Sponsor News - December 2011
8/9/2011 Jennifer A. Watkins
The Department of Labor (DOL) is in the process of adding hundreds of investigators to its staff. And since DOL investigators are responsible for enforcement of fiduciary, reporting and disclosure requirements for employee benefit plans, that means you had better be following the letter of the law. In 2010, the DOL conducted 3,112 civil investigations, almost 75 percent of which resulted in findings of one or more violations.
Here are six ways to avoid a visit from your friendly local DOL investigator:
1) Deposit participant contributions as soon as possible.
This issue is one of the DOL's top enforcement initiatives.
DOL regulations require that participant contributions, including loan repayments, be deposited to the plan's trust on the earliest date the contributions can reasonably be segregated from the employer's general assets. The DOL's position is that the "earliest date" is determined on a case-by-case basis. Because most companies have the ability to transfer funds electronically, the "earliest date" is often within a few days of pay dates, and sometimes even the same day. It is not acceptable to rely on the maximum time permitted under the regulations, which is the fifteenth business day of the following month.
The Form 5500 Annual Report asks whether the employer failed to transmit any participant contributions within the period described in the regulations. This question must be answered "yes" if there have been late deposits-even if the employer has corrected the violations. If there have been late deposits, very often the DOL will send the employer a follow-up letter requesting confirmation that the employer took appropriate corrective actions. Our experience has been that a DOL investigation will sometimes follow, even if the employer has already corrected the violations and responds to the follow-up accordingly.
The Form 5500 is signed under penalty of perjury and plan administrators must always complete it truthfully. If a late deposit has been discovered, it should be corrected and reported on the Form 5500 as required. The only way to avoid inquiries from the DOL is to avoid making late deposits in the first place. Deposits should be made as soon as possible after each pay date on a consistent schedule.
2) Make sure your plan has a proper fidelity bond.
Another of the DOL's hot-button issues is inadequate bonding of plan fiduciaries and individuals who handle plan funds. A company often has a fiduciary policy or a policy protecting directors and officers, but not a true ERISA bond protecting the plan. Generally, the amount of the ERISA bond should be at least 10 percent of the amount of funds handled, but in no event less than $1,000 or more than $500,000 for each plan covered.
The Form 5500 asks whether the plan is covered by a fidelity bond and for what amount. Answering this question "no" would obviously tip off the DOL to an issue, as would a bond below the required level.
Plan sponsors should know what level of coverage the plan has and answer the question accordingly. If the bond is inadequate, the plan administrator should seek to increase it immediately.
3) Promptly respond to participants' inquiries or requests for information.
Certain plan documents must be made available for examination by any participant or beneficiary. These include the latest summary plan description, latest Form 5500, any applicable collective bargaining agreements, the trust agreement and plan document. If a participant or beneficiary submits a written request for these documents, the plan administrator must provide them within 30 days of the request. If a plan administrator does not, it may be liable for a penalty of up to $110 per day.
The participant or beneficiary may complain to the DOL if the plan administrator does not comply with information requests. These complaints often trigger an inquiry from the DOL and, depending on the response, the DOL may investigate the plan. A large number of investigations are based on participant complaints.
The best practice is to keep plan records updated and organized, and respond to participant or beneficiary inquiries as soon as possible.
4) Distribute regular, accurate participant statements.
Plans must distribute regular benefit statements to participants and beneficiaries. For defined contribution plans, statements generally must be distributed once each calendar quarter if the plan allows participant investment direction, and once each calendar year if the plan does not allow investment direction. For defined benefit plans, statements generally must be distributed at least once every three years. Finally, participants and beneficiaries may also request statements once during any 12-month period.
Just like with routine plan documents, participants may complain to the DOL if they have trouble obtaining accurate statements. Statements should be accurate, easy to understand and distributed in a timely fashion.
5) Ensure that fees are reasonable and do not pay expenses with plan assets.
The Form 5500 requires large plans to disclose service provider fees charged to the plan. Excessive plan fees have become another top investigative issue for the DOL, and investigators are likely to carefully review Schedule C to identify potential red flags. Also, while many administrative expenses may be paid from plan assets, some may not. Contact us for help with determining whether fees are reasonable and sorting out what expenses may be paid with plan assets.
