AdvisorNews - April 2016

What does Retirement Plan “Best Interests” Really Mean for the 401k and IRA Fiduciary?

May 05

There’s a new standard coming to town, at least if the DOL follows through on their proposed new rule. If there was one theme Tom Perez repeated during his press conference introducing the proposal, it was “best interest.” He asserts the new rule will require brokers to act in the “best interest” of the clients they serve, whether they be institutional or individual.

For all the talk, however, the DOL never really defined exactly what “best interest” means. Indeed, according to the formal release, there is an expectation the term will be defined through class action law suits, which the DOL explicitly encourages. This offers little in the way of help to both 401k plan sponsors as well as the financial service providers that serve them.

Are “best interests” in the eye of the beholder, or is there a standard definition to this new standard. To find out, FiduciaryNews.com canvassed retirement plan service providers from coast to coast. Here’s what we discovered:

The term “best interests” can best be described as a huge umbrella that covers a wide variety of issues. Allen Laramy, Financial Advisor at VALIC Peachtree City, Georgia, defines “best interests” as “Everyone is better served through increased participation, more generous employer matching, and lowering of administrative cost while designing a plan that is completely within all the limits set by all testing rules.” In other words, “be the best you can be.”

But is that enough? And by “enough” we mean both in terms of a broad definition and in terms of the specifics of a practical definition. Tom Balcom, Founder of 1650 Wealth Management located in Fort Lauderdale, Florida sees “best interests” as creating a “low cost, solid (well diversified) investment lineup.” When it comes to fees, he specifically cites using “funds without the ‘hidden’ charges associated with 12b-1’s and/or commissions including front/deferred charges.”

Indeed, much of the DOL’s press conference focused on “high fees” and “conflict of interest fees.” At the same time, the DOL, in its 408(b)(2) advisories, has repeated said it’s not about “low” fees or “high” fees, but about the value derived from any fee. “I believe the biggest disservice to this industry is the tremendous emphasis on fees irrespective of value,” says Andy Bush of Horizon Wealth Management in Baton Rouge, Louisiana. “Sure,” he continues, “fees should be reasonable – for the value received. We are in business for profit, not for gouging, but profit relative to value and services delivered. The lowest fee may not be the best situation for the client, yet the emphasis of low fees seems to somewhat abandon value and services received.”

While fees may be a part of it, the “best interests” equation certainly contains other components. Tony Hellenbrand, Owner of Hellenbrand Financial in Green Bay, Wisconsin, says, “It’s too bad that always acting in the best interests of the client has to be forced upon the industry by the DOL. It should be the whole reason an advisor is in business. I think acting in the best interest of the client is as self-explanatory as a definition gets. Any action that does harm, any inaction that leaves a client open to harm, or any action that is not the best possible for the client is not acting in their best interest. That can include everything from slow service, to charging high fees, to a proprietary investment lineup.  It’s commonplace to find a servicing company using all their own fund family in the lineup and consistent/rampant under performance.”

Advisers do, however, need to be careful when trying to incorporate investment performance into any “best standards definition. The DOL has long said it’s not the outcome, but the process, this it is most concerned with. “Best interests means that the investment options will be recommended or offered without weight given to any other factor than the recommendations’/offerings’ investment ‘performance,’” says Norman Pappous, President of GradeMyAdvisor.com located in Galveston, Texas. He says, ‘Performance’ is regarded as the portfolio’s risk/reward profile and NOT the simplistic metric of returns. ‘Risk assumed’ dictates ‘return level.’”

As if coming to a consensus on a single definition of “best interests” isn’t enough, we may find ourselves with two definitions. After all, do the “best interests” of the plan sponsor always overlap the “best interests” of the plan participants? Many believe they do. Joe Gordon, Managing Partner of Gordon Asset Management, LLC in Durham, North Carolina, says “[best interests] means putting the clients first and your interests second and acting with a duty of loyalty to the plan participants. [It] means the same thing for both retirement savers and plan sponsors.”

Warren A Ward, of Warren Ward Associates in Columbus, Indiana, suggests it may not be as cut and dried as this. He says, “Although I’d imagine that all conflicts are being disclosed, it’s hard to see how revenue sharing, pay-to-play fund choices and unnecessary life insurance serve investors’ best interests. Since the fees are often passed on, perhaps this is less of an issue at the sponsor level.”

