Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
The pendulum of life is always swinging. With respect to employees and employers the pendulum swang in the direction of paternalism in the middle 20th Century. Employees and their employers had informal contracts that implied that if employees worked there long enough, their employers would take care of them. That pendulum swung in the other direction for a good part of the last 50 years with employees assuming more and more responsibility for their own wellbeing and employers taking a more hands off approach. Is the pendulum swinging back again?
Some new research from PIMCO, a large asset management firm on the west coast, is suggesting that the pendulum is indeed swinging back at least a little bit. In the last couple of years, more and more research has come out that employees trust their employers more than they used to. They are looking to their employers for help and guidance in a number of areas from better health and wellbeing advice to retirement and financial planning tools. This new research from PIMCO is now showing a further iteration in employees and employers working together.
It has long been known that most employees when they retire have almost no idea how to arrange their assets in such a way as to provide a lifetime of income. And why should they? After all, they have been spending a lifetime accumulating assets and saving, not figuring out how to make their assets last the rest of their lives. It appears that employers are starting to take notice and help out. The PIMCO Study shows that in the Small Plan Market (<$50mm in plan assets), the top client priorities in 2020 are Improving Participant Retirement Education, Evaluating Retirement Income for Participants, and Minimizing Fiduciary Liability, in that order.
So what does this mean, or could this mean, to you as a Plan Sponsor? The first question to ask, of course, is do you have any interest in helping your employees prepare for retirement beyond just helping them save through the retirement or 401k plan? If yes, then it is probably a good idea to begin exploring what this assistance would look like. It should begin with education and helping employees understand how to use their assets in retirement. It could then move to helping employees work with an advisor to put together a plan for transitioning into retirement and living the life they want and can afford.
But where does it truly begin? It begins with working with an advisor with experience in helping pre-retirees plan for retirement. Experience helping employees understand their asset mix and the tax implications of using those assets. Experience with Social Security and estate planning.
If you are concerned with your current advisor’s level of experience, please give me a call. I would love to work with you and your employees as they prepare for a retirement they have earned.
Pete Welsh a/k/a 401kGuy
It’s mid-May, 2020, and every part of the country is in some stage of either planning to restart the economy or is doing so. It is certain to be a new world once everyone gets back on-line, and for some of you who will be either bringing back furloughed employees or rehiring, there are some things you should be considering with respect to your retirement plan.
With record unemployment numbers, it’s clear that many employers have downsized their companies either temporarily or permanently. In the “temporary” column are some employers who have laid off with an intent to rehire the same personnel as well as some employers who have terminated employees without the expectation of rehiring those specific employees when they start to come back on-line.
Once you start to bring back employees, you might have questions about when those employees should be permitted to contribute to their retirement plan. Moreover, what do you do with those employees who were maybe so new with your firm that they hadn’t yet qualified to participate in your plan. Where do they fall and when do we start the clock for them? Maybe they are eligible immediately upon returning to work? Maybe not? Who knows?
The good news is that there are rules to which we can turn for some of these answers. If you are rehiring employees who were already participating in your 401k program, they should be eligible to immediately begin deferring into your plan once you rehire them. A “separation from service” of only a couple of months is not great enough to qualify as a “break in service” which would require employees re-satisfy your plan’s eligibility requirements. They will also, most likely, not experience any gap for vesting purposes either.
Employees who had not yet met the eligibility requirement to participate in your plan should also pick up where they left off. For example, if you had an employee who was in the process of meeting the eligibility period, the time the employee was separated would count toward satisfying the waiting period. Sort of like they never left. Didn’t see that one, eh? Well, in truth it only works this way if your plan is on the "elapsed time" method versus "actual hours" method. Do you know which one your plan uses? Does your advisor? Some of these rules can be complicated.
If you are an employer who might not be rehiring a significant percentage of the laid off employees, you should also become familiar with “partial plan termination” rules. Generally, if 20% or more of your workforce is laid off, a partial plan termination will be deemed to have occurred with respect to those laid off/terminated employees and special vesting rules apply.
