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Sponsor News - April 2014

Developing a Fiduciary File Cabinet

February 14, 2013 ( – In the event of a plan audit or litigation, a retirement plan sponsor’s fiduciary process is only as good as it can demonstrate, said David Wolfe, partner with Drinker Biddle & Reath.

During a webcast, “Fiduciary Issues for Tax-Exempt Benefit Plan Sponsors,” sponsored by Crowe Horwath LLP, Wolfe shared best practices for creating and maintaining a fiduciary file cabinet. He noted that these are best practices for both Employee Retirement Income Security Act (ERISA)-governed and non-ERISA-governed plans.

An appropriate ERISA bond should be in place for fiduciaries before they begin to act. The bond should be updated periodically to make sure coverage is appropriate as the plan grows, Wolfe noted.

The fiduciary file cabinet must include documentation of systematic processes, as well as evidence that good processes were followed. According to Wolfe, a critical starting point is identifying parties in plan operation and management, what they are responsible for and whether they are a fiduciary or not. For plan committees, a committee charter is needed to identify who is on the committee, when it meets, what processes it is responsible for and how it implements these processes. In addition, for third parties heavily involved in plan administration, plan sponsors must have a definitive agreement to establish roles and liability.

Plan sponsors should pay special attention to fiduciary training. “It is on agencies’ radar right now, they ask when fiduciary education is provided and what it entails,” Wolfe said.

Plan committees should meet regularly with written agendas and written meeting minutes. When third-party providers are retained, sponsors should document the evaluation and selection process.

Plan sponsors should maintain a complete set of all current documents: plan document, trust agreement, summary plan description (SPD), plan forms and service agreements, as well as all amendments to those documents. “Ensure that the plan gives broad and final interpretive authority to the internal fiduciaries,” Wolfe added.

The plan should have written investment policies and procedures. Fees should be reviewed regularly, and this process should be documented.

Wolfe shared key documentation that should be included in plan committee minutes:

  • Identify all persons in attendance;
  • Highlight very prominently the good process followed by the committee at the meeting;
  • Focus on decisions reached at the meeting;
  • Maintain more formality (i.e., resolution format) as to actual votes taken;
  • Incorporate reports from third-party advisers by reference and maintain as part of the minutes;
  • Maintain appropriate plan-by-plan separation within the minutes; and
  • Emphasize advice provided by third-party advisers and legal counsel for the committee.

Wolfe said the committee should develop a general format for the minutes, and the minutes should be drafted as soon as practical after the meeting. He suggested obtaining approval of the minutes by all members who attended and using the minutes as a basis for summary reports to higher governing fiduciaries to the plan.

SIMPLE IRA plan to 401(k) Plan - Important Deadline!

There's an important deadline on the horizon if an employer has a SIMPLE IRA plan in 2013 but would like a 401(k) plan in 2014 - that date is November 1, 2013. If an employer wants to terminate a SIMPLE IRA plan, it may do so prior to the end of the calendar year. However, the employer must give its employees at least 60 days’ notice that the SIMPLE IRA plan is being terminated. An employer does not need to give any notice to the IRS that the SIMPLE IRA plan has been terminated. Once the SIMPLE IRA plan is terminated, a new 401(k) plan may be established on January 1, 2014. An employer cannot maintain a SIMPLE IRA plan and a 401(k) plan in the same calendar year.

So why consider a change from a SIMPLE IRA plan to a 401(k) plan? Some key reasons may include:

  • Higher contribution limits for employees
  • Additional benefits available for owners and highly compensated employees
  • Avoiding 100% immediate vesting of employer contributions
  • Increased investment selection
  • Allowing for plan loans
  • Being able to buy tax-deductible life insurance

401(k) plans will have additional testing and reporting requirements versus SIMPLE IRAs, making them more expensive to maintain. However, the cost considerations in switching from a SIMPLE IRA plan to a 401(k) plan, with respect to the long-term goals of any employer-sponsored retirement plan, may be well worth it.

In terminating a SIMPLE IRA plan, employers must notify the Simple IRA Plan Provider, that they will not make a contribution for the next calendar year and that they want to terminate the contract or agreement. Likewise, in considering a switch to a 401(k) plan, set-up/plan lead times for vendors offering such plans typically run from 30-60 days.

In addition, unless an exception applies, SIMPLE IRA plans are subject to a 25% penalty tax by the IRS if a participant less than age 59 ½ makes a withdrawal within the first two years of participation. This two-year period starts when a participant makes his or her first contribution into the SIMPLE IRA account. Once the new 401(k) plan is established, participants that have been in the SIMPLE IRA contract for more than two years may roll their SIMPLE IRA monies over to the 401(k) plan if the new plan allows for such monies to be rolled into the plan.

Lastly, and most importantly, employers should consult with their financial advisor, accountant or attorney prior to considering any of the changes noted above.