Stuart Robertson, President of ShareBuilder 401k in Seattle, Washington, says, “Employers must run plans in the best interests of employees.” For retirement savers, he says, “‘best interests’ means presenting clients with options that will best position them to meet their savings goals. For advisers, it is important to analyze multiple plan options and combinations, to deliver a customized solution that best suits the client’s individual situation. Additionally, professionals advising retirement savers can act in the best interest of individuals by advocating for investor education and providing resources that will help savers make the most informed decisions.”

So, what do advisers feel are some good “rubber meets the road” examples of “best interests”? Balcom sees “best interests” in action when he sees professionals “providing low cost solutions and guidance on how to select or construct the most appropriate portfolio for each participant.”

Is seems like the infrastructure of the plan itself provides an excellent proving ground for the existence of “best interests.” Along these lines, Mike Woomer, senior vice president at Fort Pitt Capital Group in Pittsburgh, Pennsylvania, says, “By allowing open architecture platforms, with no proprietary funds. By allowing the plan to use Institutional (lower expense funds).” Hellenbrand adds to this with his list of “providing an independent/open-architecture investment lineup, clearly disclosing fees, clear statements, simple performance metrics, etc.”

While costs are always mentioned, “best interests” can include all forms of transparency. Robertson says, “Financial service providers should always remain transparent about costs and risks associated with investments with participants. Communication is a key component in working with both plan sponsors and participants ensuring they are abiding by their ‘best interests’ especially with the [proposed DOL Rule].”

Ward focuses on compliance matters when he says, “Hopefully all plan documents are current, regardless of the sales channel.” Nathan Garcia, Managing Director of Westbourne Investments in Alexandria Virginia, agreeing, noting “best interests” include “providing an investor policy statement and hosting education meetings more than once per year.”

In the end, though, “best interests” might be measured by tying the entire retirement plan complex into the benefit’s ultimate objective: preparing employee’s for retirement. Gordon offers, “A few examples would be: RIAs acting as a fiduciary and following the IPS it crafts for the client providing consistent review of selection process in action; Doing an analysis of both quantitative and qualitative fund metrics and replacing funds when appropriate to do so; Reviewing plan participant data and taking initiatives to get savings rates higher; and, periodically re-enrolling the plan to rebalance back to asset allocation age-appropriate targets.”

Just as important as good example, bad examples often provide an instructive “what not to do” when it comes to “best interests.” Among the most heinous of bad examples includes not being upfront about fees, something that conflicts-of-interest make all too easy. When it comes to something not in the “best interest” of the retirement saver or plan sponsor, Garcia cites “working on a commission basis a.k.a. being paid from the mutual funds based on how much money is put into them.”

Here, Garcia’s reference includes proprietary products. Although they are not de facto contrary to any “best interests” standard, they do pose a potential problem for plan fiduciaries. Woomer says, “Pushing proprietary products or pushing products (annuities) might not be in the best interest of the individual taking a distribution from the plan.”

More generally, though, it is clear certain compensation structures will be raising red flags among regulators (if they aren’t already). “Funds that have big revenue sharing or 12b-1 fees are under greater scrutiny for not being in the best interest of emotes and could put advisors and employers at greater risk,” says Robertson.

Hellenbrand offers a litany of bad examples when he lists, “Hiding/burying fees 30 pages deep in disclosures or even breaking the fees up and sending 3 or 4 different disclosures and ‘amended’ fee disclosures that make it almost impossible to calculate fees; convoluted quarterly statements; short and under-performing proprietary investment lineups; and, holding plans hostage by threatening to end or impair banking relationships if the provider loses the 401k plan.”

Lastly, and this is something that has been severely underplayed to date, is the issue of shelf space – where custodians extract “rents” from mutual funds for preferred seating when it comes to being viewed by prospective investors (including plan sponsors). Pappous say, “Sometimes providers sell shelf space – that is a very real potential conflict of interest if that shelf space is targeting retirement clients that also pay for the provider’s advice.”

