Every group has its own lingo. When football coaches speak about designing receiver slants, hitting the A-gap, or running stunts, players quickly understand their roles. Likewise, as theater buffs converse about moving stage left, blocking, and striking, no one bats an eye. But if you’re not part of either group, it might just sound like gibberish.
The retirement industry has this problem, too. Advisors and plan sponsors use technically-correct language to describe company plans, features, and savings strategies, but the jargon is causing a disconnect. Research has revealed participants find their retirement plans to be confusing; their desire for clearer language should be a loud call for our attention. If they don’t understand their options, participants may be less likely to make appropriate decisions about their retirement plan account.
As mentioned in previous posts, different generations desire different benefits options, but they also have unique communication needs. This is true for not only how we communicate but what we communicate. A baby boomer may be looking for financial advice, while a millennial might prefer a financial coach or financial counseling.
Plan enrollment is a critical time to help employees see the big picture. Defined contribution is a somewhat clunky term – employees can be encouraged to participate in their workplace savings plan. And instead of talking about a deferral rate, employees might better understand phrases like the amount you contribute or the percentage of your paycheck that you put in the plan.
The employer match is also a point of confusion, but clarification is critical for increasing participants’ savings rates. Telling participants about free money and the ability to significantly increase their total amount of retirement savings resonates with their goals.1 After defining the company match, it’s important to explain how that money is vested – but very few employees have any idea what a vesting schedule is. They might, however, be very interested to hear about the rate of ownership for that free money.
Finally, it’s easy to quickly get in the weeds when it comes to investment terminology. Target date funds are the victims of plenty of industry jargon. A helpful explanation about their intent may include language about a customized strategy that is managed for you and designed to help achieve your goals.1 Talking about a glide path may illicit blank stares, while a risk-reduction path1 over the course of working years is easier to understand.
Ultimately, no language choice will be the perfect fit for all employees, but it remains essential for advisors to prioritize speaking in more understandable and relatable terms.
No matter our job titles here at Shepherd Financial, we are all nerds. Every last one of us. Case in point: every year, the IRS announces new contribution limits for retirement savings.
Because it’s vital information for how we operate, timeliness is essential – so at a meeting several weeks ago, I jokingly suggested there would be a prize for the team member that conveyed the new information to me first. Perhaps the IRS caught wind of our challenge; instead of releasing the limits mid-October, as they traditionally have, we waited with bated breath until November 1st.
(I’m completely serious when I tell you one team member set her Twitter account to alert her every time the IRS tweeted. She still didn’t win.)
In brief, the new limits: in 401(k), 403(b), and most 457 plans, the contribution limit was raised from $18,500 to $19,000. Not a huge jump, and the limit tends to increase by about that much every year. Significantly, though, the IRS has increased the contribution limit for traditional individual retirement accounts (IRAs) for the first time since 2013 (the limit is now $6,000).
But what’s the big deal, you might be asking? Essentially, the government has enabled Americans to save more. Larger retirement contributions can mean lower tax bills and more income in retirement. And if you happen to be an American with a late start on your retirement savings, this is good news. If you’re over age 50, between your 401(k), IRA, and catch up contributions, you could save $32,000 in 2019. That doesn’t even take into account an employer match or integrating a health savings account in your retirement investment strategy.
And that’s where saving smarter comes in. All these investment vehicles play a unique role in your overall retirement savings strategy. If you’re not sure about how to best utilize each one, call our team at Shepherd Financial. We nerds have a great time figuring this out every day.
Are you a procrastinator? Do you get a rush from delaying things until their final deadlines? You’re certainly not alone. Many people will sheepishly admit to sometimes pushing work to the last minute. But it could be a problem if you’re part of the 20% of the population known as chronic procrastinators, whose delays create havoc and undermine goals in multiple areas of their lives.
At the halfway point of 2018, we have to ask: where do you fall on the spectrum? And is your procrastination affecting others? As a plan sponsor, it’s your fiduciary duty to prioritize your company’s retirement plan and participants. So those financial wellness goals you set in January? Pretty important. The pending decisions about plan design? Critical and time sensitive.
First, remind yourself of the priority items for this year. If this was never a discussion with your advisor, schedule a review meeting right now. You need to have a clear picture of where you’re going to determine the steps you should be taking along the way. Analyze what adjustments might need to be made to those goals since a great deal of change can occur over the course of six months.
With regard to financial wellness, consider your employee population and anything you’ve learned about them. Do you know their communication preferences? It may be helpful to integrate those attributes and desires in your overall delivery strategy. Examine the type and frequency of participant meetings. Are your employees engaged? Do they have access to appropriate resources? If the answer to either question is no, consider the changes needed to help your employees retire well. You should also think about how you currently measure the success of your financial wellness program – what are your metrics? What results have you seen so far this year?