If you have questions about your plan’s operation and how to have a smooth restart once we get going again, please feel free to contact me at your convenience. These rules are not intuitive, and you want to get them right.
Pete Welsh a/k/a 401kGuy
The recently passed CARES Act is designed to provide stimulus and economic support during the COVID-19 pandemic. The largest such relief of its kind in history, it’s not surprising that there is much to the legislation. The law itself runs for 880 pages. And like all big pieces of legislation, there are provisions affecting your retirement plan. Let’s take a look at one.
One of the provisions getting the most press permits eligible employees to take hardship distributions from their qualified accounts penalty free up to $100,000. Normally, a Hardship Distribution that occurs before 59 ½ is subject to both income taxes as well as a 10% early withdrawal penalty. Waiving the withdrawal penalty seems like a humanitarian gesture in this time of need. But as with most things like this, the initial gesture can get complicated quickly.
For one thing, the law permits the income tax on the distribution to be paid over a period of 3 years, but it does not require this. Presumably an employee would make some kind of election as to how to pay this tax – all at once, evenly spread, some here/some there, etc. But because the amount is treated as ordinary income, it would get lumped in with all other earned income and considered part of your Modified Adjusted Gross Income (“MAGI”). This by itself is going to require some real planning. But wait, it gets better.
On the top of page 159 of the CARES Act there is a specific provision that allows, but does not require, someone who has taken a distribution to repay the amount of the distribution into the same qualified account from which it came or another qualified account if the repayment occurs within 3 years. If the amounts taken, or some of the amounts taken are repaid, those amounts are not considered taxable income. It would sort of be like the distribution never actually occurred, and no tax would be owed on those amounts repaid.
What if an employee chose to pay all the tax this year, and in 2 ½ years when this whole crisis is in the rear-view mirror decides to repay some of the original distribution? It would seem as though the employee should receive credit for the taxes paid originally, right? Double taxing the same dollars would be inappropriate. I’m sure we will get guidance on this, but the law is silent.
And on top of all this, if the distribution is from an employer qualified retirement plan versus an IRA, this whole thing has to be approved by an employer. The employer is not required to permit hardship distributions. And what type of reporting might the employer need to consider if these distributions, repayments, and taxes all need to be tracked and monitored? What if the distribution comes from your plan but the employee repays the amount to an IRA? Or another plan?
If you are an employer looking for good counsel during these times, I would encourage you to give me a call. This is not the time to try to figure this stuff out on your own.
Pete Welsh a/k/a 401kGuy
PWC is one of the largest accounting firms in the country working with some of the largest corporations in the US and even around the world. Given their size and scope, they do a lot of research, and one annual report they have been publishing for several years is around Employee Financial Wellness. They have been producing this report for 8 years.
The report is interesting because it asks employees a number of questions regarding their overall financial wellness and preparedness. How confident are employees regarding their financial decisions? What kind of decisions are employees making? What do employees think about their future? And the ones I find most interesting are those around what their employers can do to help them with their overall financial wellness.
Financial Wellness and programs around them in the workplace have been very popular for a number of years now. It’s very seldom I come across a 401k prospect that doesn’t have some type of “program” in place to address financial wellness for their employees. So you would think that after several years of workplace initiatives employees would be feeling better about their finances, right? Less stressed than ever. Ya, well, it doesn’t seem to be working out that way.
In 2017, the PWC survey indicated that 46% of employees said that financial or money matter challenges were their #1 stressor. After years of trying to help employees, the most recent PWC survey indicates that 59% of them now consider financial or money matter challenges their #1 stressor. Almost 30% more employees are stressed about financial matters now than they were just 3 years ago! At this rate, we should have everyone completely freaked out about financial matters by 2025!
So what the heck is going on here? During this time frame, the economy was strong, inflation was virtually non-existent, and unemployment was at historic lows. We can’t blame any of those factors. What I think is going on is an over reliance on technology as the solution to this issue. I see it all the time as companies roll out new programs to help employees. They are well intentioned, and often well-constructed, but they lack much human involvement.
In my practice, when I am able to meet with employees face-to-face to review their situations and make plans, they are not more stressed after our visit(s) but less stressed. Sure we use technology as an enabler, but the real work happens face to face.
