How to Save over $55,000 in your 401(k) Plan

Like most people, you are probably depending on your 401(k) plan to have a comfortable life after you retire or at least have enough money where you can enjoy your retirement. This means that it is crucial for you to maximize your 401(k) so that you are able to save as much money as you possibly can. The problem is that a majority of the time, retirement plans are set up in a simplistic fashion, so you are not getting the most out of your plan. You do have 401(k) options and understanding this can benefit your financial future.

If your company is looking to maximize contributions to a 401k plan you should review the benefits of a cross-tested plan. What a cross-tested plan means is that the profit sharing contributions go through a specific method of testing in order to ensure that the targeted contributions do not discriminate against in favor of highly compensated employees, or HCEs. The biggest advantage of choosing this plan is because it allows for a much larger contribution for those older employees or owner employees and less of a contribution for younger employees. This is an important distinction because younger employees have more time to accrue money in their 401(k) while older employees do not.

There is also a Safe Harbor Plan option that you can consider for your 401(k). A Safe Harbor plan is where HCEs and other key employees can defer a specific amount of money up to the annual maximum without having to worry about non-discrimination testing. With Safe Harbor Employer Basic Match, there is a basic 100% match of your salary deferrals with up to 3% of compensation. This is in addition to the 50% of salary deferrals for the next 2% of compensations with a maximum of 4%.  There is also the Safe Harbor Enhanced Match. With this, you get 100% of the salary deferrals for up to about 6% of compensation. There are other options that are a bit more aggressive than these that you can choose in order to get the best 401(k) for your specific needs.

Each of these different plans has their own benefits for the employee. A great financial company will be able to address the needs of your employees. They will carefully look at your plans to make sure that you are getting the most out of your 401(k). Your livelihood after you have retired depends on this. When you retire, you do not want to have to find another job to make ends meet because you didn’t have enough in your retirement accounts to relax during this new phase of your life. You do have options and by optimizing your 401(k) plan, you could potentially save well over $54,000 in your 401(k) plan. This is going to make a huge difference in the quality of life you will have when you retire.

  - Stephen Dix, ERPA, QPC, QKA

Mr. Dix is a Senior Pension Consultant and owner of Wellington Retirement Solutions, Inc. with over 25 years of experience in the industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

Why You Need Investment Advice for your Retirement Plan

In today’s world, you easily get advice on just about anything. Where to get the best price on suits. How to change a flat tire. Where to go for the best manicure. Etc., etc. Advice, it seems, is everywhere, and mostly free for the taking, and many consumers take full advantage of it to better their lives or make smarter decisions.

But, what about financial advice regarding your retirement plans, like your 401(k) and/or IRA?  Do you really need advice and, if you get it, will it help you get better results (i.e. more money to spend when you reach your ‘golden years’)?

The answer to both of those questions is a definitive ‘yes’ but, unfortunately, most consumers who have a retirement plan either don’t seek out advice or, even worse, take the advice of an unqualified ‘advisor’ rather than seeking out an expert. That’s not good, because even a small mistake when starting your retirement plan can multiply into a huge financial loss when retirement finally arrives.

For example, let’s take a look at management fees: Management fees are the costs you pay to have your retirement fund ‘looked after’, so to speak, while your money is busy accruing equity. In a 401(k) you can lump all your fees into what’s called the ‘expense ratio’, or, the cost of your investments. So, knowing that, and knowing that you should always try to keep your expense ratio as low as possible for the highest returns over time, which of the below two choices would be best?

1- A retirement fund offering 9.2% returns with 1.4% expense ratio

2- A retirement fund offering 8.4% returns with a 0.2% expense ratio

If you said choice #1 you’d be wrong, even though the return is higher. Fund #2 would actually lead to bigger gains as the net return would be 8.2% (8.4% - 0.2% = 8.2%), as opposed to #1 at 7.8% (9.2% - 1.4% = 7.8%). Thus, the fund with the lower gross returns would actually be the better fund due to its lower expense ratio.

That might seem like basic math, but without the basic knowledge needed to know the difference, many consumers choose #1 simply because the returns look higher upon initial glance.

This is why competent, quality advice on your retirement plans is so vital. There are so many small choices that we must make over the lifetime of your retirement account, and all of them will have either a positive or negative impact that you may not find out about until it is too late & you have lost thousands, maybe hundreds of thousands of dollars.

