SponsorNews - April, 2013
Why You Need To Consider Retirement Plan Advisor Due Diligence
Posted on January 23, 2013
By Trisha Brambley
Today, 75% of Plan Sponsors use the services of an Investment Advisor for their retirement plan. Many of these plans (up to 75%) do not have a specialized Retirement Advisor while others may have outgrown the Advisor they do have. The providers too are seeing an increase in companies looking for that “best fit” Advisory Firm. A high quality firm can offer outstanding investment and retirement plan expertise. Plan Sponsors are looking for more from their advisors than ever before. Many want a more knowledgeable and specialized retirement advisor, or are looking for help supporting their employee education program or want help minimizing costs. Committee members think about changing advisors as their plan, or need for help, grows. For these reasons, many Plans Sponsors embark on a due diligence process to find the best advisory firm for their plan and their employees.
Companies that use a qualified Retirement Plan Advisory Firm can experience greater satisfaction with their plans through improved plan performance, a better understanding of their fiduciary responsibilities, and better support for participants. However, a number of plan sponsors feel dissatisfied with their Advisory Firm if they are running their plans without the needed expertise and technical knowledge a quality Retirement Plan Team brings to the table.
If you serve on a plan committee and are considering adding an advisor or replacing one, you will want to delve into the details to ensure you get the best possible fit for your plan. Here are some of the points we recommend exploring when considering a plan advisory firm:
All advisors are not fiduciaries. Since 2008, fiduciary concerns have nearly tripled. Find out if your Advisor is ready to take on the co-fiduciary role. Often, we will find some investment plan committee members who think their plan vendors will automatically assume the company’s fiduciary liability. Also, do not assume that your broker is a fiduciary, because in many cases they are not. If your advisor is qualified to serve as a co-fiduciary, get it in writing.
Advisors are either specialists or generalists. According to the Retirement Advisor Council, 75% of plans between $5 million to $500 million do not use an Advisor who specializes in retirement plans. Some of these plans do not have an advisor at all and the rest are using generalists. A retirement plan specialist can round out the needs of the investment committee. They can provide the committee with ideas on Best Practices, can alert the committee to trends and ideas, and even offer influence with your plan vendor for handling special requests or pricing that you would like to have. We have found that regardless of plan size, the committee members value the retirement expertise that a specialist can bring to the table and increasingly demand these skills.
Learn where potential conflicts of interest lie. Does the advisor get special bonuses based on how much business they place with certain firms or funds? Does the firm have preferred vendors because they receive additional compensation? Does the firm have a policy on receiving gifts of any kind from the vendors and companies they do business with?
Make sure all fees are reasonable—including the plan advisor’s fees. If the advisors’ fees are taken from plan assets, you need to be sure that the fees are reasonable in context of the services provided. Surveys can be a good starting point. However, there is no substitute for a periodic structured process to determine the best price for the best services. Just as you do a periodic review of your plan vendor’s fees, it is a Best Practice to shop for these services every three to five years.
Understand how the plan pays fees. New, more stringent retirement plan fee disclosure rules make attention to this detail mandatory. Advisors may charge a percentage of assets or a flat fee through an ERISA expense budget or as an add-on
Question advisory firms about capacity and resources. Your advisor may work for a firm with thousands of employees. This doesn’t mean the firm has the professionals your plan requires. Ask how many professionals are exclusively Retirement Plan specialists for plans of your size. How many are dedicated to your plan? It is important to take a close look at the actual team (and their credentials) that will be servicing your plan. Is the advisory firm growing and how will they manage that growth?
Find out if your advisor has influence. Top advisors have significant influence with service vendors and can help you get the best pricing and service for your plan. Advisory firms that are growing can often help the plan sponsor when negotiating fees and services on their behalf.
