AdvisorNews - December, 2013
By Richard F. Stolz
March 28, 2013
Apparently some plan sponsors and even advisers overlook a basic resource when conducting 401(k) enrollment and education sessions: The TPA. “Advisers are sometimes surprised to see a TPA at the meeting,” says Beth Harrington, president of Benefit Resources Inc. in Sacramento. “That shocks me.”
Perhaps that’s because she also has been told that that hers is one of the few TPAs included in enrollment meetings. Yet she considers it a basic way TPAs can help plan sponsors fulfill their legal obligations because enrolling eligible participants is a fiduciary responsibility. Advisers should make a point of involving TPAs in this process, she suggests.
The advisers she jointly presents with at enrollment meetings, she says, are greatly relieved to have a TPA along side them who can complement their own investment expertise with that of an individual who knows the plan’s features and operations better than anyone. “During the Q&A I like to stand next to the adviser so it looks like we’re working shoulder to shoulder with the adviser” -- which is indeed how she likes to operate.
In her experience, enrollment meetings with expert presentations from service providers produce far better results, with employees coming away with true understanding of the plan and its investment options. Yet some plan sponsors still expect adequate results from simply distributing stack of printed enrollment materials without expert testimony to accompany it.
She is a fan of having advisors hold one-on-one meetings with participants following the general enrollment session, and encourages her clients to make that possible.
What are employees asking?
In her enrollment presentation with advisers, Harrington hears all kinds of investment questions. And what sorts of questions are being thrown at you in participant meetings today? Compare your experience to that of Greg Makowski, CFP, AIF, a co-founder of CFS Investment Advisor Services who operates on the other side of the country from Harrington, in Totowa, N.J. Following are typical statements and questions he is hearing from participants, and, informally and broadly stated, the gist of his response:
I don't know anything about investing.
“If investment lingo makes your eyes glaze over and you don't want to think about how or what to invest in then split your money between a target date fund and a balanced fund. You can then stop worrying about everything and just keep putting your money in: The Rip Van Winkle approach to investing. Set it, go to sleep for 20 years and wake up to a large account balance.”
I can't afford to participate.
“Can you afford $3/day? That's one Latte/day less. $3/day will grow to about $50,000 in 20 years. If your employer is matching 50 percent that's now $80,000! $4/day with the employer match is $100,000. How can you not put away $3 or $4/day?”
I don't know how much risk I should take.
“If you have $1,000 in your account and it goes down 20 percent you're temporarily down $200. What will you do? (Answer; nothing.) If you have $10,000 in your account and it goes down 20% you're temporarily down $2,000. What will you do? (answer: nothing). If you have $100,000 in your account and it goes down 20 percent you're down $20,000. What will you do? (Answer: panic). Ok, then since you have $10,000, invest in the age appropriate target date fund and as you get older and your account gets larger the risk goes down, so let's not worry about anything right now.”
Should I invest in the index funds or actively managed funds?
Yes. Whichever you pick, if you stick with it and keep putting money away, it will pay off over time. It doesn't matter which fund you invest in, what matters is that you put money away.
Should I invest in the ROTH 401(k) or regular 401(k)?
“If you invest in the regular 401(k) and save $2,000 in income taxes what will you do with the income tax savings, spend it or save it? Participant answer: ‘I guess spend it because I don't think about it.’ Then invest in the ROTH because it forces you to invest the income tax savings.”
Should I invest in the ROTH 401(k) or regular 401(k)?, part II:
“Would you like to have the ability to take money out of your 401(k) plan at retirement and buy a vacation home? ‘Sure.’ Then invest in the ROTH because if you have $100,000 in your regular 401(k) you won't take it out and pay $30,000 to the government in taxes. If you have $100,000 in your ROTH you can take it out tax free-the ROTH gives you more flexibility.
I'm afraid to invest in bonds right now because interest rates are so low.
“Then invest in the stable value fund and as interest rates go up your principal remains fixed.”
I don't know if I should have any money internationally right now.
“When you go shopping do you like to pay full retail or do you want to buy when everything is on sale? Europe is on sale; it might be the greatest sale in a generation.”
“These,” Makowski says, “are typical questions and answers.” Yet he also gets plenty of even more basic questions, like “what is a stock? or “what is a mutual fund?” In a perfect world, employees would have had the benefit of an “Investments 101” course prior to enrollment meetings. But life is not always perfect.
A good relationship with investment advisors is critical to our success as a Third Party Administrator for retirement and pension plans. The advisor and the TPA work together to design the best pension plan for their clients.
FOCUS ON SERVICE
Advisors who work with a TPA can offer their clients more plan design flexibility, a better understanding of compliance issues, and superior customer service than they can get using the national or bundled alternative where investment and administration services are provided together. Advisors who use national TPA service providers end up doing a lot more client service work to fill in the gaps left by the national provider. Using a local TPA allows the advisor to focus on what he or she does best – investment selection and monitoring, and employee education.