Seeking out a financial expert who specializes in retirement funds like 401(k)s and IRAs is a must, and finding them when you begin to invest is the key. (Let’s face it - great advice about how to save for retirement after you’ve actually retired probably won’t do you much good.)

Some companies provide an Investment Advisor to the employees who take advantage of their 401(k) plans, whereby the employee can actively learn about investing, receive guidance and get sound advice. If you have a 401(k), your best choice is to take as much advice as you can get.

 

- Robert J. Alexander

Mr. Alexander is a Pension Consultant for Wellington Retirement Solutions, Inc. with over 10 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

What is a 401(k) Fee Benchmark Report and Do I Need to Benchmark My 401(k)?

As business owners, we all wear a number of important hats. Trying to run and grow a business is an 80 hour week job in itself.  When it comes to choosing a provider for your 401(k) or retirement plan business owners often choose the path of least resistance or delegate the responsibility to a department head who does not have a lot of experience with retirement plans.  We often look to set up what will be the easiest solution for the business.  A number of business owners also look at solely employer costs as a deciding factor when selecting a retirement plan provider.

A 401(k) fee benchmark is such an important tool that can help you understand the fees you are paying and make sure that they are competitive in relation to the services that are offered.  As a Plan Sponsor and Fiduciary, it is your fiduciary duty to ensure that your employees are paying reasonable fees for these services. You are not required to find the cheapest provider, only that the fees are reasonable in relation to services provided. 

But isn’t that the catch? How are you to know what a “reasonable” fee is?

A 401(k) fee benchmarking study will compare all of the fees in a 401(k) account including those hidden 401(k) fees that you may not be aware of. The best thing that you can do as a sponsor is to use the 408(b)(2) disclosure that you are required to receive to make sure that their employees are not paying excessive 401(k) fees. A fee benchmark is crucial to ensuring that you are meeting your fiduciary duties to your employees.

Many plans that we have taken over were initially started with the two factors mentioned above as the only criteria in selecting the provider.  What they missed was the hidden or not so clear fees that participants were paying for recordkeeping and the actual investment selections.  The plan appeared inexpensive and easy to run, but after performing a benchmarking study after years into the plans life many company’s are shocked at how expensive the plan really is.  We can point to numerous examples of plans we have taken over where total fees were running 1.50% - 2.00% per year of assets!  Imagine how much money was lost to fees in these retirement plans.

If you have not figured it out yet: Yes, you do need to benchmark your 401(k). This is the only way for you to ensure that you are getting the best services for the best price.

You may be tempted to try to do all of this research on your own. The problem is that if you are not an expert in this field, you may not know exactly what you are looking for when you see the 408(b)(2) disclosures. We have written other articles that explain the basics of the 408(b)2 disclosure. While you can attempt this on your own, Wellington Retirement Solutions will perform free of charge, a 401(k) benchmarking service. The Benchmarking Report gives potential clients and current clients a valuable resource in making sure the company retirement plan is only paying reasonable fees for services offered.

If you have not already benchmarked your 401(k), you need to today. This is the only way that you can make sure that your retirement plan expenses are reasonable for the services offered.

 

 - Stephen Dix, ERPA, QPC, QKA

Mr. Dix is a Senior Pension Consultant and owner of Wellington Retirement Solutions, Inc. with over 25 years of experience in the industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

What to know about being a Fiduciary to your 401(k) Plan

A fiduciary is an individual or group responsible for administering, managing and making decisions about a 401(k) plan and as such, they have an extremely responsible role as their decisions can impact the retirement plans for their employees.

While this title and role seem a little bit old fashioned, the importance of understanding what a   fiduciary does, perhaps matters even more than ever.

Fiduciaries have some specific roles and responsibilities as laid out in the Employee Retirement Income Security Act (ERISA).  Some of these responsibilities could be as simple as notifying plan employees of any changes to the plan, including changes from one provider to another, whereas others could be significantly more complex.  A key requirement however is that they are bound by law, to focus on your good above anyone else – including their own – and they are legally obligated to advise of any conflict of interest that might impact this.

Being A Fiduciary Requires You to:

  •  - Act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  •  - Carry out their duties prudently;
  •  - Follow the plan documents (unless inconsistent with ERISA);
  •  - Diversifying plan investments; and
  •  - Paying only reasonable plan expenses.

How does this work in practice?

