Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
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
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
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
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
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