July 28, 2014 (PLANSPONSOR.com) – Plan sponsors need to carefully consider their options when it comes to choosing a third-party administrator (TPA) for their retirement plans.
One issue in particular that plan sponsors need to examine is whether or not they should use their payroll provider as their TPA.
There are some definite advantages to using a payroll provider as a TPA. “The major advantage of using a payroll provider for your 401(k) plan is the integration of payroll for deferral uploads and data sharing,” James F. Sampson, managing principal for Cornerstone Retirement Advisors, tells PLANSPONSOR. “It can be a great convenience for the plan sponsor to not have the need for uploading deferrals and census data each week, and can also allow for the plan sponsor or plan adviser to have access to live census data, testing results and participation metrics.”
Chris Augelli, vice president of Product Marketing and Business Development for ADP Retirement Services in Florham Park, New Jersey, adds, “Integrating payroll and recordkeeping data allows us to automatically manage the remittance of employee salary deferrals into the plan, on time, every time. It allows for automated and accurate loan administration, and continuously supplies the comprehensive employee census information needed for compliance testing.”
Augelli tells PLANSPONSOR that ADP’s integration capabilities offer the advantage of synchronizing updates made to either platform, whether it’s an update to ADP payroll records made by the client or an increase in a salary deferral made by an employee via the ADP plan participant portal. The system also analyzes the data streams shared during each payroll cycle, proactively looking for input errors. Overall, he says, such integration enables targeted participant communications to help maximize their savings opportunities.
However, there can also be disadvantages to using a payroll provider as a third-party administrator, especially when the integration of payroll and plan administration capabilities is not as seamless as is needed.
“Sometimes, payroll operations and the 401(k) operations are separate, and one doesn’t know what the other is doing,” says the Warwick, Rhode Island-based Sampson. “Efforts are sometimes duplicated when the sponsor needs to upload data to both payroll and 401(k) systems, when the expectation is that they should feed off each other.” Sampson recalls a scenario with a client where an employee was re-hired and making employee contributions to the plan, yet the 401(k) system labeled the employee as terminated and not eligible for nondiscrimination and top heavy testing purposes. This meant that test results were incorrect, testing had to be redone, and the sponsor had to change the employee’s employment status on both systems to make it work, all because one system did not update the other.
Ary Rosenbaum, an attorney with The Rosenbaum Law Firm in Garden City, New York, which specializes in retirement plan issues, recommends plan sponsors do a thorough search for a TPA, choosing the candidate that best meets their needs and not just going for the easiest choice.
Rosenbaum, who recently wrote a paper about the pros and cons of using a payroll provider as a TPA, tells PLANSPONSOR, “Plan sponsors may think that it’s less work for them to have their payroll provider also act as their third-party administrator, but in truth, payroll services have little to do with retirement plan administration.” His experiences with clients have shown him that not all payroll providers acting as TPAs have the necessary expertise in areas such as top heavy and nondiscrimination testing.
Rosenbaum also cautions that some such TPAS may assume that the plan sponsor knows more about the nuances of the plan than they actually do. He recalls one scenario with a client where the TPA did not properly define the term “key employee,” in terms of the aforementioned testing, for plan sponsors. As a result, the plan failed testing it should have passed.
Third-party administrators need to have an understanding of the finer details of plan administration, Rosenbaum says. This includes being knowledgeable about safe harbor issues, plan design, deferrals and combination plans such as hybrids or cash balance plans. They also need to make sure they are maximizing tax deductions for employer contributions, he says.
Sampson concurs that TPAs need to be on their game about a variety of relevant topics. While some payroll providers have adapted to be able to offer plan design features, such as safe harbor and cross-tested plans, they are simply processing information. “A classic case of garbage-in, garbage-out can be common,” he explains.
A big drawback to some payroll providers, as well as bundled recordkeepers, is that they often do not provide any proactive consulting services after the point of sale, Sampson says. The advantage to using a TPA that is not a payroll provider is the consultative approach they provide. “Many local TPAs will visit with clients annually to review company demographics and objectives to see if the current plan design still meets the objectives of the employer. One other issue with payroll providers is that there is rarely a single point of contact for ongoing service. Many times they call a service desk and never get the same person twice.”