Financial professionals can help 401k plan sponsors act in the “best interests” of plan participants. Most directly, Woomer suggests they be “a co-fiduciary on the plan .This way the adviser has some responsibility on making sure the client is doing what’s best for the participants.”

Service providers can help quarterback important disclosures, especially as they pertain to plan costs. Gordon says providers can make sure there is “transparent disclosure of all fees and expenses; benchmark against at least one database; police service provider disclosures under 408(b)(2).”

Robertson goes one step further when he says advisers can help by “surveying employee satisfaction with retirement plan sponsors aid in avoiding misconceptions about what employees need and what plan sponsors think they need. Professionals can help plan sponsors devise a strategy to keep fees low, preventing barrier of entry for employees with financial limitations.”

While all of the above sounds fine and dandy, in reality the definition of “best interests” won’t be based on gut feelings, it will come about through case law. The DOL appears to have purposely described it only the vague terms so as to not constrain employees and plan sponsors from pursuing any questionable actions.  Marcia Wagner, Managing Partner of The Wagner Law Group located in Boston, Massachusetts, says, “ In the DOL’s view, best interest means that an adviser and his or her firm will act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person would exercise based on the particular characteristics of a retirement investor. Each retirement investor is different and the duty to act in the investor’s best interest shifts with his or her investment objectives, risk tolerance, financial circumstances and needs. Above all, advisers and financial institutions must act without regard to their own interests, be they financial or otherwise. In other words, the interests of the retirement investor must come first.”

Wagner believes, despite this wide ranging definition, the DOL wants to focus on fees. She says, “From a practical perspective, the major way this standard plays out is that the structure of the compensation an adviser receives for rendering advice to a retirement investor must avoid incentives that would tend to encourage the adviser to make recommendations favoring one investment product over another. Under the best interest contract exemption included in the DOL proposal, an advisory firm can set its own compensation practices, provided it enters a written agreement with the client committing itself to the best interest standard, adopting compliance policies designed to mitigate conflicts of interest and disclosing any conflicts that may exist.”

She offers the following examples of what should be OK, and what might be dangerous: “An example of an adviser acting in accordance with this standard would be the provision of an investment program that allocates assets among a range of asset classes and investment products that fit that investor’s needs without regard to the compensation generated for the adviser. An example of an adviser violating this standard would be one who places a retirement investor in an investment mainly because the investment provider will pay the adviser a commission that is higher than fees available on other products.”

Those might be the good and the bad examples, but the ugly truth is this: legal talent will end up defining “best interests.” We might find a case can be made that conflict-of-interest fees, while obviously self-dealing, may not violate the “best interests” standard based on the “value” they offer. If this is the case, the DOL may be about to institutionalize the very practices it claims to want to discourage.

 

 

 

How to Explain Fiduciary Duty to Clients

By Kimberly Foss January 29, 2016

The basics of best interests

Most prospective clients do not understand that RIAs and brokers are held to different standards. In fact, potential clients often react with disbelief when they learn that RIAs like me operate under a fiduciary oath and must always act in their clients’ best interests, while brokers are required to suggest suitable investments.

The confusion is understandable. Anyone can call himself an advisor, but not everyone upholds the fiduciary standard.

Most consumers don’t fully understand the word fiduciary. It’s financial jargon such as basis point, alpha or beta.

Of course, explaining the concept can seem canned and wordy: “As an RIA, I am bound to always act as a fiduciary. That means that I will always act in your best interests, even when your best interests conflict with my own best interests.”

Telling prospects that I am bound to serve their best interests can give a skeptical person a chance to think of the inverse. A potential client might think, “Maybe the law requires her to act in my best interests because she may not be naturally motivated to do so.” A prospect might wonder if I operate under an extra layer of regulation because of some previous wrongdoing that I committed.

If prospects hear me talk too much about how I have a fiduciary duty and how it serves them well, my efforts could produce a negative result. By insisting that I am trustworthy, might those claims sow seeds of doubt, allowing my audience to wonder if the opposite could be true?

A duty that creates trust

Most of my new clients come through referrals. They may know something about the work I have done for a colleague or friend. I try to add to their knowledge by describing how I define a working fiduciary relationship. For instance, I underscore the importance of CEG Worldwide’s Six C’s as the foundation for client trust and satisfaction: character, chemistry, caring, competence, cost effectiveness and consultative.