The 80-120 Rule: Does Your Retirement Plan Require an Audit?

By Lara Fuller
August 16, 2013
The economy continues to have its ups and downs. Weather your company is growing and you are adding employees or if you are downsizing and possibly considering eliminating your benefit plan, the number of participants in your plan can significantly fluctuate from year to year. As a result, you may now be required to have an audit of your plan or, maybe your plan is small enough that and audit is no longer required.

In order to determine the audit and filing requirements for qualified retirement plans, it is necessary to be aware of what has become known as the 80-120 Participant Rule. In general, plans covering 100 or more participants at the beginning of a plan year are called “large plans” and require an audit, while plans covering fewer than 100 participants at the beginning of a plan year are called “small plans” and do not require an audit. The 80-120 Participant Rule is an exception to the general rule and allows the plan administrator to elect to complete the annual return/report in the same category (“large plan” or “small plan”) as was filed for the prior year return/report. Therefore, until the retirement plan’s participant count at the beginning of a plan year goes above 120, the plan can continue to file as a “small plan” and would not require an audit. Once the retirement plan’s participant count at the beginning of a plan year exceeds 120, the plan will be classified as a “large plan” and would require an audit for that year, as well as for each subsequent year until the beginning of the year participant count decreases to 99.

For example, ABC, Inc. 401(k) Plan (ABC), a calendar year plan, had 98 participants on January 1, 2010. For the 2010 plan year, ABC filed Form 5500 as a “small plan” and was therefore not required to attach an audited financial statement to the annual Form 5500 filing. Participation increased during the year, and as of January 1, 2011, the plan had 112 participants. ABC can elect to file as a “small plan” for the 2011 plan year since participation did not increase to over 120. Thus, for the 2011 plan year, although there are more than 100 participants as of the beginning of the plan year, the plan is not subject to the audit requirements faced by “large plans.” Once participation reaches 121 or greater at the beginning of the plan year, ABC will be required to attach an audited financial statement to the annual Form 5500 filing. Assuming participation in ABC reaches more than 120 participants as of the beginning of a plan year, ABC will be required to attach an audited financial statement to the annual Form 5500 filing for that plan year, and all subsequent plan years, until participation at the beginning of the plan year decreases to 99 or less.

For Form 5500 purposes, a “participant” is an individual in one of the following categories:

  • Active Participant – An individual currently in employment who is earning credited service under the plan. An individual who is eligible to participate in a 401(k) plan but has opted not to defer any money is considered an active participant.
  • Retired or Separated Participant – Individuals who are retired or separated from employment and are receiving benefits under the plan or have an account balance in the plan.
  • Other Retired or Separated Participants Entitled to Future Benefits – Individuals who are retired or separated from employment and who are entitled to begin receiving benefits under the plan in the future.
  • Deceased Participants – Individual who has one or more beneficiaries who are receiving or entitled to receive benefits under the plan.

5 Reasons to Consider a Solo 401(k)

September 10, 2013 By Roger Wohlner

As we move closer to the end of the year those of you who are self-employed should be thinking about starting a retirement plan for yourself if you don’t have one in place already. There are a number of options available; here are 5 reasons to consider opening a Solo 401(k).
High maximum contributions

For 2013 the maximum contribution limits are $51,000 and $56,500 for those who will be 50 or over in 2013. This includes the regular 401(k) contribution limits of $17,500 and $23,000 for those 50 and over plus an employer profit sharing component. The ability to contribute at the maximum level is based upon your income level.

Investment flexibility
A Solo 401(k) can be opened at many popular custodians such as Schwab, Fidelity, Vanguard, T. Rowe Price, and many others. Just like with an IRA or a SEP-IRA you can invest your account in a range of investment options such as mutual funds, ETFs, closed-end funds, individual stocks and bonds, and any other investment vehicle that is offered by the custodian that isn’t prohibited by 401(k) rules.

Contribution flexibility
While the high maximum contributions are an advantage for those self-employed individuals with the income and cash-flow to afford them, there is no requirement for you to make any level of contribution per year. In fact if need be you can skip a year if desired.

Another form of contribution flexibility is the ability to make contributions up to the maximum as long as you earn enough. Contrast this to a SEP-IRA where the contribution is a percentage of your income and the contribution amount would be much lower in some years. This means that as long as you have the cash to make the contribution, the Solo 401(k) would generally allow a larger contribution at lower levels of income than a SEP-IRA.

Easy to open and maintain
Most major custodians, many banks, and most brokerage firms welcome these accounts and make the process of opening and funding your account easy. Most of these firms use a prototype plan and there are very few regulatory or administrative requirements until your account balance gets up to the $250,000 level.