As for best practices that plan sponsors should follow when seeking out a TPA, Rosenbaum recommends looking for one that has experience working with plans of similar size, as well as making sure the fees and expertise are appropriate for their plans. TPAs should also have a good knowledge of plan design, he says, with the appropriate levels of experience and training to back up their claims.
Sampson suggests plan sponsors ask TPA candidates to make recommendations for the different plan designs they could use to align with their goals. They should also ask what could go wrong if testing fails and what the remedies might be. Plan sponsors should also ask how often the TPA will review the current design, as rules and company objectives change.
Augelli recommends plan sponsors require their TPA be able to provide ease of administration, alignment with the plan’s interests, and possess the experience necessary to carry out those interests.
And finally, word of mouth is a tried and true method of finding good service providers, says Rosenbaum. “Don’t be afraid to ask for recommendations,” he says. “Talk to ERISA attorneys, financial advisers or accountants.”
Few things are more debatable then tax theory combined with investment theory and, when you throw in retirement accumulation theory, one is more likely to get broad consensus on political or religious issues. Still, some facts are facts, and they should serve as a starting point for any discussion on the advantages of Roth post-tax retirement plan savings versus traditional pre-tax savings.
Traditional ERISA-style retirement concepts are built on the theory of tax-advantaged contributions and investment growth, with taxation upon withdrawal. The tax-advantaged contributions take the form of individual IRA contributions, deferred compensation (typically 401(k) or 403(b) contributions) or company contributions that are tax deductible to one’s employer. Once contributed to the IRA or qualified plan, they enjoy tax deferred investment results, hopefully positive, until which time taxable distributions occur. The distributions are taxable in the calendar year they are received.
In the 1990’s, Senator Bill Roth came up with the idea of a non-tax-advantaged contribution, tax-deferred investment results, and non-taxable distributions. In 1998, Roth IRAs were made available. In 2006, Roth 401(k) and 403(b) contributions were added. Finally, rules for the option to convert traditional IRA and qualified plans accumulations to Roth accumulations were gradually phased in.
So, this is great, but what the heck does it mean? Let’s start with a simple mathematical test to see which is better. So, a participant makes a $10,000 traditional 401(k) deferral in a particular year. The participant is fortunate enough to receive a flat level rate of return of 7% for ten years. At year ten, the $19,672 accumulation is withdrawn; income tax of $5,902 (30%) is paid, resulting in a net payment to the participant of $13,770 (let’s assume the participant is now at least 59 ½, so that the excise tax on premature distributions is inapplicable). So let’s do the same thing with the Roth. The participant has $10,000, and after paying $3,000 in income taxes (30%) makes a $7,000 Roth 401(k) deferral. Again, the participant is fortunate enough to achieve an absolutely flat level rate of return of 7% for ten years and then withdraws the net accumulation tax-free, $13,770 (again we must assume the participant is over 59 1/2 to qualify for Roth treatment). Hmmm, that’s the exact same result.
But just as in politics and religion, the devil is in the detail. First, one might be in very different tax rates in the contribution year and the distribution years. The income accumulation will likely not be a flat steady rate, but will vary significantly from year to year. The time horizon may be more or less than a fixed period of time, and withdrawals may occur after significant or not so significant investment returns. The law on the taxation of the accumulations (beyond a change in tax rates) could be modified, although it is generally thought preferential tax treatment is unlikely to be retroactively rescinded.
With all of these variables, it’s difficult to clearly determine which approach is best. But it is easy to draw a conclusion that the flexibility to contribute and withdraw on a pre-tax or post-tax basis depending upon one’s tax rate is the key advantage. That makes for the general conclusion of this discussion, that it is advantageous to have tax-diversified accumulations. This offers the most flexibility with distributions, as one has the choice to receive tax-free or taxable distributions in any given year, taking the current tax rate into consideration.
So, once the case is made for tax-diversified accumulations, the next question is how to get it diversified. Unless one is 20 years old, it is quite likely that one’s accumulations are mostly traditional pre-tax accumulations. In order to diversify to Roth accumulations, one may start making Roth 401(k)/403(b) deferral contributions, Roth IRA contributions, or converting existing balances in qualified plans or IRAs. The conditions for converting traditional accumulations have broadened in recent years, making them basically universally available. Obviously, a conversion will trigger a significant tax liability in a particular year, so this is a very personal decision one must make with one’s accountant. Once significant parts of one’s accumulation have been diversified into traditional pre-tax and Roth accumulations, the investment philosophy of these different accumulations is the next logical consideration, but certainly less important then the taxation considerations.