If you are an employer who has implemented a Financial Wellness program but are questioning its effectiveness, I would love to sit down and discuss how we can change that result and begin getting your employees less stressed!
Please give me a call.
Pete Welsh a/k/a 401kGuy
I do a lot of 1-on-1 meetings with employees of my corporate clients. The meetings tend to be clumped after employee education sessions as part of the 401k or 403b plan. I always make sure that any employee who wants to have a private conversation with me about their situation has my contact information and we can schedule either a phone or in person consultation.
Yesterday I had a meeting with a young lady (24 years old is young to me) who works for one of my retirement plan clients. She asked to meet to get an opinion that was not a friend’s or family member’s on whether or not what she was doing was the right thing. She was a very impressive woman, in her first job out of college, and had done her homework on the retirement plan, investments, and savings options outside the plan.
As we were getting into her situation, it occurred to me that many individuals would benefit from the work she has done. First, she noted that many of the free planning tools on the web are too simplistic to account for life as we live it. How perceptive! Even at 24 years old she realized that while some of these tools can provide some direction, they are not a map. On-line tools are generally just calculators and none of us are math problems to be solved.
Secondly, she realized the value of saving both before and after tax. She had calculated what she needed to save in the corporate plan to maximize the company match, and then all additional dollars she is putting into a Roth IRA. She has an auto-sweep on her checking account to automatically take $500 per month out of her checking and put into her Roth IRA. What genius! We discussed how having both before tax and after-tax buckets of money in her retirement years will be extremely beneficial. She noted that many of her peers don’t even know that they can contribute to both a company retirement plan and a Roth IRA. It’s true that there are income thresholds that phase out the ability to do this, but for 2020 that threshold is not met until her income hits $124,000, and she is well below that.
After we got a clear picture of her retirement savings strategy, we discussed the need for an emergency fund and only then did we discuss the merits of whether or not she should try to pay down her mortgage.
Suffice to say that she is a remarkable young lady who will clearly be in a great position once she reaches retirement age…in 41 years! But what struck me most about her was how poised, confident, and in control she was after our meeting. I couldn’t help but think what an asset she must be to her employer/my client.
As a financial advisor, some days are better than others, but yesterday was pretty good, and inspired me to continue helping other employees of my clients to get the financial confidence she has. I would love to speak with you about how we might work on this together.
Please give me a call!
Pete Welsh a/k/a 401kGuy
There is much going on in the retirement plan community as we kick off 2020. New Legislation (the SECURE Act), new Regulation (the SEC’s Regulation Best Interest effective this summer), and all kinds of new research.
With respect to research, Russell Investments just published their newest study around anticipated changes that are likely to happen to your 401k plan in the next few years. The good news about most of the anticipated changes is that they will be “good.” “Good” being defined as a change that will better enable employees to prepare for a comfortable retirement. Everyone can get behind those kinds of changes.
One anticipated change that stuck out to me was their “prediction” that as a matter of best practice, employers will begin to conduct retirement readiness reports of their plans to better understand the “funded status” of their participants. The term “funded status” is generally used in defined benefit (“DB”) plans to indicate the extent to which the plan has the money to pay out benefits. This is another way of saying that in the future, employers will start to look at their employees’ savings and ask “are they on track.” I’m oversimplifying a bit, but not much.
The reason this stuck out to me is that I already do this with my clients. And have for quite a while. A prediction of something that is already occurring isn’t much of a prediction. However, as I thought about this, it occurred to me that maybe the majority of advisors do not assess retirement readiness, e.g. “funded status”, for their clients and that what Russell was saying is that “in the future” they might. Well, if this is what they are saying, then there is a problem.
If you are company that sponsors a 401k plan, I have to ask, does your advisor conduct periodic reviews of the plan’s retirement readiness? Are you aware on a quarterly basis how your plan is doing to prepare your employees for retirement? Does your advisor have a framework to assess these questions and provide you with objective reporting?
