Process

Customizing Plan Design

by

No "One Size Fits All" Plan

Retirement plans come in all shapes and sizes: DC Plans, DB Plans, Non-Qual, 401(k), 403(b), 401(a), 457, SEP IRA, Simple IRA, Roth IRA, Cash Balance, HSA… and any other number letter combinations that you can think of. The simple truth is that there is no one-size-fits-all version of a retirement plan; and as a plan sponsor, you need to select a benefit plan that is appropriate for your company and its participants. It is important to understand the basics of plan design, work with a knowledgeable advisor, and evaluate your plan based upon your specific needs.

While designing your company’s 401k plan, six major elements must be defined: eligibility, compensation, contributions, vesting, distributions and loans.

Eligibility | Who can enter the plan and when?

Pretty simple and first on the list is addressing which employees are able to enter the plan and when they are able to do so. Depending on the demographic and culture of your workforce, you may elect certain eligibility requirements such as age, tenure, or full-time employment status. Plan sponsors may choose to grant immediate eligibility or require a waiting period before new employees are allowed to participate in the plan.

Tip: Auto-Enrollment

Compensation | What part of the paycheck?

Next, you must decide what types of compensation will be used in the plan and how they are taxed. Certain types of compensation may be excluded for plan purposes without issue; these may include: compensation earned prior to plan entry and fringe benefits, even bonus and overtime (if special annual testing is passed)[1].

 

Contributions | Who is putting money into the plan and how?

Your plan may permit both employee and employer contributions. Any employer contributions must be allocated to participant accounts pursuant to a formula in the plan document.

Contributions can be broken into 4 major groups: elective deferrals, employer matching, safe harbor and non-elective (profit sharing) contributions.  Each of these groups has its own unique formulas and feature options that can be applied to help maximize savings. It is important to remember that all money entering the plan is subject to annual limits.[2]

Vesting | When do employer contributions become employee assets?

Participants are only entitled to the vested portion of their account balance upon exiting the plan; the remaining unvested portion must be forfeited to the plan. Sponsors can choose to reallocate these forfeitures to pay plan expenses or reduce employer contributions (e.g., the funds may be used as matching contributions for other employees).

Employee contributions and most safe harbor contributions must always be 100% immediately vested. However, plan sponsors may elect a vesting schedule appropriate to specific company needs for matching and profit sharing contributions.

Broadly speaking, there are two kinds of vesting schedules: graded vesting and cliff vesting. Regardless of schedule, a participant must become 100% vested when they reach “normal retirement age.”

Distributions | When can money be withdrawn?

Distribution is a fancy word the IRS and the financial industry use to discuss withdrawing money from the plan.  Generally, employees are eligible to take penalty-free distributions at age 59½, but it is not until age 70½ that the IRS requires employees to take distributions.

Often, plans will only permit a lump sum distribution when a participant separates from service and is entitled to a distribution. Under the lump sum option, a participant must take their entire vested account balance in a single distribution. Other distribution forms available include installment payments and partial payments.

You can permit a participant to take a distribution while still employed. These are called “in-service” distributions. These distributions must be available upon the attainment of a certain age (59 ½ or greater) or a “hardship” event. Eligible hardship events are defined by law.

A plan may permit the involuntary cash-out of small account balances. Balances under $1,000 may be distributed in cash to the participant. Balances under $5,000 may be involuntarily rolled into an IRA for the benefit of the participant.

Loans | Can employees borrow from their savings?

Retirement loans are popular among employees but often add administrative complexity for plan administrators. Employers may need to sign off on loan requests and deduct loan payments from payrolls. Offering retirement plan loans is not required: as a plan sponsor you have the authority to allow them or not.  

Understanding these 6 key elements can help you to customize a plan unique to your company’s specific needs. Beyond these basics you may even consider implementing advanced plan design options such as auto-features, enhanced matching formulas, or offering a cash balance plan. [We will dive into those options in an upcoming article. Be sure to connect with us on LinkedIn or visit our blog to stay informed.] 

We pride ourselves in being knowledgeable advisors and would be happy to walk through a plan design questionnaire to help develop a plan that is right for you and your employees because in the end, the whole point of your company’s plan is getting everyone successfully to retirement!

[1] Mitte, Ed. “CPE_Compensation.” IRS.gov. Summer 2013.

[2] Internal Revenue Service. “401(k) Plans: Deferrals and matching when compensation exceeds annual limit.“ 2017.