Simply put if you are dealing with an investment professional that is not bound to a fiduciary standard, they can suggest investments that while meeting your goals might end up costing you more in fees and commissions in the longer term. The new Fiduciary Rule introduced by President Obama prior to his term ending would require that any registered investment professional dealing with a retirement type of account become a Fiduciary.  An advisor bound to the standard is legally bound not only to disclose the differences to you but is in fact obligated to look for the deal that benefits you the most, regardless of the personal benefit.

Are all financial planners fiduciaries?

No, they are not.  It is actually your responsibility to find out if your advisor is also a fiduciary and to question and understand the fees you will pay for any particular investment.  While most financial planner’s and all fiduciaries are obligated to seek investments that will best meet your needs and requirements, that does not obviate you from the responsibility of knowing and understanding how your own money is being spent.

What if the fiduciary does not follow the law?

If a fiduciary is found to have not followed the standards of conduct expected of the role, they could be held liable to the plan to restore any losses incurred.  Mitigating this risk requires fiduciaries to clearly document all of the processes they have followed in pursuing their decisions.

I now realize that I am a Fiduciary to my retirement plan - What should I do next?

In general, lower fees are better, but fees need to be put into the context of services being provided.  The law specifically states that all fees charged to a plan be “reasonable” however this determination can vary from plan to plan with some providers bundling multiple services in a single fee. Many say the best offense is a good defense.  You need to make sure you document your review process of your retirement plan. You should be able to explain and demonstrate that your plan offering is competitive relative to the services and investments offered to help to further reduce liability. Benchmarking your retirement plan is the first step in this process.

 Wellington Retirement Solutions offers a free retirement plan benchmarking report.  Click here to get started.

 - Stephen Dix, ERPA, QPC, QKA

Mr. Dix is a Senior Pension Consultant and owner of Wellington Retirement Solutions, Inc. with over 25 years of experience in the industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

 

What is a 408(b)(2) Disclosure and What it Means to Me?

There are many aspects to the financial world that can be confusing for people. This is especially true when it comes to all of the disclosures that you have to go through from various service providers that you work with through your business. One of these items that may cause some confusion is the ERISA Section 408(b)(2) Plan Fee Disclosures. Here, you will learn everything that you need to know about the 408(b)(2) and how it can affect you.

The Employee Retirement Income Security Act (also known as ERISA) Section 408(b)(2) was enacted on July 1, 2012. This act requires that all retirement plan service providers, subcontractors, and their affiliates, must disclose their compensation plan to the 401(k) Plan Sponsors. It also mandates that these dollar disclosures, both hard and soft, need to be made in a reasonable amount of time ahead of parties entering into a contract. When the contract is renewed, any changes to the contract must be disclosed as well as whenever there are any changes to the fees. This makes it so that plan providers have a fiduciary duty to manage the fees for their plans as well as ensuring that sponsors understand any “hidden” or indirect compensation that goes back to the providers. This is especially true for any compensation that is $1,000 or more.

So, what does all of this mean to you as a company looking for a provider? 408(b)(2) disclosures provide responsible party’s the information they need to benchmark their 401k retirement plan program. Fee benchmarking, which is the comparison of these fees across different companies, is there to allow the consumer to purchase from a provider that offers them the most reasonable fees while also showing consumers any companies that charge excessive 401(k) fees. When you are deciding on which provider to sponsor a 401(k) from, collect all of the information that you can from this disclosure. This includes any fees, services, and qualifications.

The depth of your benchmarking report will impact your ability to draw correct conclusions about fee reasonableness. Your failure to comprehensively consider the services rendered, who pays for those services, and how those services are paid for are all-important steps in proper benchmarking. Taking short cuts in the collection and evaluation of pertinent data, subjects benchmarking results to criticism the process was imprudent.

If this sounds a bit complicated for you, Wellington Retirement Solutions, Inc. offers a free Fee Benchmarking Report. You shop around for everything else for your business; why not use a comparison like a fee benchmarking report to help you make this important decision?

 - Robert J. Alexander

Mr. Alexander is a Pension Consultant with Wellington Retirement Solutions, Inc. and has over 10 years of experience in the industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

Participant disclosures and Communications – What and When?

I am often asked by clients, who should get this notice and when?  There are a number of required documents that need to be delivered to participants to effectively communicate retirement plan details.  With many new rules there has been an added number of documents that must be delivered to  participants by specific dates.  The failure to do so could have serious consequences.

We have prepared a list that you can refer to so you can easily identify what document should be delivered by date.  We will discuss in an upcoming article what options are considered Safe Harbor for delivery by the Department of Labor.

