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.
If you’ve been around the past few months, you’ve probably seen that health savings accounts (HSAs) are all the buzz in the retirement industry. But what’s the fuss?
Well, a major fear for adults is that they’re going to run out of money to pay for health care or long-term care as they age. Studies estimate the average 65-year-old retired couple is going to need between $250,000 and $300,000 for out-of-pocket health care expenses, though some reports push those numbers over $400,000. Regardless, it’s an intimidating number, especially for employees already struggling to save for retirement.
So how can HSAs help? These tax-advantaged medical savings accounts were created in 2003 as part of the Medicare Modernization Act to provide Americans with more knowledge about and more control over their health care spending. HSAs are designed to help people save money for current and future qualified expenses.
An HSA can be a very effective companion to a 401(k) plan when preparing for retirement. And for certain employees, after qualifying for their employer’s matching contribution in the 401(k) plan, it could make sense to max out their HSA contributions. There are three primary tax advantages:
- Like a 401(k) account, employees can make pre-tax contributions, lowering their taxable income. Employers can also contribute to the account, either in a lump sum or with each paycheck.
- The money grows tax-free and, depending on the HSA’s features, can be invested for greater growth potential.
- As long as the money is used for qualified healthcare expenses, withdrawals and any investment gains are 100% tax-free. (If money is withdrawn before age 65 for any reason other than paying qualified medical expenses, there is a 20% IRS penalty, and the funds are considered taxable income.)
An HSA’s positive features don’t end with the triple tax savings – they’re individually owned and portable, which means employees have control of their accounts and can transport them from job to job. Unlike a flexible spending arrangement (FSA), HSA money isn’t forfeited at year-end.
Though there are contribution limits, HSAs allow more than just the account owner to contribute, because after-tax contributions are also permitted (and if made by the account owner, these contributions can also then be deducted on personal taxes). Additionally, individuals age 55 or older can make catch-up contributions.
Employees can easily miss out on an HSA’s advantages if they are not properly educated about its features. The Shepherd Financial team is equipped to help your participants better understand their whole suite of benefits; call us today to schedule an HSA-focused employee engagement meeting!
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.
‘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.
In the financial world, we tend to think in quarters rather than seasons, use spreadsheets more than pencil and paper, and punctuate our speech with ticker symbols instead of adjectives. But Shepherd Financial is not your average retirement consulting firm.
Yes, our goal is to create retirement-ready individuals – whether that’s through our 401(k) plan participant engagement meetings or individual wealth management process. Our team is always focused on providing amazing, intentional service. What really differentiates us, though, is our desire to prioritize people, as well as their stories, lives, and goals.
We know that while not much actually changes between December 31st and January 1st, most people view the turning of the calendar page as their chance for a fresh start. The new year lies ahead, open and unblemished. If you are ready to charge into the new year with guns blazing, we applaud you. Take the world by storm!
But for others, the new year creates anxiety. And if you are one of the many people who experienced a tumultuous 2016, you may be looking back, weary and unsettled. Perhaps unexpected medical bills have financially swamped you. Maybe you are now responsible for the care of an elderly parent. You might feel uncertain about our country’s economic future. How you feel about these experiences truly matters.
And we know it can be quite common to let those feelings create a state of paralysis. Worry and fear twist in your stomach. You stop moving, and life simply happens to you. We get it. But know this: we see you, and your story matters to us. You are not alone.
If you’re hesitantly peering over the edge of the new year, our challenge for you is this: be the leading character in your own story. This will require turning hopeful eyes toward your circumstances, taking ownership of your situation, and making active decisions about what comes next.
You are not stuck unless you do nothing – so do something!
For some, that will include swallowing your pride and asking for help. Make the phone call you’ve been avoiding and set an appointment with a financial planner/counselor/personal trainer/doctor. Yes, it’s hard, but it is necessary to move forward.
Other people will need to take a long look at spending habits and commit to doing something different with finances this year. Maybe it means cutting up your credit cards, or perhaps it involves creating a budget and carefully tracking expenses in order to get out from under a weighty mountain of debt. Financial freedom won’t happen unless you deliberately work toward it.
Let 2017 be a year of positive change in your life. And if you need us to partner with you for either the first step or the long haul, our team is only a phone call away.