Perhaps you want to implement a safe harbor contribution provision in your plan design. Well, don’t delay – missing the deadline can be costly. To obtain the safe harbor exemption from ADP and ACP testing for the remainder of the year and ensure an active safe harbor plan by January 1st, the setup process should begin no later than September 15th. Since you must provide notices to your employees at least 30 days (but no more than 90 days) before the beginning of the plan year, notices should be delivered by December 1st.
So even if you’re infamous for your procrastinating ways, here’s your gentle reminder: your deadline is now. Do the things you’ve been delaying – at least when it comes to your company’s retirement plan.
‘I don’t know if you’ve been watching the news lately, but we live in contentious times,’ said [anyone at any given moment in history]. It seems to be the case that putting people near each other is the fastest way to guarantee discord of some kind. In our industry, that can play out in a number of ways; making major headlines these days, though, are lawsuits targeting 401(k) plans.
For the last decade, most of these lawsuits have been aimed at mega plans – those in the multibillion-dollar arena – and their service providers. But the past few years have seen this litigation creep down market and target plan sponsors for their lack of fiduciary prudence. So the question must be asked: as a plan sponsor, do you know how to help reduce the threat of litigation?
First, remember the point of the 401(k) plan is to help employees achieve desired retirement outcomes. In other words, your legal obligation is to ensure your plan’s administration and investment management decisions are in the best interest of the participants. Keeping that in mind, it’s useful to understand potential danger zones.
Inappropriate investment choices – ERISA puts the emphasis on a prudent decision-making and monitoring process in the selection of investments, rather than on the specific funds chosen. Creating an investment policy statement (IPS) is the best way to establish guidelines for making investment-related decisions in a prudent manner, but plan sponsors must be diligent in following its criteria and objectives. Once established, failure to follow an adopted IPS could be considered a demonstration of fiduciary imprudence.
Excessive fees – Again, ERISA requires a careful, prudent process to ensure no more than reasonable fees are paid for necessary services. High fees aren’t inherently bad, but they can become legally problematic if a plan sponsor can’t demonstrate their prudent decision-making. Understanding if fees are reasonable requires a thorough benchmarking process – fund fees should be compared to other funds with similar risk/return and asset class characteristics, and plan fees (recordkeeping, administration, advising, and any other recurring expenses) should be compared to peer plans.
Documentation is an important element here – formally demonstrate the process undertaken to select and regularly monitor investments, review fees charged and services received, and choose which benchmarks were used. Continue to monitor fees over time and consider how changes in the plan have affected those fees. (For example, as plan assets grow over time, the plan may become eligible for a lower cost share class.)
Committee members who both understand and properly execute their fiduciary roles and responsibilities are better equipped to serve their plan participants and avoid litigation. That’s a winning formula for everyone (except the litigation lawyers, I guess).
Because we’re passionate about staying at the forefront of industry trends and regulations, Shepherd Financial recently sent a team to the National Association of Plan Advisors (NAPA) 401(k) Summit. This national conference allows industry experts to interact and share relevant, best-practice strategies for serving retirement plans. Our team highlighted the following topics as key difference makers in the retirement industry, plan administration, benefits collaboration, and plan participant financial wellness:
Industry News: Plan Litigation
The news continues to swirl with lawsuits against corporations, alleging their 401(k) plans have high fees harming employees. Such litigation has brought greater awareness to the fees being charged in plans, as well as a sense of urgency for retirement plan committees to take their fiduciary duties seriously. For example, the duty of exclusive benefit means fiduciaries must be aware of and fully understand all expenses paid from the plan – but it doesn’t end there. Expenses must also be deemed reasonable for the services provided. There is no obligation to choose providers or investments with the lowest costs; the best choice for a plan is unique to the plan’s objectives and characteristics. The most important elements for avoiding litigation over fees come in the form of a consistent process and thorough documentation.
Plan Administration: Committee Relationships
It can be beneficial to establish a committee to assist plan sponsors in the development of prudent processes for plan governance. It’s considered best practice to select a committee chair and establish a committee charter. Utilizing a committee charter to formally authorize the purpose and scope of the committee defines how committee members are selected or appointed, how often meetings occur, and the roles of any outside consultants. Understanding each party’s role, financial liability, fiduciary responsibility, and signing authority can help ease the administrative burden.