Summary Plan Description –  This document should be automatically distributed or made available to participants within 90 days of becoming covered by the plan and to pension plan beneficiaries within 90 days after first receiving benefits.  However, a plan has 120 days after becoming subject to ERISA to distribute the SPD.  An updated SPD should be furnished if changes are made to the Plan Document or SPD information.

Summary of Material Modifications - Automatically to participants and pension plan beneficiaries receiving benefits; not later than 210 days after the end of the plan year in which the change is adopted. A Summary of Material Modification is produced when there is a material modification in the terms of the plan or any change to the information in the Summary Plan Description.

404(a)5 Disclosure – General information about the plan and potential administrative and individual costs, as well as a “comparative chart” of key information about plan investment options, must be furnished annually. On at least a quarterly basis, participants must receive a statement of the dollar amount of administrative and individual fees that were charged to their accounts. This applies to plans valued on daily basis. Plans valued on an annual basis participants must receive that statement at least annually.  This information may, in certain circumstances, be included in the plan’s SPD and participants’ Periodic Pension Benefit Statements.

Safe Harbor Notice –  Generally, the safe harbor notice must be provided within a reasonable period before the beginning of the plan year. The timing requirement is deemed to be satisfied if the notice is provided at least 30 days (and not more than 90 days) before the beginning of each plan year. If the notice is not provided within this time frame, whether the notice is timely depends upon all of the relevant facts and circumstances.

Maybe Safe Harbor Now Safe Harbor – Generally, the safe harbor notice must be provided within a reasonable period before the beginning of the plan year. The timing requirement is deemed to be satisfied if the notice is provided at least 30 days (and not more than 90 days) before the beginning of each plan year. If the notice is not provided within this time frame, whether the notice is timely depends upon all of the relevant facts and circumstances.  When the plan is amended to now become a Safe Harbor Plan a new notice needs to be delivered 30 days prior to year end to all eligible participants.

Summary Annual Report – Automatically to participants and pension plan beneficiaries receiving benefits within 9 months after end of plan year, or 2 months after due date for filing Form 5500 (with approved extension).

Notice Of Individuals Benefits( Vesting Statement) - For plans that allow self-directed investments, statements must be furnished at least once each calendar quarter.

For plans that do not allow self-directed investments, statements must be furnished at least once each calendar year.

 

- Stephen Dix, ERPA, QPC, QKA

Mr. Dix is a Senior Pension Consultant and owner of Wellington Retirement Solutions, Inc. with over 25 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

What is Safe Harbor 401(k) and Does My Business Need a Safe Harbor Plan?

There are many different options for your company’s 401(k) Plan and it can be overwhelming trying to decide on one. One option that you may have seen in your research is a Safe Harbor 401(k) Plan.  A Safe Harbor Plan can be a great option for your business for a variety of reasons. The more you learn about how a 401(k) Plan works - particularly the annual Nondiscrimination Testing – the more you will understand why Safe Harbor is the ideal choice for most small & medium-sized businesses. This article will help you to better understand this type of 401(k) for you to make an informed decision.

A company of any size can utilize the Safe Harbor feature. What makes Safe Harbor 401(k) plans so great is that the plan will automatically pass the annual Top Heavy tests and the ADP/ACP tests. This allows the owners & officers to maximize their contributions to the plan without worrying about receiving any refunds.  In order to be a Safe Harbor Plan, the business must choose between using a Safe Harbor Match or a Safe Harbor Non-Elective (Profit Sharing) Contribution. The required match you would provide would be a contribution 100% on the first 3% of salary deferred of compensation to anyone actively participating in the Plan; with the Non-Elective Contribution you provide 3% to anyone eligible for the Plan. Either of these contributions can be a small price to pay to avoid dealing with ADP refunds for you or the high-ranking employees in your company.

The reason that Safe Harbor can be such a great option is that it allows all employees, including owners, officers, and other Highly-Compensated Employees (HCE) to save up to $24,000 without them having to worry about issues like a “Refund of Deferrals”. This happens because at the end of the year, there can be 401(k) test failures. You should know that there are quite a few complicated 401(k) nondiscrimination tests that take place each year, the results of which are often undesirable and unexpected.

