(2) & 404(a)(5)), the Department of Labor (DOL) began to consider the appropriateness of the allocation of plan fees among participants. This is a subject that generally had not been on the radar screen of many plan fiduciaries, but once identified, tends to generate considerable traction due to its obvious validity. Ironically, a plan sponsors’ diligent attention to obtaining the lowest accessible share class for new funds in plan menus has contributed to this fee imbalance among a plan’s participants.
Fred Reish, a partner with Drinker Biddle in the Los Angeles office has weighed in on this issue by stating, “While there are no requirements to charge equitable fees, in Field Assistance Bulletin (FAB) 2003-03, the Department of Labor (DOL) indicated that allocating plan expenses is a fiduciary decision that requires fiduciaries to act prudently… Whatever allocation method is used, failure by fiduciaries to engage in a prudent process to consider an equitable method of allocation of plan costs and revenue sharing would be imprudent and a breach of fiduciary duty.”
While ERISA does not prohibit the passing on of reasonable plan fees to participants, others concur with Reish that having a process to consider how fees are charged to each participant is a best practice sponsors need to consider.
Most plans contain funds in their menu that include fee ingredients, such as various revenue-sharing payments, that can contribute to participant fee imbalance. While there are some investments that do not offer a share class that has zero revenue sharing, many do. The simplest way to solve for the fee imbalance is by eliminating this fee ingredient altogether, wherever possible. But, this typically generates a revenue loss to your plan’s recordkeeper that needs to be recovered in some form. This revenue loss can be offset with an alternative, and more levelized form of revenue recovery, such as a fixed dollar quarterly participant fee (which is the ultimate in simplistic fee transparency), or an asset wrap fee (fees can increase as assets grow) or some combination of both. Combining both the quarterly fixed fee and asset wrap fee becomes of interest to plan fiduciaries when they realize that the fixed fee approach advantages the high account balance participant and the asset wrap approach advantages the low account balance participant. Some plans having an ERISA budget account established can remit revenue- sharing fees back to this account. Another method is for the provider to issue fee credits to participant accounts to achieve fee levelization.
Many plans have not yet addressed participant fee levelization. Some reasons for this are lack of awareness on the part of plan fiduciaries, recordkeeper system limitations, and imperfect current solutions. Most industry people believe that participant fee levelization will eventually become ubiquitous as recordkeeper systems are adapted. Fee levelization is a difficult concept to refute as it logically makes sense and ignoring this issue may potentially lead to fiduciary liability concerns.
Most providers have been working on options that can remediate fee levelization concerns to some extent, if not fully. At this time, a prudent approach for plan fiduciaries is to investigate the appropriateness of current fee allocation structure among plan participants, consider opportunities to approach fee levelization with your current providers, and document the consideration process and conclusions.
WHY YOU NEED TO COMMUNICATE WITH EMPLOYEES
Businesses understand how vital it is for employees to understand retirement options and are increasingly including employee education in fiduciary risk management, whether it’s in the form of one-on-one counseling or educational seminars. Take a look at these reasons why you should communicate with and educate your employees.
Gossip Can Be Dangerous
If retirement opportunities are not properly explained, employees will likely ask each other instead. Someone could accidentally relay incorrect information and create the misconception that your savings plan options aren’t effective, leading to disgruntled, unsatisfied employees. This tends to snowball into frustration and a lack of trust. Make sure your employees know that you have their best interest at heart.
Create a culture of open communication. Encourage employees to approach you with questions, suggestions on benefits they’d like to see, or concerns, whether they’re positive or negative. Intentionally respect, honor, and reward that honest communication. This helps employees feel valued and happy, and a happy employee is a productive one.
If you don’t provide the educational support your employees need, chances are good that there are competitors who will. If you struggle to find and retain great workers, this could be a contributing factor. Employees may believe your plan is inadequate when compared to what other businesses offer, so by conveying your plan’s many benefits, you can avoid this problem and keep employees happy.
Employee Success Is Business Success
Employees are interested in working for thriving companies that offer exceptional benefits. Since high employee morale has been connected1 to great customer service, know that if you take care of your employees, they will in turn take care of your clients. Satisfied customers will recommend you to friends and your business will continue to grow.
Communication is an important part of fiduciary risk management2. By making an effort to counsel and educate your employees on 401(k) programs, HSAs, and other retirement options, you’ll improve morale and quickly grow your business.
WHAT CONSTITUTES PROPER DOCUMENTATION OF RETIREMENT PLAN COMMITTEE MEETINGS?
With most retirement plans, the fiduciary responsibility of selecting and monitoring the plan’s menu of investments is designated to a retirement plan investment committee. This committee usually includes financial officers and human resources officers of the employer. The committee meets periodically (anywhere from annually to quarterly) to consider agenda items including investment due diligence, fees and services of plan providers, status of plan goals, etc.