Most of the large investment companies that offer a bundled option have also come to realize that a TPA can often provide the best result for their clients. The national providers are more likely than not to offer a TPA product. They want to specialize in the growth of their assets under management. Offering the administration component can cause service challenges that could disrupt their relationship with the plan sponsor. By having the TPA doing the compliance work the relationship is more solid, and the client is less likely to make a change.
LOCALLY BUNDLED SOLUTION
The advisor has more freedom and control over the relationship with a retirement plan client when using a local TPA alternative. The communication loop between the parties is complete, and all done behind the scenes:
- the advisor and the TPA,
- the advisor and the investment custodian, and
- the TPA and investment custodian.
The client can enjoy a “locally bundled” option and truly enjoy the best pension plan solution for them.
By Stewart Feller
April 4, 2013
As HR/Payroll outsourcers look to continue to attract more and in some cases smaller businesses to their outsourced model they increasingly look to build data integration with third party systems to gain efficiencies and drive down costs. Thus the intersection between Human Resource/ Payroll software and retirement services recordkeeping software (plan administration) is heating up.
ADP and Paychex market 401(k) recordkeeping systems that exchange data with their HR/Payroll software seamlessly. This data exchange clearly has become a key value proposition for these firms. From a benefits or HR manager’s prospective the ability to enter new or terminated employee information once into their HR/payroll and then have that data automatically recorded in the retirement services record keeping software is a significant advantage as it eliminates redundant data entry, unsynchronized data sets, system omission errors and saves time and has a clear return on investment. In addition, as the system of employee record the HR/Payroll software has the ability to automate a census output to the 401(k) TPA and advisor which is a major time saver for the HR/Payroll administrator. The TPA and advisor have the ability to record which employees are terminated and when, as well as have access to this information in a timely fashion. For firms that perform plan administration; including compliance testing, employee deferrals and loans, etc. having ready access to the payroll data allow 401(K) plans to run more efficiently. In addition, the definition of compensation for plan purposes is not always the same as for payroll so access to the full year compensation figures is significant.
HR/Payroll companies such as Ceridian and Paylocity who do not have 401(k) offerings have begun to partner with record keepers with software platforms such as Aspire Financial and investment firms that have a robust recordkeeping platform such as Great West and ING to offer the advantages that an integrated system offers in order to compete with the likes of ADP and Paychex. Even regional payroll companies like Balance Point Payroll in New Jersey have payroll and 401 (k) administration data exchange with Great West and other providers.
TPA, and now advisers, have begun to understand that he who controls the payroll (census) controls the sponsor, something payroll companies understood some time ago.
As a result, some third party administrators have started their own in-house payroll businesses.
As an independent financial adviser should you consider working with one of the national payroll providers such as ADP and Paychex (which have advisor products and partner programs) or a regional HR/Payroll company that is strictly focused on the needs of local businesses? A good place to start might be to ask your current and prospective clients how they process payroll and then explain the benefits of data exchange to gauge interest. Your firm will want to perform its own due diligence process to determine the level of customer service that the payroll provider offers and its client satisfaction scores. Partnering with an HR/Payroll provider or multiple providers is clearly a way to offer vale to your clients.
By Jerry Kalish
April 1, 2013
If you’re an adviser who works with business owners, you know that the “retirement plan season” is the end of the year. It’s that time when many business owners decide to set up a retirement plan before the yearend deadline.
It’s not that business owners aren't usually aware of what a qualified plan retirement plan can accomplish, but procrastination is part of human nature - and sometimes a business owner's nature. The owner (and maybe even the accountant) believes that setting up a retirement plan at year end can accomplish his or her tax planning objectives.
But that’s now always the case. With tax time approaching, it might be timely for you to point out to the business why now the time to set up a retirement plan is.
- Not enough compensation for a shareholder-employee of an S corporation.
Many owners will minimize W-2 compensation for payroll tax reasons. The balance of their income goes on their K-1s. However, only W-2 compensation can count for retirement plan purposes. Minimizing W-2 income can also minimize retirement benefits.
- Not enough time to maximize 401(k) contributions.
Adopting a 401(k) in the latter part of the year may not give an employee enough time to maximize his or her own contributions. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral.
- Not sufficient notice given to employees to change from SIMPLE to 401(k) plan
For example, an employer sponsoring a SIMPLE who wants to change to a 401(k) plan, notice must be given to employees at least 60 days prior to the start of the next calendar year. Thus, November 1, 2013 is the target date for the notice for a new 401(k) plan in 2014.
Timing can be everything.
Most of the mystery surrounding Davis-Bacon plans is caused by the fact that the actual Davis-Bacon rules for this type of plan design are found in the Davis-Bacon Act, not the Internal Revenue Code or ERISA. Additionally, Davis-Bacon compliance is monitored by the wage and hour division of the DOL and not the Employee Benefits Security Administration nor the IRS.
To provide some historical perspective, the Davis-Bacon Act was signed into law in 1931 to prevent the federal government from reducing local area construction wages. The Act was amended in 1935 to establish a system of setting wage rates in advance of the contract bidding. In 1964, it was amended to include fringe benefits as a component of the overall prevailing wage. In general, the Davis-Bacon Act requires any contractor bidding on a government construction project in excess of $2,000 to pay workers at a “prevailing union wage”, even if the employer did not employ union members.