Benefits Collaboration: Health Savings Accounts
The buzz continues around health savings accounts (HSAs): they’re the link between health care and finance, but many employees still don’t understand their unique benefits. These savings vehicles provide triple tax-advantaged opportunities (tax-deductible contributions, tax-free earnings, and tax-free distributions), but few are taking advantage. Often confused with flexible savings accounts (FSAs) or health reimbursement accounts (HRAs) and their ‘use it or lose it’ rule, unused HSA funds from the current year roll over to the next year, so participants don’t have to worry about forfeiting their savings. Additionally, employees are often not saving enough to fully utilize the investing capabilities of the HSA – savings can be invested in mutual funds, stocks, or other investment vehicles to help achieve more growth in the account. Clearer education is needed to enable participants to fully engage in their whole suite of benefits.
Plan Participants: Watch Your Language!
The retirement plan experience can be extremely intimidating for participants, and language choices from both plan sponsors and advisors are important. Communication needs to be positive, reasonable, clear, and personal. Participants respond well to a process that is readily accessible, but they first need to hear why they’d want to participate. Using phrases like ‘a comfortable and enjoyable retirement’ and ‘an easy, cost-efficient, and satisfying path to retirement’ resonated well with employees. Each company has unique demographics, so plan sponsors should work closely with their advisor to determine the best language fit for their participants.
This list doesn’t need to be overwhelming – navigate each of these areas by working with your advisor to create a retirement plan strategy every year. Incorporate a formal process that includes regular plan cost benchmarking, a thoughtful examination of plan design, thorough documentation of committee policies and procedures, and honest conversations about how to better equip participants to retire well.
Did you know Department of Labor investigations consistently find failures in over 70% of retirement plan audits? These findings could be anything from failing to monitor the plan to defects in plan administration to misinterpreting plan provisions. Since spring is now officially upon us, consider a few suggestions for cleaning up your retirement plan.
Review your plan documents
First of all, it’s pretty helpful to know where they are – an auditor would certainly want to. Plan documents include the adoption agreement, amendments, summary plan description, investment policy statement, and so on. If you don’t have a fiduciary file or secure online vault in which to store these documents, start one today. Request any missing documents from the appropriate parties. Next, verify your plan documents are compliant with laws and regulations; amend them as required. Most importantly, though, ensure you are adhering to them!
Know your roles
To be compliant, the people running your day-to-day operations need to understand both the plan documents and their fiduciary duties. Define roles and clarify responsibilities. Don’t forget to document these assignments, as well as the processes to implement them – it may be beneficial to utilize a committee charter, fiduciary acceptance and acknowledgement letters, or a retirement plan internal controls policy. It’s important to be aware of all the fiduciaries serving your plan, because you have potential liability for their actions. And even if you have delegated certain fiduciary duties to others, you still retain fiduciary responsibility for prudently monitoring their performance.
Monitor the contribution process
The most common ERISA violation is making delinquent contributions and loan repayments. No matter who is responsible for remitting contributions, you must know your plan’s reasonable standard and understand the overall remittance process. Take care to monitor the responsible parties so you are attuned to issues as they arise; if they do, work with an advisor to determine how you should correct late payments, as well as report delinquent payments on your Form 5500.
Schedule your audit
If you haven’t done so already, schedule your plan’s required audit. Take care as you select your auditor: an auditor plays an important role in the health of your plan, so be sure to ask clarifying questions regarding their capabilities, workload, credentials, etc. Exhibit due diligence by documenting your selection process.
Clear the clutter
You also have a fiduciary responsibility to monitor the assets held in your plan and prudently act on your participants’ behalf. This includes terminated participants with account balances in the plan. And that’s not all. Those terminated participants are also required to receive benefit statements and plan disclosures. Depending on your service agreements, you may be paying a per-participant fee to maintain these terminated account balances. Discuss with your advisor if it would be beneficial to initiate a force-out campaign – following the terms of your plan document, of course!
You have three quarters left to achieve the goals initially set for 2018. Preparing participants for retirement might be high on the list (we sure hope so!), but have you put plans in place to make it happen? Pull out your calendar and prioritize time for your employees – schedule enrollment and engagement meetings to increase their financial wellness. Equip them with the tools they need to succeed. Determine the metrics you’ll use to track their progress, then decide next steps based on that data.
Being a plan fiduciary is not a duty to take lightly – there are many administrative and compliance-related tasks to perform. But we do believe you should take pride in being a good steward of your company’s retirement plan assets, because it means you are better equipping your employees for retirement. After all, the primary purpose of a retirement plan is to provide benefits for plan participants and beneficiaries. So roll up your sleeves and take time to polish your plan.
Our team at Shepherd Financial is passionate about creating retirement-ready employees and responsible plan fiduciaries. One of the many ways we achieve these goals is through our extensive fiduciary training. Committee members and key personnel are equipped with critical knowledge to properly execute their roles and responsibilities. As a result, participants may achieve more successful outcomes, because their plan is carefully developed and monitored.