Choose candidates who talk to you. Some plan advisors may talk at you—or over your head. The world’s most knowledgeable advisor should still communicate to you in plain English. The people who serve on investment committees are not necessarily professionals with an expertise in investments. The advisors you rely on need to be able to communicate complex financial matters in understandable terms to help you make informed decisions about the plan.
Check their insurance. A detailed review of the advisors’ fiduciary liability insurance and Errors and Omissions coverage is critical in determining their suitability for your plan and your company.
Check all candidates’ background, professional credentials and experience. A thorough review includes a background check on the advisors who will work on your plan. That includes getting details on their credentials, experience, ADV filing, and bankruptcies, criminal charges, liens and more.
The Plan Sponsor’s choice of a retirement plan advisor is one of the most important plan related decisions that can be made. A thorough, periodic review can yield better protection for the company and the committee members, better service from the vendor and better techniques to get the participants ready for retirement.
1. Retirement Advisor Council
2. Fidelity Investments 2012 Biannual Plan Sponsor Attitudes Survey
3. Fidelity Investments 2012 Biannual Plan Sponsor Attitudes Survey
7 Simple Saving Secrets Every 401k Investor Should Know
By Christopher Carosa, CTFA | February 5, 2013
I must have gone through thousands of retirement analyses through the years. When I was younger, looking mostly at younger people, what I saw scared me. Retirement, this great nebulous beyond, seemed almost a fantasy land. It lay beyond the horizon, and unimaginable. Saving for it, on the other hand, appeared to most – me included – like a large twenty-ton boulder. This “saving for a retirement” was an obstacle far too obstinate for a mere mortal to tackle.
At least not then. Not in the 1980’s. Not during the period of the vanishing (and now extinct) pension plan. No, our parents had it easy – they had the best of both worlds. They had the guarantee of a fixed pension and they had the lavish promise of private retirement accounts. What I saw before me was Mount Everest compared to their Pike’s Peak. The older generation could merely latch on to the vehicle of their company’s retirement fund and drive to the summit of retirement success. The younger generation faced sheer cliffs that required individual effort to surmount.
Again, the pure size of the mission dwarfed the confidence of the average twenty-something year old.
Yet, despite the onus of this burden, we heard repeatedly this mantra from our experienced elders: “Every great journey begins with but a single step.” In addition to this philosophical tidbit, we had a guidebook of a handful of simple savings secrets. They were so simple they defied belief. Indeed, some young skeptics, too cool to bind themselves to someone else’s ideas, opted instead to live as if the world would end tomorrow. For a lucky few in that group, it did. For the others in that cohort, they soon learned the price of hedonism.
But for the rest of us, those willing to take those single steps, we find ourselves nearing the end of a rainbow our entire life told us could never exist. And yet it does. Within our very real grasp sits a pot of gold, the fruits of our life’s labors, the milk to our retirement shake, the one thing that guarantees us comfort in our remaining years. And, to think, it all started with that fistful of simple savings secrets we almost tossed aside.
What are these simple savings secrets? Why do they work? And How can you take advantage of them? We each have our own shorthand for these secrets. How we refer to them depends on our upbringing, our education and, to some extent, our own personal values. As Chief Contributing Editor at FiduciaryNews.com, I’ve had the honor to speak with hundreds of financial professionals from all across America. This has given me a chance to taste the different flavors of this same sauce of success. No matter what the spices the cook uses, the cuisine pleases the pallet, which in this case, really means the wallet.
Without further ado, here are the seven most important simple savings secrets every 401k investor should know.
#1: Make a Commitment.
The best way to commit yourself is by stating a specific goal and then coming up with a plan to attain that goal. Mitchell D. Weiss has taught as an adjunct in the Economics & Finance Department at the University of Hartford’s Barney School of Business in West Hartford, Connecticut. He believes it’s important to “start by establishing the objective of the money (in this case, retirement).” The plan need not be elaborate. In this case, it can simple be “saving.” The point isn’t the precision, it’s simply the fact that it’s easier to plan for an event (like retirement) if you start earlier. Elle Kaplan, CEO & Founding Partner at Lexion Capital Management LLC in New York City, says, “Planning for retirement should begin decades before you plan to retire.”