If the answer to the above is “no”, then I would respectfully suggest you have two options. The first option is to wait about 5 years as the authors of the research believe the probability to be 100% that such reporting will be in place by 2025. The second option would be to give me a call and we can start discussing how you can get this information today. After all, why would you want to wait 5 years when you can get a "future best practice” today?
Pete Welsh a/k/a 401kGuy
Northrup Grumman recently settled a lawsuit (while denying all liability for the claims and maintaining they were without fault, of course) for a little over $12mm. This case is not unlike many suits brought against large retirement plans in recent years. The arguments of “unreasonable fees” and “fund mismanagement” are well trodden paths in 2020, and these were the allegations against Northrup Grumman.
What is interesting, however, is that Northrup Grumman was not a fiduciary with respect to its retirement plan. In fact, almost 2 years ago the court actually dismissed most all the claims against the company itself. Northrup Grumman was very clever in its establishment of its retirement plan and specifically designated 2 committees – an Administrative Committee and an Investment Committee – to serve as the plan’s administrator and named planned fiduciaries. They outsourced fiduciary responsibilities to two committees! Clever!
So, if Northrup Grumman was not a fiduciary to its own retirement plan and therefore can’t actually be found guilty for any violation of a breach of fiduciary responsibility, why then did it recently settle for $12mm???
The answer to this question lies in ERISA Section 1002(21)(A) which says that the ability to appoint, retain, and remove plan fiduciaries is itself a fiduciary responsibility and there is an ongoing duty to monitor those who you appoint. I recognize this is a fine point, but very important.
In 2018 when the court dismissed most all the counts against Northrup Grumman, one they did not dismiss was the duty to monitor other fiduciaries they appointed, i.e. those 2 Committees! It’s another way of the court saying, “Ok, Northrup, we’ll let you out of all those direct charges against you, but if those two committees acted improperly, guess what, you’re still liable!”
Today it is very common for plan sponsors to appoint investment advisors, investment managers, and even Plan Administrators who make the pitch that by appointing them the employer is relieved of fiduciary responsibility. If you are such a company, how well do you know your advisor? How well is he or she performing those duties for which you are no longer responsible? Everything good??? You sure??
If you have any concerns about the duties for which you might still be held responsible, give me a call as I would love to visit with you about how to establish a proper fiduciary governance program to help ensure you are never left holding the fiduciary bag at claim time.
Pete Welsh a/k/a 401kGuy
I learned the above over 30 years ago. I can almost remember the exact time and location. The revelation hit me like a load of bricks as I had never thought about it before, and then when I did, was shocked to realize how correct it is in business. So simple, and yet so complicated.
We can only move business forward with one (or a combination) of 3 things – people, processes, and technology. Want to make more widgets to sell? Then hire more people to make them, improve your manufacturing processes, or develop new technology to make more of them. That’s it. There’s nothing else to consider.
As we approach the end of the year and you look into 2020 with the hope of “doing more”, what one of the 3 levers are you going to pull? Technology is a game changer but often times take time to build and implement. Processes are often overlooked and can really move the needle, but process improvement initiatives are not always intuitive. For many companies, the go-to lever is “people.”
So what are our people options? Well, can we work our existing employees harder? Maybe. Afterall, 40-hour work weeks are for sissies, right? But let’s assume that working existing employees harder isn’t option. Then what? We need to add employees and/or replace less productive ones. Again, pretty simple on paper.
However, hiring new employees in 2020 may not be as easy as you would like. According to the new CNBC Global CFO Council Survey, 30% of global CFOs expect to be hiring more people in 2020. And Daniel Zhao, Senior Economist and Data Scientist at GlassDoor, while looking at the trends and available talent pool has said “hiring is going to be more difficult in 2020 than it is now.” Just what you need to hear as a business owner, right?
So as we close out 2019 and you finalize your 2020 plans, what are you going to do? If part of the answer is to hire more employees you already know that this is going to be difficult as wages begin to rise and the competition for talent intensifies.
I would suggest that one thing you can and should be doing is looking at your benefit programs and promoting them to the max. Are your benefit programs aligned to attract the talent you seek? Do you need to make changes to your 401k program to ensure competitiveness and desirability? Has your current advisor had this discussion with you yet?