So, at the end of the day, we can agree on a basic concept that tax-diversified accumulations are a critical advantage of the Roth savings approach. That is pretty much indisputable, much like democracy is pretty much the best political system and there is probably some kind of God or something like that out there. It’s the fine details after this basic truism that differentiates and personalizes retirement savings approaches.
By SARAH MAXJULY 30, 2014
Soon after Sabina Gault got her public relations firm up and running in 2008, she asked for a show of hands from employees interested in having a company 401(k) plan. The consensus? “Nobody wanted it,” said Ms. Gault, whose firm, Konnect Public Relations, based in Los Angeles, had just a few employees at the time.
Two years later, with eight people on her payroll, she raised the question a second time. Again, the response was lukewarm. So she waited.
Finally, in 2013, she made an executive decision about the 401(k): “I said, ‘We’re going to do it no matter what, even if it’s just a few of us.’ ”
While the share of small businesses offering 401(k) plans has picked up since 2008 — when just 10 percent offered the benefit — 401(k) plans are still the exception at small companies. Just one in four firms with 50 or fewer employees has such a plan in place, according to Capital One’s ShareBuilder 401k.
· Employers point to a lack of interest among employees coupled with the costs of setting up and administering the plans. That is one reason Ms. Gault waited as long as she did. “It didn’t make sense to pay for something people wouldn’t use,” she said, noting that most of her employees are in their early 20s. Had they been a little older, she said, it might have been more of a priority.
·Retirement plans typically take a back seat to salary, benefits like health insurance and other more immediate perks, said Sabrina Parsons, chief executive of Palo Alto Software, a 55-employee business planning software company based in Eugene, Ore. Yet when it comes to recruiting and retaining employees over the long term, “not having a retirement plan is a glaring hole,” she said. “It’s like restrooms in the office; you can’t not have them.”
·What’s more, a company-sponsored plan is also the most effective way for small-business owners to save for their own retirements, said Leon LaBrecque, chief strategist and founder of LJPR, a wealth management firm in Troy, Mich. Owners can contribute to individual retirement accounts or to a Roth I.R.A., but the contribution limit for these plans is just $5,500 a year ($6,500 for anyone 50 and older). That is one third the maximum allowed for a 401(k) plan. SEP I.R.A.s, while popular among the self-employed and very small businesses, are generally not a good bet for growing companies; they can be costly, and they require owners to contribute the same percentage to employee plans that they contribute to their own plans.
·Fortunately, setting up a 401(k) plan is considerably easier and cheaper than it was just a decade ago. Setup and administrative costs vary from one provider to the next — and increase if the plan offers more customized investment options, hands-on advice and other bells and whistles. Many 401(k) providers, including Sharebuilder 401k, offer basic plans that start around $1,000 a year. And there are tax incentives. Companies with fewer than 100 employees can claim up to $500 in tax credits to offset administrative costs for each of the first three years of a first-time plan.
·Owners shopping for a plan will want to balance investment options and services with costs paid by the company and fees paid by the employee. Many providers charge a management fee — to employers or employees — on top of fixed administrative fees. Employers should be wary if fees creep above 1 percent of employee assets. (Additional management fees are charged by the mutual funds or other exchange-traded funds used in 401(k) plans.)
·One exception, according to Ms. Parsons: It may be worth paying more to bring in a financial adviser to help select investment options and to give employees hands-on investment advice. “Our thinking is, if you take the time to set up a plan, you want to make sure employees are getting the most out of it,” she said. “We work with a planner who does an informational meeting with the company every quarter and also meets with employees individually.”
·Having worked in the financial services industry for much of his career, Darius Mirshahzadeh, president of Endeavor America Loan Services, was particularly aware of fees when it came time to set up a 401(k) for his one-year-old business. The plan, which will be available to employees beginning in August, is administered by the Online 401k, a 15-year-old company with more than 7,000 small businesses on its platform. Its most popular option, the Express(k), charges employers with 50 or fewer employees about $1,200 for the year; employees pay an additional flat fee of $4 a month.
·For some employers, though, administrative fees are just the beginning of the expense. The bigger concern for many small businesses is the cost of matching benefits. “The biggest misconception is that employers have to do a match,” said Neil Smith, executive vice president at Ascensus, one of the nation’s largest independent record keepers and administrators for retirement plans. “A match is completely optional in a traditional plan.”