From a fiduciary perspective it is just as important to properly document these meetings as it is to hold the meetings. Proper documentation serves as proof that the committee’s responsibilities are being prudently executed. Often plans question the degree of documentation necessary. Below are a few suggestions of what the retirement plan investment committee meeting minutes should include:
- A listing of all parties present with identification of roles (committee member, guest, financial professional, provider representative, attorney, accountant, etc.);
- A description of all issues considered at the meeting: fund performance of investments offered, participant communication/education initiatives, plan demographic and provisional review, investment policy statement review, market summary and other topics as appropriate to achieving and maintaining a successful plan;
- Documentation of all materials reviewed during the meeting;
- Documentation of all decisions made and the analysis and logic supporting each decision; and
- Identification of any topics to be continued in subsequent meetings.
For those topics which are relevant to services provided by us, complete documentation will be included in the Executive Summary which your financial professional provides after each meeting. These documents should also be posted for you to access at any time during the year. For more information, contact your plan’s financial professional.
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.
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|
|Total In Retirement||$51,790||$28,031||$23,759|
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.
Q2 2020 FIDUCIARY HOT TOPICS
CARES ACT ALERT!
On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security (CARES) Act (the “Act”) was signed into law. A portion of the Act is intended to loosen access to retirement plan funds and provide relief for individuals impacted by the COVID-19 pandemic. The following is a summary of the retirement-related provisions of the Act:
Coronavirus-related distribution (CRD)
- Waiver of 10% penalty on early withdrawals for amounts up to $100,000 from a retirement plan or IRA taken between January 1, 2020 and December 31, 2020 (so can be retroactively applied to distributions taken prior to enactment of the Act)
- CRDs are only available to a qualified individual (see “qualified individual” below)
- Individuals may elect to pay the tax on a CRD ratably over a three-year period; and
- Individuals may elect to repay the CRD back to the plan, tax-free, over the three years from the date of the withdrawal (not limited by plan limits). May be repaid back into the plan allowing the withdrawal, another qualified plan or an IRA that accepts rollovers.
- Plan sponsor has discretion whether to offer this design, with modifications (if so desired and their service provider can accommodate), in their qualified plan
- Act does not limit a CRD to active employees (should check with service provider if they will allow CRDs to terminated participants)
- For participant loans taken from plans between enactment of the Act and September 23, 2020, loan limits may be increased for qualified individuals (see “qualified individual” below) to the lesser of:
- $100,000; or
- 100% of their vested account balance.
- Plan sponsors may elect to set a lower limit, but cannot allow for loans that exceed these limits
- Qualified individuals (see “qualified individual” below) with existing outstanding loans with a repayment due from the date of enactment of the Act through December 31, 2020 may delay each of those loan repayments for up to one year. Loan repayments will resume with the first repayment due on or after January 1, 2021. Interest will accrue on the delayed payments. The plan can choose to extend the term of the loan for the period of delay (equal to the first payment delayed through December 31, 2020) as well. Doing so would allow participants to avoid a financial hardship when they do resume repayment by keeping their repayment amount close to the same amount (adjusted within the reamortization for interest accrued) as prior to the suspension of the repayment.
- Plan sponsor has discretion whether to implement these design elements, with modifications (if so desired and their service provider can accommodate), in their qualified plan
- Eligibility for the CRD and the adjustment to the loan limits is conditioned upon a participant meeting one of the following criteria:
- Is diagnosed with COVID-19;
- Whose spouse, or dependent (as defined by the Internal Revenue Code) is diagnosed with COVID-19;
- Who experiences adverse financial consequences due to furlough, quarantine, layoff, reduction in hours, inability to work due to lack of child care due to COVID-19, or closing of business/reduction of hours by individual due to COVID-19; or
- Factors determined by the Secretary of the Treasury
- Importantly, the Act does not require the plan sponsor to verify whether an individual qualifies for the COVID-19 adjusted loan limits or the CRD. The plan sponsor may rely upon a participant’s certification for eligibility.
- Also important to note, the emphasized word “participant” above. A spouse experiencing any of the third bullet does not qualify.
Required minimum distributions
- The Act waives RMD payments for 2020.
- Includes RMD attributable to 2019 which was not paid by January 1, 2020;
- Includes RMD if made prior to enactment of the Act in 2020; but
- Does not include RMD distributions that were made in 2019.
- For RMDs that were made prior to enactment of the Act in 2020 the participant may defer taxes and roll it back to the plan from which it was made or roll it to another qualified plan or IRA which accepts rollovers. Additional guidance regarding any potential impact to the 60 day rollover period is expected from the IRS.
Defined benefit plans
- The Act allows these plans to delay any contributions due in calendar year 2020 (including all quarterly contributions) until January 1, 2021. The new January 1, 2021 due date applies for all quarterly contributions (they would no longer be separately due).
- Leveraging the delayed due date would subject the employer to interest on the delayed contributions from the original due date(s) at the effective rate for the plan year that includes the date of payment.
- Plan sponsors should expect leveraging delay should lead to higher contributions in 2021.
Reporting and notices
- The Act empowers the Department of Labor to extend certain deadlines for notices – more information expected in the coming weeks.
Plans can adopt the new rules immediately. The plan will eventually need to be amended on or before the last day of the first plan year beginning on or after January 1, 2022, or later if prescribed by the Secretary of the Treasury.
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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