In general, the prevailing wage is based on area union wages and fringe benefits. Thus, prevailing wage compensation can be broken down into two components — the prevailing hourly wage and the prevailing hourly fringe benefit amount. Davis-Bacon prevailing wages must be paid to affected employees unconditionally and not less often than once a week.
The prevailing wage fringe benefit component is intended to take into account fringe and welfare benefits, such as health insurance, which are paid to union construction workers. Under Davis-Bacon guidelines, the fringe benefit amount can be paid as cash wages. However, pursuant to Revenue Ruling 75-241, if the fringe amount of the compensation package is paid to the worker as cash compensation, it becomes subject to FICA and other payroll taxes as well as for purposes of determining workers' compensation premiums. Despite the additional tax liability to both the contractor and the employee, contractors frequently pay the fringe wages in the form of compensation. In some areas, this is necessary in order to get qualified workers; in other instances, contractors claim it is just easier. Through a combination of attractive plan design and good communication, a Davis-Bacon plan could be just as easy and just as attractive, if not more attractive than payment in cash.
From a practical perspective, there are certain plan features that coordinate better with the prevailing wage guidelines. In general, the Davis-Bacon portion of a retirement plan must provide for immediate eligibility and full and immediate vesting. Absent immediate eligibility, the Davis-Bacon fringe would need to be paid as compensation until such time as the individual becomes eligible. Full and immediate vesting is required because, unlike a traditional qualified plan, in a Davis-Bacon situation, the contributions are in lieu of actual cash wages due to the participant. Thus forfeitures cannot inure to another employee, nor can they be used to offset future plan contributions.
Contributions are required to be made not less often than quarterly, this differs from both the rules that apply to 401(k) elective deferrals as well as other employer contributions. In addition, the plan design cannot require a requisite number of hours of service or last day employment.
Davis-Bacon plans are not subject to the multiemployer rules; since the employment relationship is not governed by a collective bargaining agreement. Therefore, it becomes essential to keep complete and accurate records of all Davis-Bacon hours. Because of the tenuous nature of construction work, one area of particular concern in a Davis-Bacon plan is when does a separation from service occur? A worker may be laid-off for a period of time and then re-employed during the construction season. There are no clear-cut guidelines as to when a separation of service occurs in this respect, therefore, care should be taken to make sure that all participants are handled in the same manner. To the extent that the contractor knows that the employee will return after a layoff he/she should probably be treated in the same manner as seasonal employees as opposed to a terminee. This is certainly the case if the contractor pays for any benefits during any lay-off periods.
Prior to EGTRRA, a common issue in Davis-Bacon plans was Internal Revenue Code Section 415 violations. This happened based on the fact that the contribution to the plan was based on the difference between prevailing wage rates and a participant’s normal pay and benefit rates and how much time he/she spent performing covered prevailing wage service. Unlike a traditional retirement plan where annual additions can be held as suspense and/or reallocated to other participants, if a Davis-Bacon participant incurred an annual addition violation, that amount would need to be paid directly to the participant outside the plan. This results in additional taxable compensation and additional payroll taxes to be paid by the contractor. Thankfully, the increased 415 annual addition limitation will prevent most annual addition violations, although special care should be taken to avoid deduction violations under Code Section 404 which is limited to 25% of compensation.
One area that remains problematic for Davis-Bacon plans is coverage and nondiscrimination testing. All of the 401(a)(4) nondiscrimination rules apply to Davis-Bacon plans. In some cases Davis-Bacon amounts can be helpful when doing the general test. This would be true in a cross-tested plan where non-highly compensated employees receive significant Davis-Bacon contributions that can be used as the allocation gateway as well as for all or a part of the cross-tested benefit. Remember, however, that Davis-Bacon prevailing wages may apply to an owner or other highly compensated employee working in a non-managerial role. To the extent that an HCE receives a significant Davis-Bacon contribution, this can cause the plan to fail nondiscrimination testing. Remember, any corrective methodology used to pass a failed discrimination test cannot result in the Davis-Bacon employee forfeiting any of his or her Davis-Bacon contributions. The definition of HCE is based on the prior plan year compensation. It is very important to identify all HCEs carefully. The volatile nature of the construction industry could result in discrepancies in the HCE group from year to year.
Despite the attractiveness of a Davis-Bacon plan, some contractors may argue that they simply must pay the fringe benefit amount as compensation in order to retain good workers. In those cases, a plan designed with liberal withdrawal rights and loans could serve double duty. The Davis-Bacon contributions could serve as the foundation for some aggressive plan design that benefits the owners, while the Davis-Bacon workers benefit, especially during layoffs by loan and hardship withdrawal provisions. Davis-Bacon plan design and administration can get complicated because the plan and its operation must remain in compliance with both the Internal Revenue Code and the Davis-Bacon Act; however, once you are familiar with the potential pitfalls, the administration is rather straightforward.