·Why the confusion? A provision in the Employee Retirement Income Security Act prohibits companies from allowing the highest-paid employees to contribute disproportionately more than the rest of the work force. Specifically, the average contribution of the highly paid group cannot be more than 2 percentage points higher than the average for rank-and-file employees. If the average employee contributes 5 percent of salary to the plan, for example, the average for the highest-paid employees cannot exceed 7 percent.
·Nevertheless, to avoid the administrative inconvenience of complying with this rule, many companies choose so-called safe harbor plans. These plans do require an employer contribution — most common is a dollar-for-dollar match, up to 4 percent — but they give all employees carte blanche to contribute as much as they want to the plan, up to the standard limits.
·The standard advice is that most companies that can afford to match probably should. A generous retirement package can be an asset for recruiting and retaining employees, said Mr. LaBrecque, who uses a safe harbor plan for his employees. “I always emphasize that this is part of their compensation package,” he said. “When employees look at it that way, they’re more likely to take full advantage of that match.”
·Small businesses that are not quite ready to make that commitment, however, can start with the traditional plan. “You can always switch over to a safe harbor plan once you have more consistent revenue coming in the door,” he added.
·For now, Ms. Gault is sticking with a traditional plan — though she does offer employees a 10 percent match on contributions of up to 5 percent of their salary. The perk has proved to be more popular than she expected. Today, she said, roughly half of her 30 employees use the plan to save for their retirement years.
By Stephanie A. McGuire
August 8, 2014
The Department of Labor has concerns about compliance with the Employee Retirement Income Security Act regulations as well as proper administration of employee benefit plans. Plan sponsors have a fiduciary responsibility to maintain effective policies and procedures to meet regulatory requirements.
Here are four common issues that plan sponsors face and ways to successfully navigate them:
Plan investment options
One of the key components to making sure a company’s employee benefit plans are being administered properly, is to ensure that the plan options are appropriate and in accordance with the plan’s investment policy statement. An oversight committee should be designated to regularly review investment options offered to plan participants. This includes a regular screening of the options available to determine that investment earnings, as well as administrative and investment fees, are reasonable and in accordance with expectations. Even commonly used target retirement date funds can be considered inappropriate for participants if their fee structure is considered excessive. A plan sponsor can rely upon the service provider to provide advice in selecting a diverse group of investment options; however, the plan sponsor is ultimately responsible for selecting appropriate investments and monitoring the plan’s investment performance.
To meet fiduciary responsibilities, first develop a clear investment policy statement for the plan, which outlines the criteria used to select the investment options. Then perform a benchmark study to determine if the plan’s fee structure is reasonable compared to other comparably sized plans and investments.
Remittance of participant contributions
Timely reconciliation is a common issue. Participant contributions and loan repayments should be remitted on the earliest date on which they can be segregated from the plan sponsor’s general assets. Establish policies and procedures to ensure the timely reconciliation of contributions and loan repayment remittances and to ensure agreement to the amounts withheld from payroll and remittance to the plan on a timely basis.
Some third-party administrators offer participants the ability to enroll in the plan as well as change their deferral elections online. In a paperless environment, plan sponsors should establish policies and procedures to ensure that communications received from the TPA are timely processed and that the correct participant elected deferrals and loan repayment amounts are remitted to the plan.
Plan definition of compensation
Companies continue to face the challenge of ensuring all deferrals and allocations are based upon the correct plan definition of compensation. The plan must define the inclusion or exclusion of payments in compensation, such as bonuses, vacation, overtime, fringe benefits and commissions. Any changes to the payroll system or nonroutine transactions, such as manual payroll checks without proper consideration of the plan’s definition of compensation, can quickly result in costly compensation errors.
To avoid these errors, plan sponsors should implement procedures to require a timely review of the plan’s definition of compensation with any new human resources and payroll personnel, as well as when changes to the payroll system are made. Amendments to the plan should be reviewed with both the TPA and payroll processor to ensure any impacts on plan compensation are properly addressed. Plan sponsors should also consider using one definition of compensation for all plan purposes in order to simplify the process.