It’s also helpful to share the definition of fiduciary offered by Steven G. Blum, a lecturer on ethics and law at the University of Pennsylvania’s Wharton School.

In his blog A New Professionalism, Blum writes, “A true professional uses his or her ability and power solely to advance the best and truest interests of the client. When the professional’s interests diverge from those of the client, the professional always follows only the client’s interests.”

In another essay, Blum states that a true professional “commits to using technical proficiency in the service of clients, but also honors the complex trust placed in them by those they serve.”

An attorney, Blum says the fiduciary duty works for the legal profession because lawyers study ethics. “It’s not enough to say the words, ‘I am a fiduciary,’ ” he writes. “You have to live it.”

I couldn’t agree more. My sense of doing what’s right for my clients springs from my heart, much in the way I willingly sacrifice for my children. My clients, and my children, understand that a potential for conflicts of interest always exists, but they are 100% sure I will always act in a way that puts them first.

In that sense, my fiduciary duty is more than a different way of doing business. It’s a different way of thinking, or feeling.

I might begin the conversation about obligation, but my talks with clients don’t revolve around me. As Peter F. Drucker wrote in his book Managing for the Future, “The leaders who work most effectively, it seems to me, never say ‘I.’ And that’s not because they have trained themselves not to say ‘I.’ They don’t think ‘I.’ They think ‘we;’ they think ‘team.’ They understand their job to be to make the team function. They accept responsibility and don’t sidestep it, but ‘we’ gets the credit. ... This is what creates trust.”

I’ll add here that trust is a two-way street. We all read studies that show investors tend to hide assets from advisors. I’ve never begrudged a client who can afford to squirrel away some mad investment money. There are instances, though, when unreported assets or a client’s perceived small decision — collecting Social Security benefits early — can disrupt a holistic financial plan. The more you encourage a team mentality,  growing from your fiduciary duty, the more likely it is that clients will be forthcoming, and the better you can plan together.

Just the facts

While it’s essential to highlight the fiduciary difference, it’s not necessary to dwell on it — particularly if a prospect comes to me from a brokerage firm. I’m not insinuating that the potential client in such a case allowed himself to be taken advantage of. I’m saying there is a better way of doing business. In fact, I sometimes share my own story.

I began my career at Merrill Lynch as the youngest female account executive there. Despite my success, the commission-driven environment and pushing of proprietary investment products persuaded me to establish my own firm in 1989.

My experience has helped frame my fiduciary duty, and has been especially appealing to business owners and more independent professionals who also have worked through career transitions.

There’s another aspect to my fiduciary duty: I keep politics out of my discussions.

Yes, we’ve been waiting more than five years since the Dodd-Frank Act was passed, giving the SEC the power to enact new regulations. And, yes, I approve of the Department of Labor’s proposal under ERISA that would require those providing investment advice to retirement plans and to IRA holders to act in their clients’ best interests. 

And while I routinely, often in newsletters, update clients on pending or new legislation, we rarely discuss these developments at great length. Once a prospect is a client, there’s really no need to do so. My clients know what I believe and, for us, the fiduciary duty is personal.

 

 

 

Labor Department Poised to “Reform” Retirement Savings at Small Businesses’ Expense: 7 Reasons You Should Be Worried

Wednesday, February 3, 2016 - 12:45pm

“If You Like Your Financial Advisor, Can You Keep Him?”

On January 29, at President Obama’s personal direction, the Labor Department sent a major regulation to the White House for final review.  The new regulation would make the Labor Department the primary financial regulator of retirement savings financial advice.  You read that correctly—the Labor Department would be the primary Federal regulator of financial advisors to Individual Retirement Accounts (“IRAs”), 401(k)s and similar retirement plans.  If that sounds like a big change, it is because it is.  And unfortunately, small businesses and individual retirement savers are the ones who will pay the price for this ill-conceived and poorly executed regulatory overreach.

We have seen this movie before.  With Obamacare, the government took on an even bigger regulatory role promising to protect workers, reduce costs and improve quality…all while not disturbing your current relationship with your doctor.  It did not end well.  Federal regulators botched implementing the new rules, health insurance costs for workers are skyrocketing, and many people did have to change doctors. 