6) Respond promptly to DOL letters requesting information.
No explanation is necessary for this one. Ignoring the DOL's inquiries will do the opposite of making them go away, so please don't try it!
Form 5500 filings are a common source for investigators to select plans for investigation. Red flags include plans with a large percentage of assets in real estate, limited partnerships or the like, noncash contributions, loan defaults, low diversification ratios, unreasonably low rates of return, an adverse accountant's opinion and notes or disclaimers on the financial schedules. Remember, the Form 5500 is signed under penalty of perjury. If you are concerned that any of these red flags may apply to your plan, we can help you fix them, but you must answer the Form 5500 truthfully.
In addition to the above triggers, the DOL will also target a plan for investigation based on other factors, such as bankruptcy filings or media reports that a company is in financial trouble. Too often, plans sponsored by employers experiencing severe financial difficulty are vulnerable to inappropriate behaviors by the employer, such as delaying deposits of participant contributions to the plan, loans to the company or other misbehaviors. Sometimes, investigators target specific industries or simply choose plans at random.
What do you do if you receive a notice that the DOL is investigating your plan? Contact us immediately! The sooner you call us, the more likely we can help make the process run smoothly and take steps to reduce your potential liability.
It's not uncommon for successful small businesses to put off starting a 401(k) plan given time constraints and other pressing business initiatives. Yet, this low-cost benefit has a lot to offer small business owners and their employees. Here are four ways a 401(k) can help you and your business:
Tax-defer up to $49,000 from your own personal taxes this year! That's right. Every employee including the owner has the ability to contribute $16,500 a year tax-deferred in 2011 to his or her 401(k) account ($22,000 if you are 50+ years of age) plus receive employer match and/or profit sharing contributions up to the $49,000 limit ($55,500 if over 50). The tax savings alone can help many business owners keep more of their own money versus not having a plan at all.
Build a nest egg of a $1M or more in 25 years or less. Tax savings are big enough reason alone to start a plan, but when you combine high contribution amounts with compounded growth, your 401(k) can build to be a big financial asset. An owner who earns $140,000 a year and contributes $16,500 a year and receives a four percent match (an additional $5,587 a year) into his 401(k) account could have $1,396,977 in 25 years. This does assume a 7% annual return on the savings which of course could be more or less depending on markets and investment selections. Regardless, it can be a meaningful amount.
Save some serious money retaining and attracting top talent while helping your employees too. Great employees can switch jobs in good or bad economies. Not too many things are worse for a business than losing a top employee with invaluable business knowledge and customer relationships. Add in the costs of hiring, training, and ramping up a new hire and the actual costs are often two to four times greater than most expect. 401(k) plans are one area that small business can get an edge on big business and standout in the current business climate.
Access to your money penalty-free in case of emergency. 401(k)s can easily enable a loan provision that allows any employee including the owner to take a loan from their own account for half of the vested balance up to $50,000. You simply pay yourself back; generally over a five year period. There are some cons to taking the loan, but it sure offers nice peace of mind for whatever the future holds.
Many owners continually think about how to gain a competitive edge, increase employee productivity, and achieve greater financial success. All are worthy business goals. A 401(k) plan is one way of moving the needle for your business. With the upcoming 2011 401(k) deadlines this month, now is a great time to consider your best options.
How to set up a 401(k) plan that your employees -- and prospective employees -- will value.
Should you start a 401(k)? After all, it's what generally successful companies tend to do: offer a financial vehicle for their employees to save for retirement.
And while you're probably going to give the job of setting up the 401(k) to a CPA or an outsourcing firm, there are still things that you, as the owner of your company, should understand before you get the ball rolling.
Here are five things you need to know about starting a 401(k).