#2: Spend Less Than You Earn.
It seems so simple, yet this savings secret often evaporates once one graduates from school. As a student, money is tight and – not counting student loans – cash flow represents a very real thing. Financial discipline isn’t just second nature, it’s the law of the land. After all, you can’t spend it if you don’t have it. Once schools unleash their graduates, the pent up demand spews out. Give a young graduate a credit card and see what happens. Ilene Davis is a financial planner at Financial Independence services in Cocoa, Florida. For her, the first simple savings secret is “spend less than you earn and invest the difference.” Tim Shanahan, President and Chief Investment Strategist at Compass Capital Corporation in Braintree, Massachusetts, agrees with this simple savings secret. He tells his clients to “live on less than your means allow.”
#3: Pay Yourself First
. Here’s another deceptively simple secret. We often have to priority, and too often we sacrifice our own needs for the needs of others. When it comes to saving for retirement, not only is it OK to be selfish, but your very survival may depend on it. Remember, you’re alone on that sheer cliff. You can’t count on anyone else. It’s your responsibility alone. Do yourself a favor. Pay yourself first. Karen Lee, owner of Karen Lee and Associates, LLC in Atlanta, GA, has been a financial planner for twenty-five years. She’s spent most of that time helping people save for retirement. She advises her clients to “save first over all other purchases, as if it was a bill you owed.”
Shanahan says, “pay yourself first – make room in your budget to save for retirement before the discretionary spending.” Kaplan tries to help clients avoid getting tripped up by the savings secret. She warns “Focusing on budgeting and penny-pinching is not the way to think about saving. Think of it as paying your future self. You can’t afford not to. Paying yourself should be an automatic first priority, just like any other bill.”#4: Start Early
. It’s funny. A lot of young savers get tripped up worrying too much about investment choices rather than simply starting to save. (The “paradox of choice” and how it causes decision delays has been written about extensively.) In reality, it’s better to just start saving with no undo emphasis on investing. “It’s about time, not timing,” says Davis. In other words, time heals all poor investment decisions, so the early you start saving, the less critical investment performance will become. Lee says, “Save young.” She points out “the money you saving in your 20s and 30s is your most valuable savings in your 60s.” Eric Heckman, President of Worry Less Wealth in San Jose, California, says, “Start now-something-anything.” Kaplan says, “Make it easy and automatic: set up a regular transfer to occur as soon as your paycheck hits your account that deposits the money directly into your investment account.”
#5 Save Money By Using Tax-Deferred Savings Vehicles.
Almost everyone has heard of the 401k or the IRA. The government allows you to skip out of paying taxes this year for any contribution you place in these vehicles. Of course, you’ll still have to pay taxes when you finally take the money out of these accounts, but, hopefully, you’ll be in a lower tax bracket then. More importantly, you can actually increase your net take home pay (including the amount you save in these tax deferred accounts) by saving in these tax deferred accounts. Tara L. Mashack-Behney, Director of Investment Consulting at Conrad Siegel Investment Advisors, Inc. in Harrisburg, Pennsylvania, explains why this is so. “Federal income taxes are not withheld from regular 401k contributions,” she says. “So for example, a $100 contribution may only cost you $85 in take-home pay. (However your actual deduction may be more or less depending on your income tax bracket, number of withholding allowances, etc.).”#6: Always Grab the Free Money
. When a company offers to match any contribution you make, take full advantage of that match. Shanahan combines an earlier savings secret with this one when he says, “Save early – as soon as you have a job – and take full advantage of employer matching.” Bouchand also says to “take advantage of employer matching in retirement accounts. Don’t leave money on the table.”#7: Now Save More:
There’s always a way to save a little more. Lee puts it succinctly: “Save a lot.” Heckman adds a little more color when he says, “if your plan has an auto-escalating feature, use it. If not, put a note to increase every year.” Kaplan is downright specific. She says, “Everyone should aim to save a minimum of 20% of every paycheck.” Rachele Bouchand, Director of Financial Planning at Clark Nuber, P.S. in Bellevue, Washington, has a very insightful way to explain the advantages of saving more. She says it “benefits you two ways: you have money you can use in the future and it forces you to live on a lower standard of living now. It’s hard to decrease your standard of living in retirement if you’re used to a higher one in your working years.”