If you would like to explore ways to improve your company’s profile to new talent in 2020, give me a call. I would love to roll up my sleeves with you and explore what we can do together.
Pete Welsh a/k/a 401kGuy
At first, it doesn’t seem as if this title makes too much sense. Afterall, 401k plans are tax advantaged vehicles and only file informational tax returns. There is no tax owed by a qualified retirement plan. And this is certainly technically correct.
However, most plans now have Roth features which allow employees to have their deferrals taxed prior to them being deposited into the plan. The advantage to Roth is that even though the deferrals are taxed initially, all future earnings on those deferrals can be withdrawn (with a few minor restrictions) tax free by the employee. Pretty niffy. Even so, the vast majority of 401k deferrals (and 403b deferrals) are pretax, meaning that employees will pay ordinary income tax on the deferrals AND all earnings when they withdraw those funds.
So tax planning for your retirement plan is really more of an employee issue versus an employer issue, and what a planning opportunity it is! I am working with one of my clients now in anticipation of conducting employee meetings in early January to focus specifically on this issue.
Some details: After the passage of the Tax Cut and Jobs Act in late 2017, the marginal tax rates for most Americans dropped. The marginal rate is only 12% for a married couple earning no more than $78,950, and it only increases to 22% if that couple earns no more than $168,400. That covers a lot of young couples in this country! In fact, my client has the majority of their employees under 30 and earning around $40,000. Most are basically in the 12% marginal bracket. Is it worth getting the traditional 401k tax break for deferrals for such a group? I would argue NO.
People tend to think Roth or no-Roth and leave it at that. I believe there are some pretty compelling arguments to be made that when employees are early in their career and earnings are more modest that Roth makes absolutely good sense. Later in their career when they might be in the 35% or 37% tax bracket, if they are so fortunate, then traditional 401k deferrals might make sense. You can always change!
So what makes the most sense for your employees? What are you advising them as you enter into a new year? Just as importantly, what is your advisor saying? And does your advisor have the skill set to even make such recommendations?
If you would like an additional perspective and some thoughts on how to position your employees for long term financial success, give me a call. I would love to visit about optimizing tax benefits. Just the thought makes me warm all over!
Pete Welsh a/k/a 401kGuy
I really enjoy working with small business owners - individuals who seemingly face incredible odds and yet still find a way to succeed. Helping such individuals is probably one of the most rewarding aspects of my role as a financial advisor.
Small business owners often have a hard time distinguishing between themselves and their business. After all, they have poured their time and sweat into making the business successful and such devotion can often come at a cost to themselves and their families. I have new client that fits this profile.
I was referred to the business owner because he has “30 employees and needs a 401k plan.” This is indeed true as the company is 10 years old, running successfully, has a relatively loyal workforce and has reached the point where a company sponsored retirement plan makes sense. However, there is so much more to the story.
While getting to know this particular business owner as we discussed options for a company retirement plan, it turns out that he has diligently been reinvesting S-Corp profits into the business. He has organically grown the business and as a consequence is currently debt free. And although this sounds great, it has come at a huge cost.
He has no savings to speak of. He has no retirement funds. He does have a wife and two children under 6, but no life insurance. And amazingly, or maybe not, he has no estate planning documents and no idea what would happen if he passed away other than that his wife, who is not active in the business, would get 100% of a business she does not know how to run.
He has been running his business with a singular focus and has not stepped back to realize that his business and his personal life are two very different things and have different needs. When we had our first planning meeting with his wife present, I can assure you that she recognizes the difference!
So, what’s next? In this case we are examining the corporate returns, balance sheet, and cash flow statement to rework how the business is capitalized and to allow him to begin taking some money out so that he and his family stop living like paupers. We are running life insurance illustrations to protect his family should something happen to him. And we are examining buy/sell options should something happen as well. In short, a top to bottom review.
If you are business owner who has not taken the time to consider both your business and your personal life holistically, know that you are not alone. But also know, that help is available! For a comprehensive plan, give me a call at your convenience!
Pete Welsh a/k/a 401Guy