There are a few other things that you should know about Safe Harbor: 1) If you want to create a Safe Harbor plan, you must do so by October 1 of a given year; after then you will have to wait until the next calendar year (and miss out on huge tax savings). 2) Employees who are eligible to make elective deferrals must be eligible for the Safe Harbor contribution - Employers will not be able to impose such restrictions as “last day of service” or any type of hours requirement for these contributions. 3) Safe Harbor contributions 100% vested immediately.

A Safe Harbor 401(k) Plan can be a great option for any business but you may find this an especially great option if you are a small business. You want to ensure that you and your employees have the best 401(k) that you can offer them because everyone wants financial stability when they retire.

Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives.

 - Robert J. Alexander

Mr. Alexander is a Pension Consultant with Wellington Retirement Solutions, Inc. and has over 10 years of experience in the industry. Wellington Retirement Solutions, Inc. is committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

Five Common Mistakes Made By Retirement Plan Sponsors

More than ever before, liabilities and regulations are becoming almost overwhelming for 401(k) Plan Sponsors.  Changes in the tax laws, new IRS rules, fiduciary responsibilities, as well as ever-increasing government regulations mean that, occasionally, a 401(k) plan sponsor might make some mistakes.  The problem, of course, is that these mistakes can cost your company, and your employee’s money, as well as causing major headaches.  Below are the Top 5 potential pitfalls you need to be aware of, so that it doesn’t happen at your place of business.

 Mistake #1: Failure to Effect Employee Deferral Elections

A relatively common error, a missed deferral opportunity is when a plan’s sponsor does not process an employee’s elective deferral. What happens next is that said employee receives taxable compensation that should have instead been contributed to their plan, and so they miss out on the a pre-tax contribution and tax deferred earnings they should have received. The employee could also be missing out on an employer match if the plan offers a matching contribution. The rules have recently been somewhat simplified to correct a missed employee election, but is best not to let this happen in the first place.

 Mistake #2: Excess Deferrals

The IRS sets elective deferral limits that can be made each year to qualified and non-qualified plans.  This includes 401(k)’s, SIMPLE 401(k)’s and 403(b) plans and SIMPLE IRAs. The problem; making deferrals in excess of legal limits is a big no-no, but a mistake that many plan sponsors routinely make.  Most of the time the plan sponsor is not to blame. The mistake happens when a new employee transfers from one division in the company to another or the employee joins your company and has previously made contributions to his/her former 401k plan and is not aware that the deferral limitations apply to them as a person for the entire calendar year.  An Excess Deferral that is not corrected timely can cause ‘double taxation’ of those amounts to the participant.

 Mistake #3: Failure To Use The Correct Definition Of Compensation

Every qualified plan will define what compensation is for a participant. The definition of compensation plays a vital role in regards to annual compliance testing and the calculation of employer contributions.  Some plans may also limit what an employee can defer as a percentage of compensation. It is extremely important to understand and use the correct definition of your plan’s compensation.  I often recommend plan sponsor’s do an annual review of this plan definition.

 Mistake #4: Correction for Exclusion of Employees for Elective Contributions or After-Tax Employee Contributions

The problem here is one of exclusion, caused when an employee who qualifies for a specific plan doesn’t take advantage of said plan because the plan’s sponsor doesn’t correctly notify what, when, and how they become eligible to be a participant.  This can, in a worst-case scenario, cause that plan to become disqualified, a huge problem not only for every employee of that company but also for the company itself. For the employee, the loss of an opportunity to put money into a tax-favored plan can mean the loss of future income.  There could also be a lost opportunity of a company match if offered.

 Mistake #5: Failure to Update a Plan

Another common plan sponsor mistakes is simply not to timely update their plan on a regular basis.  As we mentioned earlier, 401(k) (and other plan) rules, regulations and requirements are constantly changing.  If a plan’s sponsor does not keep up with those changes, and implement them into their plan, that can spell big financial problems all-around, including the loss of qualified status. Every qualified plan is required to be restated every five to six years.  This is commonly known as a plan restatement.  The plan is restated to account for all current and past regulations that have gone into effect since the prior plan restatement.

 

- Robert J. Alexander

Mr. Alexander is a Pension Consultant for Wellington Retirement Solutions, Inc. with over 10 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.

Important 401(k) Deadlines

Being aware of 401(k) deadlines is as important as any other aspect of a retirement plan. Download a copy of our 401(k) Deadline chart here.

- Robert J. Alexander

Mr. Alexander is a Pension Consultant for Wellington Retirement Solutions, Inc. with over 10 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.