It’s amazing what following these seven simple savings rules can lead to. Now that I’m older, I can see firsthand how following this sage advice has helped not only me, but many others like me. It’s amazing, but true.
And to think, it all started with one small step.
If you’re still not convinced you need to start saving right now, I’ll let Stanley H. Molotsky, President & CEO at SHM Financial in Philadelphia, Pennsylvania have the last word. “You have to do it and do it now,” says Molotsky. “You might want to wait for government programs to help,” he adds, “but government programs may not be there in the future, so you have to do yourself.”
5 Retirement Myths to Avoid
By David Ning
February 13, 2013 RSS Feed Print
If you read enough retirement literature, it's easy to develop a general idea of what ultimately matters most in achieving a comfortable retirement. But it’s just as easy to develop misconceptions about planning for retirement. Make sure you aren't blindly following these common myths about retirement:
A comfortable retirement is all about reaching a target net worth number. It can be useful to have a retirement savings goal. But many people seem to pick a net worth number out of thin air and then spend decades trying to reach it. Before you do the same, make sure you are able to translate that final number into income needs so you can determine if you will have enough to meet at least essential expenses.
Saving more is always the ideal choice. Finances are a big part of being able to enjoy the golden years, but many people forget that a good life is what they should be after. Saving money is extremely important, but so is everything else. Do you actively make an effort to keep your family close physically and emotionally? Are you going to spend time every day to keep yourself in shape physically and mentally? Not everything is going to cost money to maintain, but don't skimp on every expense during the accumulation phrase for the sake of more savings. Those who are truly able to enjoy aging aren't the ones with the highest balance in their bank account, but those who have a balanced life.
There's a perfect withdrawal strategy. Sustainable withdrawals, where you can pick a monthly number to withdraw at the start of retirement and stick with it through thick or thin, don't actually exist. You will continually need to adjust, which will mean you have to keep an eye on your portfolio well into the retirement years. These adjustments can be made well in advance of a disastrous scenario happening and allow you to prevent running out of money in retirement.
You can map out retirement with good certainty. You won't be able to. No matter how much time and effort you spend planning, realize that your retirement may not be exactly as you envision it. Those who are lucky will spend three, four, and perhaps even five decades in retirement. Just as the necessities of today were unthinkable 50 years ago, you can bet that innovation will push your lifestyle to unimaginable heights throughout retirement. Do your best with your retirement plans, but build in a few contingencies just in case you need a plan B.
The last day of work is the finish line. After spending decades thinking, planning, and saving for retirement, it's easy to think that you can let it all go as soon as you hand in your resignation letter. But the reality is that the end of your working years just marks the beginning of another journey. That's actually good news because now you get to enjoy the fruits of your labor.
The Anti-401(k) Agenda Continues
Brian Graff•2/19/13 •Add Comment
The Washington Post on Feb. 17 published yet another article attacking the 401(k) system. Fueled by academic studies with a clear anti-401(k) agenda, these articles seem to revel in the entirely unsubstantiated failure of current workplace retirement plans. Not sure who is more to blame: the academics who reach the outrageous conclusions based on either irrelevant or incomplete data, or the media who perpetuate them. Either way, the anti-401(k) agenda is founded on a series of persistent myths, continued in this most recent article, that simply do not reflect the reality of America’s retirement plan: the 401(k).Myth #1: 401(k) Plans Only Benefit the Wealthy
Eighty percent of 401(k) participants make less than $100,000 per year, and almost 40% of 401(k) participants make less than $50,000. That translates to almost 50 million not-so-wealthy working Americans who benefit from 401(k) plans. Even more importantly, moderate income workers participate when covered: More than 70% of workers earning between $30,000 and $50,000 save in their 401(k).