Evaluating Your Fiduciary Process

by

Evaluating Your Fiduciary Process

Believe it or not, an efficient retirement plan committee does not happen by chance. The “best practices” your committee upholds form the foundation for a prudent fiduciary process creating an opportunity for employees to pursue their retirement goals. Companies of any size can benefit from a consistent process and should consider implementing a few of the tips below.

Evaluate What’s Established

If you have a company 401k plan and you are on the retirement committee, then you are a plan fiduciary. As such, you have many duties and responsibilities to uphold to help support plan compliance to the benefit of your company and the plan participants.  This is a great opportunity. However, is there more you can do to help limit liability and create a track for retirement readiness?

It’s more than likely you have a process in place to monitor and manage the company retirement plan; but with this process in place, have you been able to:

  • Measure the success of your plan?
  • Evaluate provider relationships and plan services and fees?
  • Limit liability?

If this doesn’t evoke a confident answer, let’s take a step back and review how you can create a repeatable process.

Process, Process, Process

Creating a repeatable process can help limit liability by demonstrating that you have carried out your responsibilities properly by documenting the procedures used and the thought process involved to fulfill your fiduciary duties.[1] Additionally, a well put together and effective retirement plan committee is the foundation of successful fiduciary decision-making and organizational risk management for plans of all sizes.[2]

Choosing the right team

First things first, who is on your team? If you’ve assembled a committee team, it may include a business owner, CEO, CFO, President, Human Resources Managers, and/or other professional colleagues. Surprisingly, members of your retirement plan committee don’t need to be experts in retirement or investing; however, they should be committed to the task and have a reputation for making good decisions.2

Documenting

Within your team, you must delegate roles and begin documenting all plan actions and why they are prudent. Proper documentation serves as proof that the committee’s responsibilities are being prudently executed.[3]

Here are some of what the retirement plan committee’s minutes should include:3

  • List of all party’s present with identification of roles
  • Description of all issues considered at the meeting
  • Documentation of all materials reviewed during the meeting
  • Documentation of all decisions made and the analysis and logic supporting each

Identification of any topics to

The Prudent On-going Process

Once your committee is in motion, it’s time to start the on-going process of monitoring, reviewing, and evaluating information. When you review your company retirement plan, create a checklist of the following:

  • Gather all plan related documents
  • Create folders
  • Read through and understand the information
  • Ask team members to assist if needed

Once the delegated committee member has reviewed the plan, it’s time to evaluate provider relationships and plan services. Consider evaluating retirement readiness, plan administration, costs, investments, and service providers.

As your committee monitors the plan, ask yourself and the team members one important question: How could you make your company’s retirement plan offering better? Some suggestions could be fiduciary advisor investment review, fee benchmarking, auto enrollment, and auto escalation.

Maintenance within the Retirement Committee

Providing Fiduciary Training

As mentioned, your committee isn’t required to have retirement and investment experts. That being said, it is crucial to provide fiduciary training so they can be educated and fully equipped to serve on the retirement plan committee. Key areas to cover should include the definition of a fiduciary under ERISA, the basic duties and responsibilities required, fiduciary best practices, investment considerations and prudent process, and an overview of current legal and regulatory trends.[4]

How Often Should a Committee Meet per Year?

Industry experts suggest meeting 2-4 times per year: formal meetings should occur on a regular basis and should not take more than 1-2 hours if well-organized.4 Scheduling meeting at the beginning of the year tends to be effective for all parties.  One idea is to pre-schedule and put the placeholder dates on their calendars so you have the meetings calendared and set for the year.

Looking Forward

Why should you evaluate your fiduciary process? As retirement plan committee members, you want your employees to reach a successful retirement, so always focus on the outcomes. Additionally, having a compliant plan can limit your liability as a plan sponsor. Lastly, ERISA is about process! The committee needs to keep repeating, refining, and improving the company’s retirement plan; because at the end of the day, you want all of your employees to win at retirement.

 

[1] Department of Labor. “Meeting Your Fiduciary Responsibilities.”  DOL.gov, Feb. 2012.

[2] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

[3] Powers, Tony. “Documenting Retirement Plan Committee Meetings.” KerberRose Wealth Management, LLC, 11 July 2016. Web. 08 Aug. 2017.

[4] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

Mid Year Plan Checkup

by

Your Mid-year 401(k) Plan Check-up and Tune-up

As we round the corner to 2018, I can’t help but wonder, where did the year go? It feels like January and New Year’s resolutions were just yesterday.  Alas, those days have come and gone, and the “next” New Year is only a few months ahead.  This means now is the time to focus on benchmarking, evaluating your plan, reflecting on what you had hoped to accomplish, and putting 2018 plans together to work towards enhancing retirement plan success.