1. Understand why you're doing this.
One of the most common mistakes companies make when it comes to a 401(k) is not knowing why they're setting it up, says Jewell Lim Esposito, partner in the benefits practice group at the national labor and employment law firm Constangy, Brooks & Smith, LLP. "If it's a tool to be competitive in the marketplace, then design the plan in such a way that employees are rewarded," Esposito says. "If it's a tool for retention, then build in safeguards and incentives for employees to stay at the company and in the plan. If it's a tool to compensate management, then do the company contributions so that they flow through to management -- in a legal way."
Esposito adds that frequently entrepreneurs "don't understand their own employee demographics before setting up the plan. An employer with a very young population might have employees who don't even stay a full year at work. If that's the case, then why incur the cost of letting them enter the plan, just to have them leave?"
2. Yes, there are fees.
The fees are going to vary quite a bit, and in some cases, you may be able to get the fees waived (generally, the bigger the company you have, the easier that is). But if you're a small-business owner with, say, a couple dozen employees, you should probably budget for around $1,500 to $3,000 to get a 401(k) up and running, says Dennis R. Marvin, CFP and principal of Marvin Wealth Management in Cleveland, Ohio, adding, "It can easily be more than that."
It can be less, too. "Some 401(k) providers might waive or reduce the startup costs," adds Marvin. In any case, you can expect administration fees, investment fees (which are deducted from the return from the investment) and maybe even individual service fees that each participant in the plan has to pay. On the plus side, the U.S. Department of Labor has issued new regulations requiring retirement plan service providers, starting Jan. 1, 2012, to disclose more detailed information about retirement plan fees and expenses to plan sponsors. It may not lead to fees going down, but at least entrepreneurs may be a little less in the dark about these costs.
The U.S. Department of Labor also has a wealth of information at its website to help point entrepreneurs toward the 401(k) light.
3. Realize there's variety in your 401(k).
There are numerous types of 401(k)s, but in general, most employers offer either a traditional 401(k) plan or a safe harbor 401(k) plan.
In a traditional plan, you contribute a percentage of income to each employee or match the amount your employees decide to put into their account. You can even do both -- for instance, match the amounts and then as a bonus, add a little more in at some point during the year. You do, obviously, have to remain with the limits of the current tax law: $16,500 for people under 50, with people over 50 allowed catch-up contributions, up to $22,000 a year. The maximum total amount that can be contributed by you and your employee is $49,000.
The safe harbor plan is pretty close to the traditional 401(k), with a few differences. For instance, under most of these safe harbor plans, mandatory employer contributions must be fully vested when they're made. That is, whereas with a traditional plan, you can require that any matching funds you present don't become the employees' until they've been with the company for five years, anything you give to the employee's 401(k) is theirs immediately.
4. You will be tested on this.
For traditional 401(k)s, not safe harbor plans, there is annual testing to make sure every employee can benefit from a 401(k). An employee making $110,000 or more a year is considered a highly compensated employee (HCE), and employers are required to test -- at least once a year -- to ensure the benefits of the plan aren't lopsided in favor of the HCEs over the non-highly compensated employees (NHCEs).
There are two tests to measure this: an actual deferral percentage test (ADP) and actual contribution percentage test (ACP). If those tests fail, the 401(k) could lose its tax-qualified status, and all contributions and earnings would have to be distributed to all the plan participants. If that happens, the low end of the salary employees won't mind, but you and your highest earning employees aren't going to be happy.
The IRS offers this helpful 401(k) checklist that details how to stay compliant with the law.
5. Don't rush.
As Rob Wilson, president of Employco, an HR outsourcing firm, asks, "Why offer a bad 401(k)?" Wilson says an entrepreneur will encounter three different types of employees: the group that won't participate no matter how good the 401(k) is, the group that will say, "I'll take it" but won't spend much time on the details of how it works, and the group that will pore over every line. It's that third group you might as well spending time impressing.
And if you do everything right and develop a 401(k) worth bragging about, boast all you want about its merits -- it is, after all, a tool that you can use to attract and retain good employees -- but be careful about getting too deep in the weeds with your company's 401(k).
"Never give investment advice," advises Wilson. "You don't want to open yourself up to liability issues."