Myth #2: Only Half of American Workers Have Access to a Retirement Plan
The fact is that 8 out of 10 full-time workers are eligible for some kind of workplace retirement plan, the most common of which is by far a 401(k)-style plan. The 50% statistic cited repeatedly by academics and the media includes seasonal and part-time workers that are not generally provided employee benefits pursuant to ERISA.Myth #3: 401(k) Plans Have Produced Meager Savings
Academics and the media consistently cite low account balances as evidence of the failure of 401(k) plans. However, the statistics they cite conveniently ignore the fact that workers today frequently change jobs and roll over account balances from previous employers’ 401(k) plans into IRAs. In other words, those statistics fail to consolidate all of workers’ retirement savings. The best data available to show combined retirement savings is found by looking at the account balances of those who have been in the same plan for 30 years. At the end of 2010, the Employee Benefit Research Institute found that people between 55 and 64 with 30 years in the same plan had an average account balance of more than $250,000. Myth #4: The Tax Incentive for 401(k) Plans is Expensive
The critics of 401(k) plans like to cite the high “tax expenditure” cost of the incentives for retirement savings. Once again, they ignore the economic truth by citing a statistic that is determined on a cash basis and ignores present value. Unlike other tax preferences, the tax incentive for retirement savings is a deferral, not a permanent deduction. When the money comes out of the plan it is subject to tax, and the U.S. Treasury gets substantially paid back. In reality, the true present value cost of the tax incentives for retirement is only about half of what these critics say they are.
SHOULD THAT VENDOR GET A 1099 or a W2?
The IRS and Taxes
In recent years, the IRS has begun to realize the large sums of potential tax revenue they are losing due to
misclassified 1099 independent contractors who should legally be W-2 employees. When a company pays a
contractor on a 1099-misc form, they avoid the following: federal and state tax withholdings, deposits and reports,
the employer’s share of Social Security and Medicare taxes, state and federal unemployment insurance premiums,
state disability insurance premiums, Workers’ Compensation costs, fringe benefits, vicarious liability for employee
negligence, and EEOC regulations.
The IRS estimates that it loses between $4 to $20 billion per year in unpaid taxes as a result of this
misclassification problem. Understandably, the IRS has made it a priority to investigate 1099-misc forms that are
turned in at the end of the tax year. The IRS is continually conducting audits to determine whether or not
contractors are being properly classified.1099s and Taxes
When a person is paid on the form, 1099-misc, all money earned by the individual is paid on an untaxed basis. It is
then the responsibility of the individual to file and pay the appropriate taxes. These taxes can be owed to Federal,
State and Local governments. Workers compensation and unemployment issues also must be addressed
independently.W-2s and Taxes
When a person is paid on the form W-2, the employer automatically withholds and pays all of the necessary
employee income taxes as required by the IRS. These taxes include: Federal Income Tax, State Income Tax, and
FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These
taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State
Unemployment Tax).What Tips the IRS Off?
Following are some standard occurrences that may flag your company for an audit:
• The independent contractor files a claim for unemployment benefits.
• The independent contractor files a claim for workers' compensation.
• The independent contractor files a claim for disability benefits.
• The IRS finds out the independent contractor hasn’t been paying taxes.
A True Independent Contractor
An individual that is an independent contractor fills the following roles:
• The independent contractor will work with a number of clients.
• The independent contractor's role is to accomplish a final result and it’s the independent contractor who
will determine the best way to achieve that result. The independent contractor will define what the agreed
upon "result" is in a contract with your customer.
