Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
Today I met with a client of mine for a committee review of the plan. It went as these meetings normally go – a review of plan level activity, a discussion of the fund line-up, how were the recent employee meetings, etc. All very pleasant with a good discussion.
At one point in the review, the owner/patriarch of the company asked “I see we have some employees invested in bonds. Why? They shouldn’t be. Can you let me know who, so I can speak to them. Fixed income is not where they should be putting their money.” To be clear, he was saying this with the best of intentions. He is universally loved by his employees and truly has only their best interests in mind. However….
It is not uncommon for employees to stop by an HR office or CFO’s office, or even the founder’s office to ask “what should I do with my 401k money?” It is also not unusual for caring individuals who occupy those seats to want to help employees with their money. But is this the right thing to do?
The problem with giving such advice, of course, is that you open yourself up to downside risk. It is almost never the case that people sue when things go well. They sue when things go wrong. So when an officer of the firm “helps”, “assists”, “advices”, etc. an employee on where to invest his or her money, downside risk is created when things do not go right
In fact, I believe there already exists a fair amount of risk as our Baby Boomers move into retirement and realize that their nest eggs are not what they need them to be. How easy would it be for an employee to look back on some “advice” their employer gave them years ago about investing and argue that but for that advice they would be in a better place with their retirement account?
Well, after we all had some fun in our meeting today challenging the owner’s actual knowledge of investing, we agreed on a better approach. As an advisor who serves in a fiduciary capacity, I am actually licensed to give “investment advice for a fee.” Since we were able to quickly conclude I was the only one so licensed, we agreed that in the future employees would be directed to me to discuss their investments and how to invest.
Are you an employer who struggles with helping employees invest? Is your advisor licensed to provide “investment advice for a fee?” Not sure? Give me a call and we can have a discussion about how to do the right thing without exposing the company to risk.
Pete Welsh a/k/a 401kGuy
In the financial advisor world, we get numerous opportunities throughout the year to take a break, attend a conference, learn a few things, and recharge the batteries a bit. This week I had a chance to do just that, and was able to listen to a very impressive speaker discuss “Trust” – what is it, how do we earn it, and what’s it mean.
The speaker was Dr. Jeff Hancock, Professor of Communications at Stanford University and Director of Stanford’s Center for Computational Social Science. Suffice to say, he is a pretty bright guy, and what he does is study human psychology and the meaning of trust. I didn’t even know that was a thing until this week, but after listening to him, I am glad the we have someone like him.
Dr. Hancock’s work is even more important in a world where many of us are inundated regularly through digital information. A thousand years ago, “trust” was more or less limited to those in our small communities. Maybe we had to trust someone a town over, but that was it for most folks. Now we have to trust, or not trust, information from all over the world that is hitting us relentlessly all day. How do we deal with this?
In the most succinct way possible, Dr. Hancock distilled trust into this simple statement – “Trust is the confidence in one’s expectations.” Beautiful, right? If I have a high confidence in what I am hearing, seeing, reading, etc., then I trust it. He was discussing trust in general, but, of course, I couldn’t help relate this back to what I do – assist employers and employees with their retirement plan.
All this made me think about the trust employers and employees have in their own 401k plan, and can they “trust it.” The first step in such an analysis would naturally be what do they expect from it. Without expectations there can be no confidence, which means there can be no trust.
So I ask you, what are your expectations for your 401k plan? How much confidence do you have that those expectations will be met? If you are struggling at all with these two questions, then how can you trust your retirement plan? And if you are struggling with these questions, how much do your employees trust the company’s retirement plan?
I have a thought. A good place to begin building up trust in your plan is to sit down with a competent advisor to clearly understand what expectations you should have for your retirement plan. Once you begin building trust in your plan, you can help your employees build trust in the plan, which is really another way of saying you would help your employees build trust in their future. And isn’t that a good thing?
Need help beginning this journey? Give me a call, I would love to work with you…trust me!
Pete Welsh a/k/a 401kGuy
This is historically the time of year when employers begin to review their retirement plans on the off chance that changes should be made in anticipation of the new year. It’s a good time to do it, as there are multiple timelines that can work to limit an employer’s flexibility with respect to what can be changed as the year begins to expire. Modifying a Safe Harbor 401k plan is just one example.
It’s also the case that by this time of year an employer’s financial picture starts to come into clearer focus. Lots of unknowns in January and February, but by September and October a “good year” or a “bad year” is taking shape. Let’s talk about the Good Year.
Let’s suppose you are an employer who is expected to have a very good 2019 and you would like to give back to your employees for being a part of that success. You could do lots of things, of course. A cash bonus in January to everyone in the same amount is not unusual. However, let’s say you want to do something different, like make a profit sharing contribution to your retirement plan. The good news is that every 401k plan is also a profit sharing plan. Surprised? Well, it’s true.
The next question you might ask yourself if you do decide to make a profit sharing contribution is “how will it be allocated?” And that is a very good question! The answer as you might expect is that it depends. The most common way to do this is “pro rata based on compensation.” It’s pretty fair and the default for many plans. But let’s say that isn’t sitting well with you. Let’s say some employees contributed more to the year’s results than other. Let’s say you would like to reward those employees disproportionately because they deserve it. Can you do that? Well of course you can!
Profit sharing contributions can be very flexible. I counsel my clients all the time around the many different ways you can allocate a profit sharing contribution, but there are some things to know. First, however the allocation is made, it must be in writing, which means we need to amend the plan (probably) which means we need to do this before year end. And depending upon how the plan provides for the accrual of benefits, we might have even passed the date that changes can be made for this year.
How are you to know what your options are and if the plan can be modified to meet your business needs? You need to work with a plan design expert who can walk you through your options. You need to work with me! Please give me a call…before it’s too late!
Pete Welsh a/k/a 401kGuy
Are you worried about cyber-security breaches? You should be! It seems to be happening all around us all the time. There is almost no end to the number of bad guys that want our data, and when that data is attached to money, it is even more appealing.
And for every data breach, there are thousands of attempts that have been thwarted. The breaches are what make the headlines, but I can assure you that all financial services firms are getting hit hundreds, if not thousands of times A DAY by cyber crooks trying to break through. One common point of entry is stealing employee data and pretending the crook is the employee to gain access to the retirement account of the employee. 401k Recordkeepers deal with this on a daily basis.
I wanted to write today to bring to light a common practice in the administration of a 401k plan that might sneak up on many companies. It is often the case that companies are asked to approve distribution requests on behalf of terminated employees. These approval requests can come from either the recordkeeper or the TPA on the plan. Attached to these emails is generally a distribution form with the terminated employee’s information, including address, date of birth, and Social Security Number. Talk about a crook’s dream come true.
What is particularly sneaky about these requests is that even if the email goes to the employer encrypted, the employer doesn’t always send it back encrypted. This is a weakness and one of which employers should be aware.
Are you an employer who is approving distribution request from terminated employees? How about approving loans for existing employees? Hardship withdrawals? Doing all this over the email system with confidential employee data, are you? Don’t think the bad guys will ever find out?
There are several areas of potential security breaches when operating a retirement plan. If you are a company that would like to ensure you are doing what you can to protect your employees’ data, give me a call. I would love to walk you through a checklist to make sure you are being as careful as possible.
Pete Welsh a/k/a 401kGuy