Three Point Check-Up

Let’s not ignore the elephant in the room: cost.  If it’s been a while since you have price evaluated your company’s retirement plan, this is a great time to open the hood and find out exactly what you are paying.  As an ERISA plan fiduciary, you have a duty to understand your costs and determine reasonableness.[1] 

Some areas to review include:

  • Investment expense ratios
  • Recordkeeper asset charges and fixed dollar costs
  • Advisor commissions and/or fees
  • Third Party Administrator (TPA) invoices

Your service provider partners are consistently making improvements to their offerings, including better user interfaces on their websites, an increased ability to take on administrative tasks (thus freeing up more of your time), and working towards better communication programs to promote retirement readiness. It’s important to conduct a cost analysis to review how much your plan is paying and match services to align with your plan’s needs.

Tune-Up: Cost Reasonableness

Conduct a cost analysis for your company’s retirement plan.  Benchmark your plan compared to other plans of similar size, industry, and demographic.  Document the process.  Determine the value of the services and assess fee reasonableness.  There is value and there is cost.  Remember cheaper is not always better. Match value and cost to determine fee reasonableness.

According to a recent study, the #2 concern of plan sponsors is: retirement readiness.[2]  This is your employee’s ability of to actually retire.  During your next committee meeting, look at your participant data and discuss retirement readiness. 

Some questions to consider include:

  • What percentage of employees are participating in the plan?
  • What is the plan’s average deferral percentage?
  • Are your employee’s investments properly diversified?
  • What is the targeted income replacement ratio for our employees?

A best practice when reviewing participation, deferral, and allocation is to remember the 90-10-90 rule.  This means that 90%+ of your employees are participating in the plan, employees are deferring 10%+ of their income to their retirement savings, and 90% of the participants are invested in appropriate portfolio allocations.

Tune-Up: Retirement Readiness

If your plan has less than 90% participation rate, you might consider a backsweep campaign.  This could be a great January 1st initiative that aligns with the top New Year’s resolution: save more money.[3] 

Next, as a plan sponsor, you could add an automatic auto-escalation feature to your plan.  Talk with your service provider, advisor, and Third Party Administrator (TPA) about how to add this progressive feature. Consider helping your employees boost their savings rates by adopting a 2% auto-increase strategy. 

Re-enrollment is a great way to engage employees who might have a “set-it and forget-it” approach to investing. This  process reinvests all participants into your plan’s Qualified Default Investment Alterative (QDIA).  This is a Safe Harbor provision that could add a layer of plan protection for you as the plan fiduciary.[4]

Tune-Up: Plan Design

The last check-up to consider is plan design. Is it meeting your plan objectives? Did you have corrective distributions last year?  Do you want to reward top talent employees?  Would you like to put away more for specific groups of employees?  As an employer, would you like to contribute less?  Most importantly, what is the goal of your company’s retirement plan?

By having a conversation with your TPA and reviewing your plan design now (most deadlines for plan design changes are October, so schedule your meetings today), you can update your plan information and be ready to implement it by January 2018.  Your TPA will need your company’s census data and a clear understanding of what you would like to achieve. 

Whether there are little changes to profit sharing or larger updates, like new comparability cross-tested plan design, it all starts with a conversation.  Setup a call with your TPA to discuss your plan objectives and how best to align your business goals with your plan design objectives.

Start Early to Maximize Success

December will be here soon enough, so don’t get caught asking yourself, “Where did the year go?”  Work with a qualified retirement plan advisor to discuss your retirement plan’s cost reasonableness, retirement readiness statistics, and proactive plan design options.  These are three key metrics to overall plan success that may help your firm become an employer of choice.

For information or help in evaluating these check-up and tune-up ideas, feel free to contact us to setup a conversation.

[1] “Understanding Retirement Plan Fees and Expenses.” Department of Labor. https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/undrstndgrtrmnt.pdf

[2] “Sponsor Perceptions of Retirement Plan Services” VOYA. January 2017.

[3] “2017 New Year’s Resolutions: The Most Popular and How To Stick to Them.” NBC News. http://www.nbcnews.com/business/consumer/2017-new-year-s-resolutions-most-popular-how-stick-them-n701891

[4] “Using Re-enrollment to Improve Participant Investing and Provide Fiduciary Protections.” Drinker Biddle & Reath LLP. https://am.jpmorgan.com/blob-gim/1383280097884/83456/WP-RE-ENROLL.pdf

Keep in touch

844.401.4636

Info@401kImpact.com

Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC and Retirement Impact, LLC are separate and unaffiliated

© 2021-2024 Retirement Impact, LLC

Privacy Policy

Skip to content