An important component of fiduciary training is learning how to monitor investments. This includes the following tasks:
- Setting overall objectives and investment strategies for the plan
- Selecting appropriate investments in light of these goals and strategies
- Monitoring the plan’s investment options on an ongoing basis
- Adding or removing investments, when warranted, over time
- Ensuring the investment options meet the provisions of the investment policy statement (IPS)
- Reviewing the organizational structure of the portfolio managers
As you think about investment selection and monitoring within your own plan, there are certainly many factors contributing to participant retirement readiness, but selecting an appropriate qualified default investment alternative (QDIA) is critical; without an approved QDIA, participants who are not actively engaged or knowledgeable in selecting their investment mix could wind up in a fund that is not suitable for their circumstances. An approved QDIA can consist of a target date retirement fund, a balanced fund, or a professionally managed account. Notice requirements must also be met for a fund to qualify as a QDIA.
Three factors should be considered when selecting the QDIA for your plan: your participant base, risk, and the elements of a periodic review.
1. Participant Base
Think about the characteristics of your participant population, such as their salary levels, contribution rates, typical retirement age, and post-retirement withdrawal patterns. Also consider their ability to stick with the default fund over time.
Risk, rather than returns, is a critical component impacting participant behavior. Make sure you understand the inherent risk associated with the QDIA – for a target date fund, examine the glidepath, asset classes, and how the asset allocation can impact participants at different phases (accumulation, nearing retirement, at retirement, and beyond retirement).
3. Periodic Review
In addition to performance, risk, and fees, determine if any information used in the initial selection of the QDIA has changed. Consider fund manager, strategy, or objective changes, as well as if your initial objectives for the QDIA itself have changed.
Shepherd Financial is a fiduciary, in writing, for each of our clients. Our commitment to this standard permeates our fiduciary training, fund screening, and due diligence processes, because we believe in working together with plan sponsors and participants to help pursue retirement health.
There is no assurance the Fund will achieve its investment objective. The Fund is subject to market risk, which is the possibility that the market values of securities owned by the Fund will decline, and, therefore, the value of the Fund shares may be less than what you paid for them. Accordingly, you can lose money investing in a Fund. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase throughout periods of fluctuating price levels. Please obtain a prospectus for complete information including charges and expenses. Read it carefully before you invest or send money. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
Risk-adjusted performance is the performance of a security or investment relative to its risk. One may calculate the risk-adjusted performance in a number of ways. One may consider the investment’s volatility. Alternatively, one may compare its performance to the performance of the marketa s a whole or relative to securities or investments with similar levels of risk.
Investments in Target Date Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The principal value in a Target Date Fund is not guaranteed at any time, including on or after the target date, which is the approximate date when investors turn age 65. Should you choose to retire significantly earlier or later, you may want to consider a fund with an asset allocation more appropriate to your particular situation. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility. All investing is subject to risk, including the possible loss of the money you invest. Diversification or asset allocation do not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
A Balanced Portfolio is a portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Sir Francis Bacon is often attributed with saying, “Knowledge is power.” While agreeing with the general sentiment, we have learned firsthand that knowledge is often not enough when it comes to personal finances. April is National Financial Literacy Month, and our team believes this is a critical and timely subject. Financial literacy is more than just a general knowledge of money: it is both the education and understanding of how money is made, spent, and saved, as well as acquiring the ability to manage one’s financial resources effectively.
In our industry, it is clear to see how a lack of financial literacy impacts both individuals and the companies for whom they work. It has been well-documented that financial stress increases absenteeism, decreases productivity, and negatively affects retirement and health care costs. So while the issue is personal, it seems naïve to believe employers should have no say in the matter. Considering its impact on physical health, financial wellness needs to have a natural place in the overall benefits package.
When it comes to retirement plan design, adding features like auto-enrollment and auto-escalation are important steps to help employees save (and save more). But plan sponsors should also consider how loans and withdrawals may cause plan leakage – when faced with financial difficulties, if employees can easily pull money back out of the plan, they probably will. However, simply focusing on increasing savings in the company retirement plan as the only financial goal could also be part of a two-fold problem – first, employees may have a variety of more pressing financial needs; second, improving financial well-being must begin with driving actual behavioral change. This involves communication, education, guidance, and resources that are customized for your employees.
Using plan and participant data (ages, current deferral rates, loan balances, etc.) can help dictate relevant strategies for your company. These targeted strategies can have a significant impact on long-term financial security. But keep in mind that creating financial literacy is not a one-time event. Instead, it must be developed over time – for example, learning how to set and achieve personal goals can positively change attitudes toward saving and spending, which can in turn help build a better budget that will actually be followed. It’s also important to engage with employees in ways that matter to them, perhaps by utilizing technology, gamifying financial behaviors, offering rewards, and incorporating overall wellness into the company culture at large.