Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
This fall I have conducted a number of Financial Education Meetings at employee worksites. Several of my clients have strong participation in their 401k plans, so traditional enrollment meetings have not been needed. Rather, we have pivoted to putting together financial education meetings that span many fronts.
You might be thinking at this point that the point of this blog post is to stress how important it is to reinforce budgeting, debt management, education planning, emergency funds, comprehensive insurance reviews, etc. And the list goes on. And while all those items are important, critically important, I am not going to discuss them here.
Rather, what has been interesting to me and what I do want to cover is how I have worked with the HR departments at my clients to get a better understanding of their overall benefits programs as I prep for my financial planning meetings. The benefit offerings at an employer can often be a seamless web and to discuss one offering in isolation of the others is to not fully convey the value of all the programs and how they work together.
For example, when I cover the need to review insurance, I like to know what the employer already provides. Is their term life insurance in place? How about some short and/or long term disability coverage? Knowing the answers to these questions allows me to piece together multiple components of the protection story and help the employees understand that their employer has already taken steps to help them out.
Another place I spend time is understanding the Employee Assistance Program. When I discuss the need for employees to have wills, health care directives, and power of attorneys, I often point out that the EAP offered by their employer is available at no cost (generally) to help employees get started on getting these documents in place. These are only a couple of examples. There are many more to be considered.
I generally find that taking a comprehensive approach to the benefit programs leaves the employees feeling more empowered and confident as well as more appreciative of their employer. It is a shame when an employer and their benefits broker put together comprehensive programs that are underappreciated and/or underutilized. Everyone leaves shortchanged in these situations.
If you are an employer looking for an adviser that takes a comprehensive approach to all your benefit programs beyond just the retirement plan, please give me a call. I would love to discuss how we might work together.
Pete Welsh a/k/a 401KGuy
I started working with a new client last week. The initial conversations were around their desire to establish a retirement plan for their small but growing company. The company was started in 2014 by the 2 founders and is in construction. They have now matured to the point where expanding their benefits offering makes sense and they want to reward the employees who were with them in the beginning and attract new talent. All of this is pretty straight forward, and we will be starting up a new plan for them in the next few weeks.
The interesting part of the conversation occurred after we discussed the establishment of the retirement plan. I asked the two owners about the company and what planning they had done. In particular, I asked about their growth plans, as well as their exit plans, including if one should die unexpectedly. They did not have good answers, but their answers were not that unusual for successful entrepreneurs. They have been working hard at growing the business, making sure that it’s moving forward, but not stepping back to consider longer term opportunities and risks.
One item on which we spent considerable time involved what would happen to the business if one of them were to die unexpectedly? They did admit that they had brought this up to one another in the past, but never moved forward to take action or to visit with anyone about it. When I asked them to “give me a rough number” on what they thought the business was worth today, they both said “$1million” at the same time. This means that if one of the partners were to die that the other would need $500,000 to buy out that interest. That’s $500,000 in cash, today. How much more might be needed in 3, 5, or 10 more years? And neither has the $500,000 needed now.
Additionally, we talked about how the founders have been reinvesting most of their earnings into the business to help it grow. This is great in many respects, but by doing so they have not been doing any planning for themselves. The business is everything, but we all know it might not always be. So the conversation quickly moved to how we can begin to de-risk their personal situations by initiating some financial planning for themselves.
In total, it was a good conversation with numerous next steps. They were concerned where to begin on a couple of action items and I told them that I could work directly with their CPA and Attorney to get the ball moving on the buy/sell agreement. I’m putting together some quotes for consideration and gave them a list of items I need to begin working on their personal situations. By breaking everything down into steps and charting a path forward, both partners felt empowered about taking control.
In many respects, that is how I see my job – empowering you as the business owner to take the steps you know need to be done but are unsure where to start. Give me a call at your convenience and we can begin taking those next steps together.
Pete Welsh a/k/a 401kGuy
The qualified plan world is tricky, and if you are a regular reader of my blog, you undoubtedly already know this. After 25 years working with retirement plans, I like to think that I have seen many if not most of the problems, and I have. However, sometimes I forget about a problem for a long time until it resurfaces. I am working on one such problem now.
In the tax exempt (or 403(b)) retirement world, it is not uncommon for employees to have individual contracts with companies such as TIAA, AIG, Lincoln, or other providers of tax-sheltered accounts. However, what has happened over the last many years is the organizations that sponsor these plans have begun to move toward what I’ll call “single contracts” for their retirement plans. Rather than have each employee maintain their own retirement contract, the employer holds all the retirement assets in a single contract for the benefit of the employees. This is how the 401k world works.
The problem on which I am currently working involves an organization that moved from these individual accounts to a single contract. What is interesting is that when they moved they did not, and could not, require all the individuals to move their money into the single contract. Some employees did, but many did not. When the new provider began recordkeeping the plan, they did not account for several employees who had these individual contracts as they could not track them on their recordkeeping system.
So, what’s the big deal? Where is the problem? In this case, the employer moved to the new provider when they had less than 100 employees. Over time the firm grew, but not to the point where they needed an audit, or so they thought, and I know you know what’s coming next….
When you add in the individuals who were not being tracked because they had individual accounts, the plan did, in fact, become subject to the Form 5500 audit requirement. An honest mistake, you might say. No big deal. An honest foul. We’ll fix it going forward
Ya, well, the DOL doesn’t quite see it that way. The penalty is $150 per day up to $50,000 for each Form 5500 when the auditor’s report is deficient. Suffice to say that if the audit isn’t even done, it’s deficient.
What are we doing now? Well, I am working on becoming the advisor on the plan because the current advisor didn’t even know about this. I am also working with the attorney who has been hired to engage the DOL and IRS to seek to mitigate penalties. We will soon be working with the plan’s recordkeeper to amend returns, and we are obviously reaching out to a CPA firm. This is a huge mess for the employer, who quite honestly is just trying to execute on its tax-exempt mission and doesn’t really have money to fix this.
Concerned that maybe your advisor doesn’t fully understand the myriad of rules that apply to your plan? Give me a call and let’s have a conversation. Problems have a way of sneaking up on you!
Pete Welsh a/k/a 401kGuy