Roth options are available
Depending upon your custodian’s rules, a Roth 401(k) option might be available to you. Just like a 401(k) plan with an employer, the Roth 401(k) option allows larger Roth contributions than the IRA limits. Additionally for those whose income is too high for a Roth IRA, the Roth Solo 401(k) can be a good option.

If you are interested in opening a Solo 401(k) here are a few things to keep in mind:

  • In order to contribute to a Solo 401(k) for the current year the account must be opened by December 31. Contributions can then be made up to your tax filing date, including extensions.
  • A Solo 401(k) only works for you, a partner, and/or a spouse. If you have employees this is not the vehicle for you. Check with your prospective custodian for more on this.
  • If you are interested in a Roth feature and/or the ability to take loans from your account you will want to make sure that the custodian you are considering offers these features. You will also want to inquire about any and all account fees. Note that any trading fees or mutual fund purchase charges that apply to other accounts at the custodian will generally apply here as well.

The Solo 401(k) can be a great self-employed retirement plan. The main thing is if you are self-employed you need to start saving for your retirement. You work too hard to put this of any longer and if you don’t save for your retirement nobody else will either.

The Retirement Saver’s Secret (as in “Under Appreciated”) Weapon

By Christopher Carosa, CTFA | July 9, 2013

In last week’s article, we explained how tax-deferred savings represents the first of four gears that drive retirement plan success. In fact, it may be the most powerful driver in the entire set of gears. For some reason, though, the standard method used this type of savings falls flat with many employees. Why is this such a problem? More important, do you know there’s a much more sexier way to entice employees to save in retirement plans?

Like driving, getting into first gear is often the highest (and hardest) hurdle retirement savers face. In this manner, tax-deferred savings is both the greatest secret weapon as well as the most under appreciated for retirement savers. Like beginning an exercise regime, many people find it hard to even start saving. But, as with exercise, once you develop the habit of saving, it’s much easier to continue.

We all know what they say about exercise. It takes time to see the effect, but over that time period, you’ll feel a lot better. In a similar manner, the most cited reason for tax-deferred savings also focuses on the long term.

“By saving in a tax deferred vehicle, the investor is able to prolong the time in which he or she has to pay the taxes on the money saved as well as the gains,” says Rob Clark, Partner at MPC Wealth Management in Orlando, Florida. “More simply, it gives savers the opportunity to have more money working during the time of saving, eventually paying the taxes when the money is needed for retirement.”

There’s nothing wrong with this explanation. It is both true and accurate. But, alas, it’s about as exciting as watching paint dry. If only there was a more invigorating reason for employees to save. Then they would have a greater interest in the wonders of pre-tax savings. Well, dear reader, we’ve just happened on just such a reason. Why it isn’t used more often we cannot explain, but here it is nonetheless.
Unlike exercise, tax deferred savings can offer immediate gratification.

It can, in effect, give you an instant raise in net take-home pay.

Pete Marriott, Managing Director at Trinity Retirement Solutions, LLC in Charlotte, North Carolina, says, “It costs less to save in a tax-deferred account than in an after tax account. That cost is about $0.70 on the dollar to get $1.00 into the account.”

“For example,” says Dan Palmer, a financial advisor for Rehmann Financial Group in Fort Wayne, Indiana, “a $20 contribution does not cost the employee $20. Because it is pretax it only costs them $15 in take home pay.”

Here’s how it works. Let’s say you’re a single taxpayer with a $25,000 annual salary, getting paid every two weeks and with the standard deduction and exemption amounts. If you save 5% in a tax-deferred plan, about $48 dollars is taken out of your biweekly paycheck. However, since this $48 is taken out pre-tax, your pay is reduced only by roughly $41. Over the course of a year, your annual take-home net, as a result of this tax savings, is $188. If you’re a spendthrift, that’s an extra latte a week. If you’re like me, that a couple dollars more you can pump into your savings account.

Now, if you think this is good, imagine if you saved more. Your tax savings would be greater; therefore, your take-home net would be greater. Using the same example above, if this person deferred 8% of his salary, his net increase in take-home pay would be $300. If he deferred 10%, it’s like giving himself a raise of $563 per year! That’s a lot of lattes.

Many plan sponsors struggle to convince employees to save in their 401k plans. They hire professionals to bring out the charts showing how such savings can, over time, grow to impressive sizes. Despite the veracity of these statements, the alluring colors of the graphics and the fact an experienced professional is often the one stating these truism, the pitch fails to get the employees to act.

The problems lies in the unfortunate reality of behavioral economics – a bird in the hand is worth two in the bush. People would rather get an immediate reward than a deferred reward worth twice as much. If this is the case, then give them the immediate reward. Tell them the truth. Tell them, by saving in a tax-deferred retirement plan, they can give themselves an immediate raise.

And the more they save, the bigger the raise.

After all, everyone wants a raise, don’t they?