• The independent contractor pays his/her own taxes and files the required government forms.
• A city license, business license, and a fictitious name or d/b/a statement will be obtained by the
independent contractor. Also, the independent contractor must obtain any necessary permits.
• Social Security taxes are the sole responsibility of the independent contractor.
• The independent contractor must obtain his/her own benefits including workers' compensation, disability,
etc. The contractor is not entitled to any typical employee benefits from any government agency.
• Independent contractor agreements traditionally provide professional liability coverage.IRS 20-Point Checklist
How do you determine if a payee should be paid on a W-2 or a 1099?
The IRS has established a 20-point checklist the can be used as a guideline in determining whether or not a payee
can legally be paid on a 1099.
This checklist helps determine who has the "right of control." Does the employer have control or the "right of
control" over the individual's performance of the job and how the individual accomplishes the job? The greater the
control exercised over the terms and conditions of employment, the greater the chance that the controlling entity
will be held to be the employer. The right to control (not the act itself) determines the status as an independent
contractor or employee.
The 20-point checklist is only a guide line. It does not guarantee that a person is correctly classified. There is no
one single homogenous definition of the term "employee." Most agencies and courts typically look to the totality of
the circumstances and balance the factors to determine whether a worker is an employee.
Following are the 20-points that have been established:
1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?
In general, "no" answers to questions 1-16 and "yes" answers to questions 17-20 indicate an independent
However, a simple majority of "no" answers to questions 1 to 16 and "yes" answers to questions 17 to 20 does not
guarantee independent contractor treatment.
Some questions are either irrelevant or of less importance because the answers may apply equally to employees
and independent contractors.
FINES AND PENALTIES
Back taxes can total:
15.30 % Social Security Tax (on income up to the cap, plus 2.9 % of income above that cap)
20.00 % Federal Income Tax
+6.20 % Unemployment Insurance
41.50 % of the contractor's pay!
Auditors can go back three years. Fortunately, for those companies the IRS feels did not intentionally ignore the
law, the fines are less (Section 3509 of the Internal Revenue Code). Be advised that any relief of tax liability
provided by the IRS -- such as Section 530 of the Revenue Act of 1978 -- is of limited applicability in the staffing
industry. This section, also referred to as the "Safe Harbor Act," was amended in 1986 to not relieve engineers,
designers, drafters, computer programmers, systems analysts, or other similar skills or lines of work of tax liability.
Additional fines can be imposed by the IRS depending on the situation. The violations and associated fines are:
Violation Potential Fine
Failure to file W-2 or 1099 form
The minimum fine is $50 for each form that you failed to file. The maximum fine is $250,000 per business or $100,000 for small businesses.
Failure to file quarterly returns 25 percent of the unpaid tax liability.
Failure to pay taxes 0.5 percent of the unpaid tax liability for each month up to 25 percent.
Failure to get Social Security number $50 for each Social Security number you didn't get.
There are also significant fines if the IRS believes you committed fraud or were negligent, plus fines for many other
situations. Contact the IRS if you want further information. In addition, any responsible person (including corporate
officers and employees or members or employees of a partnership) with authority over the financial affairs of the
business who willfully fails to collect and pay taxes may be held personally liable for the total amount of the
uncollected tax under the "100 percent" provisions of the Internal Revenue Code (I.R.C.). Another point to keep in
mind is that independent contractors who wrongfully benefited as a result of being paid on a 1099 are virtually free
from penalties. The IRS may audit them and require them to eliminate any business deductions they took;
however, the main focus is on the entity with the deepest pockets, in most cases, the company.
Furthermore, if a company classifies workers to avoid paying overtime according to the FLSA, the company can be
subject penalties, from the payment of unpaid overtime premiums to liquidated damages, fines of $10,000, and six
months imprisonment for willful violations. Unpaid overtime premiums alone may represent substantial monetary
liability depending upon the size of the work force and the length of time that the company has failed to pay