When errors occur that result in too much compensation being included in eligible wages, excess elective deferrals are generally required to be distributed to the affected participants. Excess employer contributions may be allocated to the plan forfeiture account to be reallocated based upon the terms of the plan document. On the other hand, when a plan erroneously omits compensation from eligible wages, the employer is generally responsible for remitting 50% of the missed deferrals as well as lost earnings on behalf of the participant. These errors may be both costly and time consuming for the plan sponsor to recalculate the impact on all plan participants during the correction period. Each plan definition of ‘compensation error’ should be evaluated based upon the individual circumstances to ensure proper correction.
There are a number of regulations in place that guide hardship distributions. For example, prior to the plan sponsor authorizing a hardship distribution, participants must meet certain requirements to demonstrate financial the need (i.e., paying medical expenses, costs related to the purchase of a principal residence, prevent foreclosure from a principal residence.) Additionally, it is generally required that deferral contributions be suspended for a period of six months following a hardship distribution. That said, it is important that companies do not rely too excessively on their TPA to approve distributions, without requiring the participant to provide supporting documentation that demonstrates immediate and significant financial need prior to the plan sponsor’s approval for a hardship distribution.
For any plan that allows hardship distributions, the amount should not exceed the financial need of the employee and may include amounts such as taxes or penalties that result from the distribution. The financial need may also include that of an employee’s spouse or beneficiary. The plan document often will specify what information must be provided to the employer to demonstrate hardship. Plan sponsors should review the hardship procedures with their TPA thoroughly, in order to establish additional review procedures as necessary to meet IRS hardship distribution regulations as well as to maintain support that proper approval procedures exist.
Plan documents should be reviewed regularly with the TPA for opportunities to clarify fiduciary responsibilities. The plan’s TPA can assist the plan sponsor in meeting regulatory requirements; however, in a paperless plan environment, it is important to define roles and responsibilities of the plan sponsor, who is ultimately responsible for implementing plan policies and procedures.
Aug 12, 2014 --- Thirty-six percent of Americans currently contributing to an employer-sponsored retirement plan have never increased the percentage of salary they defer into retirement accounts. ---
This is according to a recent survey from TIAA-CREF conducted among a national sample of U.S. retirement plan participants. The survey results show an additional 26% of current plan participants have not increased their defined contribution retirement account deferral in at least a year. Even employees who received a raise showed reluctance to increase salary deferrals—with 57% of workers saying they did not increase their plan contribution after their last raise.
Considering that 44% of American employees save 10% or less of their annual income each year, these findings indicate that many employees have the opportunity to improve their retirement readiness by increasing their plan contributions regularly, TIAA-CREF says.
Further exacerbating the deferral problem, TIAA-CREF says, is the fact that relatively few plans have adopted automatic enrollment. A full 53% of employees with access to workplace retirement plans say they were not automatically enrolled, according to the survey. As TIAA-CREF explains, those not automatically enrolled lost precious time saving for retirement, with 37% of respondents noting they waited six months or longer to enroll on their own, and 24% of employees waited a year or more (see “Auto-Enrollment Can Help Solve Balance Disparity”).
A commonly cited reason for not increasing contributions after a raise is the need to pay for short-term living expenses. A more encouraging sign is that 25% of respondents say they did not increase their contributions after their last raise because they were already contributing to their plan at or near the legal limit. TIAA-CREF says men (33%) were nearly twice as likely as women (17%) to be contributing the maximum amount allowed.
Another issue is that participants are not taking the steps necessary to make sure they have the right investments at each stage of their lives. Twenty-five percent of workers have never made changes to how their money is invested, and an additional 28% have not made changes to how their retirement savings are invested in more than one year.
Thirty-four percent of people age 55 or older say they have never made a change to the way their money is invested, meaning they are less likely to have taken the steps necessary to transition from saving for retirement to creating income for a lifetime. Changing markets also necessitates consistent asset rebalancing to ensure portfolios are maintaining appropriate equity and fixed-income exposures (see “Equity Overweighting Likely As 401(k)s See Record Balances”).
“Plan sponsors should be proactively looking for opportunities to engage directly with employees about their retirement savings, especially during pivotal times such as benefits enrollment season and after an employee receives a raise,” explains Teresa Hassara, executive vice president of TIAA-CREF’s institutional business. “Reaching employees at the right time with the right messaging can have a profound effect on retirement readiness.”
An executive summary of the research, which highlights other important statistics around auto-enrollment and auto-escalation, is available here. TIAA-CREF worked with an independent research firm, KRC Research, on the poll of 1,000 adults nationwide.