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.
A special year-end note from Leah, partner and Director of Retirement Plan Services at Shepherd Financial:
I should preface this by saying I am not at all a blogger – my degree is in Mathematics, so I don’t claim to have a way with words. But I am obsessed with people who do – my newsfeed is full of great writers talking about the things I love – like food, fashion, and Notre Dame football, just to name a few! So I hope I do the blogging world justice with this post, because I have something important to say.
Our industry moves fast, and our team at Shepherd is constantly running at breakneck speed to stay ahead of the curve. It seems as if each year goes faster than the one before, and December feels like it’s gone as soon as it starts – between work deadlines, holiday parties, and a million errands, I often find my head spinning. Don’t get me wrong – it’s a joyful time, full of celebrations and things to be happy about. But because of our frenetic pace, I sometimes have to force myself to pause and reflect on the past year.
And when I do, I am just in awe. 2018 was a really big year, both personally and professionally. I have some wonderful trophies to remember the year by – I was published and made partner – and I am so grateful for them! But the biggest accomplishments, in my mind, are the relationships I have built or deepened this year.
I have been here since the beginning and gotten to see Shepherd Financial grow right in front of my eyes. We still have a long way to go and are always trying to innovate, but we are doing so many things well. The level of service we are able to offer to our clients has increased exponentially. The success stories we hear from helping plan sponsors and participants show we’re making positive contributions, and I’m so proud to be part of those experiences.
This was a pivotal year for our team – we adopted a new branch and have experienced the growing pains that come along with opening our arms to more people. We are still in process as we figure out how to improve, learn, and grow together. While we have good and bad days, I believe we will ultimately come out better than before.
And that’s largely due to the fact that I am blessed to be surrounded by really good and extremely talented people. The makeup of our team is so unique, and I am consistently impressed by each person. I believe I am part of a truly special group, and if we’ve come this far in four years, there’s no telling what we can accomplish in the future. In the grand scheme of things, we’re really only in the beginning of our story.
So from the bottom of my heart, whether you are a client, service partner, or one of my team members, thank you for sharing in this with me. I’m in awe and so, so grateful.
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.
We work in an industry focused on finances and future planning – two areas that can cause great stress. Our team strives to minimize worry, provide resources, and help each client feel equipped to achieve success, but that can sometimes mean working in a state of hustle and bustle. As we enter November and turn our eyes toward Thanksgiving, we’d like to slow down and highlight a few of our many blessings here at Shepherd Financial.
We are thankful for one another. Knowing how much we need each person’s skills and gifts, we feel so fortunate to work together. Each team member cares deeply about our clients, each other, and producing consistent, high-quality work. In the three years that Shepherd Financial has existed, we have experienced tremendous growth, and it couldn’t happen without the whole team giving their all every single day. We continue to challenge and encourage one another as we take on new roles and responsibilities.
We are thankful for our growing pains. As our partners moved from solo practices into a true team practice, we experienced our share of struggles and setbacks. Each problem, though, has allowed us to learn more about one another, strengthen our team bond, and produce creative solutions – such as customized videos, extensive fiduciary training, and e-newsletters designed specifically for either plan sponsors, participants, or individual clients. Moving into our fourth year, we are seeing incredible fruit from our hard work together. Because we have been through these storms, our successes seem that much sweeter.
We are thankful for our role in the industry. Our work has been noticed and lauded by several elite industry magazines and organizations in the past few years, a testament to the many ways Shepherd Financial seeks to innovate, implement best practices, and lead the charge for retirement readiness and financial wellness. Our team depth has really allowed us to see particular needs and move quickly to meet them. We are also thankful for both our partners and competitors in the industry – we are seeing positive momentum in bringing awareness and resources to underserved participants.
And, of course, we are thankful for our clients. We simply would not exist without you. Because we have the opportunity to work with corporations and individuals across the nation, representing a wide variety of industries and demographics, we gain new knowledge every day to better serve each of you. Our team has adapted how we communicate with specific groups of participants, figured out how to navigate different challenges, and interacted with many amazing people. We are truly blessed to partner with you!
Here’s to a season and spirit of gratitude.
–The Shepherd Financial Team