Putting greater control of retirement savings and financial advice in the hands of Labor Department bureaucrats is not going to end well, and we are all going to suffer for it.  That’s about $16 trillion in retirement savings the Labor Department wants to control, telling small plans and individuals what kind of financial advice they can get, and telling advisors how they can be paid and how to act.

It is true the Labor Department has always had a role in regulating the benefits employers offer their workers in the private sector.  However, this pending final regulation, which may be published by the end of March, goes well beyond that traditional role, imposing new and expanded fiduciary standards on advisors helping companies offer retirement plans, helping workers make retirement savings decisions, and helping individuals who own IRAs.

The Labor Department proposed the draft rule last year.  It was a mess, chock-full of both technical and policy problems.  Put simply, it just did not work as written.  Unsurprisingly, the Department received tens of thousands of comments, a record-number for a retirement regulation, including letters of concern from hundreds of Members of Congress, including 129 Democrats.  Many of these comments raised very complex problems that required careful scrutiny and additional discussion.  Undeterred, however, the Labor Department has moved forward to the final rule only a few months after the comment period closed, suggesting only cursory consideration of these issues.

Here are seven reasons you should be worried that the final rule is going to make it harder for you and small business employees to save for retirement:

  • We will not know what is in it until we have to live with it—Despite tens of thousands of comments identifying dozens of major and complex problems with the proposed regulation, the Department has refused to reissue the rule for one more round of public review and comment.  You could not get away with skipping a final draft in high school English, but going from the first draft to the final paper is exactly what the Labor Department and the White House are doing.  This is a recipe for disaster, but it is a consequence of the Administration’s drive to complete the rule this year no matter what.
  • The rule discriminates against small businesses and individuals—The proposed rule discriminates against small businesses and individuals, denying them the choices of advisors it permits large businesses in their 401(k)’s.  A retirement plan with more than 100 participants essentially retains the choices and options it has today, while a small plan with less than 100 workers, and all IRA owners, can only receive advice under the new rules that limit the types of advice available.
  • The rule will increase costs and reduce financial advice choices, particularly for small business plans and IRAs—The proposed rule would change how many advisors, particularly those serving small plans and small account balance IRAs, can charge for their services, change what services they can offer, would increase their legal liabilities, and would require onerous new disclosures.  The cost of this increased compliance burden will be passed on to plans and individuals.  Advisors and plans have both testified in Congressional hearings that this will cause some small plans and IRA owners to lose access to their advisor. 
  • The rule could actually prevent advice that is in your best interest—Part of the proposed rule would actually limit the types of investments that advisors could recommend in certain circumstances.  For example, it might not be possible for an advisor helping you “roll over” money from a 401(k) to an IRA to recommend a managed account or other investments not on the Labor Department’s “approved” list, regardless of whether that investment is in your best interest.
  • The rule conflicts with existing securities laws and financial regulation—The Labor Department’s new rule would apply at the same time as the extensive securities, banking, insurance and other Federal and State financial laws and regulations.  Unfortunately, the Labor Department did not coordinate well with these existing regulators, because the proposed rule directly conflicted with some securities rules, and creates new and slightly different parallel standards for others.  This creates confusion and chaos in trying to comply with the rules—costs we all pay for.
  • The rule makes it harder to offer investment education and to consolidate retirement accounts to prevent “leakage”—Workers and IRA owners need help saving for retirement.  The proposed rule would convert many current educational efforts into financial advice subject to all of the new rules and requirements.  For example, under the proposal, giving a model asset allocation chart to a worker would become advice if the chart showed which plan investments corresponded to each asset class.  As another example, telling a worker to roll their old 401(k) into the new employer’s plan could become fiduciary investment advice.  These kinds of educational assistance programs have been in place for nearly 20 years, helping employee understand their workplace plans, and should not be disrupted.  
  • We need more advice, not less—A few years ago, the Obama Administration issued a DOL economic analysis showing that lack of access to investment advice cost workers more than $100 billion every year in preventable investment mistakes.  The rule will make it even harder to provide that advice by increasing costs and regulatory hurdles; even though that same economic analysis showed that regulatory barriers were one of the causes of a lack of access to advice.