September 26, 2011 By David Pitt Tags
DES MOINES, Iowa (AP) --- Sometimes it pays to get help. A new study of 401(k) accounts provides further evidence that workers who get help pocket higher returns than those handling their own investment choices.
The study by human resources consultant Aon Hewitt and investment adviser Financial Engines shows that workers who received some form of help experienced annual returns on average of 3 percent better than workers who handled their own accounts.
But it's important to clarify what's meant by "help." Workers who used target-date mutual funds, professionally managed accounts or accessed online advice were all deemed to have used help for purposes of this study. Their behavior from 2006 through 2010, and how it affected account risks and returns, was studied.
Target-date funds automatically set the mix of stocks and bonds according to a worker's risk tolerance and years until retirement. Managed accounts are those with professional manager so the accountholder doesn't have to make ongoing investment decisions.
Based on the returns estimated in the study, the difference that 3 percent could make over 20 years is striking. If two accountholders --- one who sought help and one who did not --- invested $10,000 at age 45, the person who got help could have $71,400 saved by age 65. That's 70 percent more than $42,100 of the worker who handled their own affairs.
The study looked at eight large 401(k) plans representing more than 425,000 individual participants with $25 billion in assets.
It should be noted that Financial Engines' services include managed accounts and advice services. Aon Hewitt offers companies retirement plan options including self-directed brokerage accounts and financial planning help services.
The difference in performance can be attributed to common mistakes made by 401(k) accountholders managing their own investments.
Getting scared and pulling money out of stocks when the market tumbles, and then failing to reinvest before the market recovers hurts many retirement investors. This behavior was very damaging in 2008, when the Standard & Poor's 500 index fell nearly 39 percent. Unfortunately many stayed out and missed the 26 percent recovery in 2009.
"When markets are as volatile as they are now there is a substantial opportunity to make some very bad mistakes," said Christopher Jones, chief investment officer for Financial Engines. "Particularly if you're a near retiree. That can be very damaging."
TOO MUCH OR TOO LITTLE RISK
Choosing an inappropriate level of risk for a worker's age and years until retirement is another common error. Leading up to the market collapse in 2008, many workers within five years of retirement carried too much risk, keeping a large portion of their money in stocks. When the market dropped, on average, 401(k) investors lost a third of their account balance. Those who were close to their planned retirement didn't have time to make up the losses and in many cases had to continue working.
Younger workers who are too cautious and shy away from stocks can cut their earning potential significantly over time.
Another common costly mistake is investing too much money in the employer's company stock, Jones said. Many workers believed their own company stock was less risky than other choices. When the market plunged in 2008, many of these stocks fell as much as 70 percent. This led to a devastating loss for heavily invested workers.
Failure to periodically rebalance a portfolio can also hurt returns. By rebalancing, investors adjust the allocation between stocks and bonds in their portfolios to ensure their investments reflect their appetite for risk. For instance, in a market where stocks surge, a portfolio can become too heavily invested in stocks unless the accountholder moves some of that money from stock funds into bonds or other assets.
Failure to rebalance after a market surge or drop leaves a portfolio at risk to underperform.
A large segment of 401(k) accountholders have historically been complacent about their investments, failing to do anything with their account for years.
"Rather than do something wrong they're just not doing anything," said Pamela Hess, director of retirement research at Aon Hewitt. "With all the volatility in the last few years, I think folks don't know what to do and a lot are just doing nothing."
More workers with 401(k) accounts are using some form of help, Hess said. An earlier study of 401(k) accounts indicated about 25 percent of workers used help with their investments in 2009. As of the end of 2010, about 30 percent of workers were using help.
Hess points out it, however, that still means about 70 percent of workers don't get help.
"This study really quantifies the fact that he gap between doing things on your own and what you can get with professional help does in fact get substantially wider during periods of volatility and economic stress," Jones said.
While acknowledging that some forms of help including managed accounts carry higher costs, Jones said the difference in performance outweighs the increased cost.
Managed account fees typically range from 0.20 percent to more than 1 percent of the account balance. Target-date fund fees can range from around 0.18 percent to more than 1.5 percent of assets.