Everyone wants to expand access to quality, affordable retirement investment advice.  Unfortunately, the proposed regulation would increase costs and reduce access.  The U.S. Chamber will examine each of these issues in more detail in a series of blog posts over the next several weeks as the countdown to a final rule continues.

 

 

Six steps for thriving in a tougher fiduciary climate

By Bruce Shutan Published February 18 2016, 1:02am EST

With the new Department of Labor fiduciary rule looming, there are six simple steps broker-dealers need to take to thrive in a tougher fiduciary climate. Outlined by Ron Rhoades, program director for the financial planning program at Western Kentucky University, these include:

  • Adopting a strategy to understand fiduciary status, its rationale and duties
  • Embracing the need for a new vision and a new mission
  • Promoting a fiduciary culture within their firm
  • Implementing the appropriate strategy and tactics
  • Promoting and marketing all this to clients, encouraging their feedback and making adjustments.

In keeping with this, Rhoades suggests that advisers rethink how they’re getting paid and discontinue building their business around commissions or 12b-1 fees. “I think over the long term, the fiduciary culture is going to win out over a sell-side culture,” he says, noting that at present fee-based revenue accounts for at least half of all BD compensation.

Those who adapt to the new environment will gain market share and maintain high profitability, Rhoades predicts, while those who fail to make the transition will see their revenues fall, their resources shrink and will ultimately be forced to merge with or be acquired by another firm. And while top-line revenue may fall for BDs, so will their expenses as they outsource more of their back-office infrastructure and proprietary applications to comply with the new fiduciary standards.

Most of this, Rhoades says, will occur whether or not the Labor Department’s fiduciary rule governing conflicts of interest is delayed, which he deems unlikely, or a Republican seeking to repeal such action becomes president. For whatever the rule’s outcome, the financial planning expert argues that consumers will gravitate towards advisers without conflicts of interest who have better investment strategies in place.

"Over the long term, the fiduciary culture is going to win out over a sell-side culture."

Rhoades, who’s also an attorney, cautions BDs about seeking guidance from law firms with whom they’ve had a longstanding relationship and who have a history of providing advice on how to avoid fiduciary status. Many larger law firms that advise BDs are “missing the boat on this whole issue and when you can terminate fiduciary status,” he observes. “To some degree, they may have been led down that path by the SEC, and in some respects, it’s just wishful thinking.”

His point is that outside legal sources could provide a new and refreshing perspective. To gauge their understanding of the issue, he suggests holding discussions on “the consequences of the presence of a conflict of interest in a fiduciary-client relationship,” as well as “the nature of waiver and estoppel under a bona fide fiduciary relationship.”

 

Retirement Plan Options for 1099 Employees

Self-employed workers need to take extra steps to save for a comfortable retirement.

By Christine Giordano | Contributor

Feb. 22, 2016, at 11:14 a.m.

If you're a freelancer, contractor or 1099 employee, you may not have the structure of a steady paycheck, health insurance or corporate matching retirement program that your staffer friends have.

You may also be going through work dry spells and windfalls, which can make it very difficult to plan a budget for health insurance and rent, let alone set aside money for retirement. You might be caught in a devil's bargain – feeling that you need to hang on tightly to money when you get it, yet if you don't set some aside for retirement, you may have to work forever.

The good news is that you're not alone. As many as 53 million Americans are working as freelancers, according to a 2014 study by Freelancers Union and Elance-oDesk. That workforce is adding $715 billion to the economy through freelance work, according to the study.

Yet seven in 10 entrepreneurs aren't saving regularly, if at all, for retirement, according to a 2013 study by Ameritrade.

Start by creating a budget. Chart how much money is coming in over at least three months and take a lowball average of what you might be able to expect in the future. Set your bank account to make automatic deductions to create an emergency fund, and then determine a percentage that will be deducted each month or week for your retirement.

"Multiple programs can create automatic deposits from your paycheck or bank account. This will give your IRA the same feel as a 401(k) – you won't see the money so you won't feel the [absence]," says Layton Cox, financial advisor for the startup robo-advisor My Pathway in Tucson, Arizona.

Generally, after a few years or even several months of fluctuation, people can observe patterns – a slump around the holidays or an especially busy time at the beginning of the year – as well as determine a typical monthly minimum income level. Budgeting, spending and saving can be done more easily with that base in mind, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, which is headquartered in San Mateo, California.

If you're decades from retirement, experts say to save windfalls and put aside at least 10 to 20 percent of your income so that you don't have to work when you're 90. Here are some plans you can use:

Roth IRA. This account is for singles who are making less than $116,000 and couples who are making less than $183,000. It's small – you can only use it to contribute $5,500 each year, but you only pay taxes on the money when you deposit it, not when you withdraw it in retirement. When it grows larger – and it usually does due to compounding interest – you don't have to pay taxes on the larger amount when investing in a Roth IRA.

"Unfortunately, contributing to a Roth IRA does not provide a tax deduction, but its ability to grow tax-free should exceed the benefit of a tax deduction for a long-term saver," says Gage DeYoung, founder of Prudent Wealthcare in Aurora, Colorado.

MyRA. The myRA, or My Retirement Account that launched in November, is for workers who don't have access to employer-sponsored retirement plans. Investments are safely backed by the Treasury Department, there are no fees associated with the account and accounts can be opened relatively easily at myRA.gov.

"MyRA is a simple, safe and affordable way to get started saving," says Richard Ludlow, executive director of the myRA program at the U.S. Treasury. Savers can withdraw money without tax or penalty at any time, but interest can only be withdrawn at 59½ or under certain conditions. Once the account reaches $15,000, it must be transferred to a private-sector Roth IRA, and interest earned may not be quite as high as other investments.

According to information provided by the Treasury, interest earned is at the same rate as investments in the Government Securities Fund, which earned 2.31 percent in 2014 and an average annual return of 3.19 percent from 2004 to 2014. People can review the interest rates as they fluctuate at tsp.gov.

Simple IRA. The simple IRA allows for low contribution amounts of up to $12,500 plus up to 3 percent of your salary. If you're 50 or older, you're allowed to contribute $15,500, says Aaron Hatch, co-founder of Woven Capital in Redding, California. It's good for business owners with 100 or fewer employees, and allows tax-deductible employer matches of 1 to 3 percent. It's cheap to set up and maintain and doesn't require a plan administrator, Hatch says, but contributions count against your 401(k), and penalties can reach 25 percent if you withdraw within the first two years.

Solo 401(k). The self-employed 401(k) is good for sole proprietorships and partnerships and leaves room for a spouse to join. To qualify, you can't have any employees. If you hire your spouse, you can both contribute $53,000 each per year, and there is no annual paperwork until your account reaches $250,000. When you're 50 or older, you can each contribute $6,500 more per year. Contributions up to $18,000 are tax-deferred, and then you can contribute up to 25 percent of business profit-sharing. Funds are available for early withdrawals before age 59½ at a 10 percent penalty or through hardship loans.

"Solo 401(k) plans can have higher administration costs, which can range from $250 to $1,500, depending on which provider you choose. One benefit of a solo 401(k) over a SEP (IRA) is that it will allow you to add on a profit-sharing feature, which could potentially increase your contributions," says Derek Mazzarella, a financial advisor with The Bulfinch Group in Needham, Massachusetts. "A solo 401(k) can also have a Roth feature."

SEP IRA. The simplified employee pension plan allows 1099 workers to contribute up to 25 percent of their net earnings from self-employment or $53,000, whichever is lower, in 2016. It works similarly to a traditional IRA, and all contributions are tax-deductible. Like a traditional IRA, you are allowed to contribute to a SEP IRA up to April 15 and still claim the contributions on the prior tax year.

The SEP IRA is relatively easy to establish and administer and allows a 1099 worker to set aside money for retirement for themselves and their employees, if they have any, says Randall Greene, CEO of Greene Financial Management in Altadena, California. And the 1099 worker is not required to file annual statements.

"However, [employers] are also required to contribute the same percentage to their employee's plans as they do their own plan. So if they contribute 10 percent of their income to their own plan, they must also contribute 10 percent of their employee's income to the employee's plan," he says.

This plan is most advantageous if the self-employed individual does not have any W-2 employees, because then they are not required to make contributions for anyone but themselves, Greene says.