EJReynolds – Cybersecurity Commitment

Trust your retirement plan development as well as your personal data with the retirement experts.

We often hear of data breaches with major corporations, even some whose main function is to protect your identity. How can you be sure your data is safe? EJReynolds would like to share with you the measures we take to safeguard the information we collect. Our cutting-edge cybersecurity commitment gives you the comfort and peace of mind that your information is always safe and secure.

How does EJReynolds handle and protect your personal information?

Our state-of-the-art cybersecurity program stems from our core principles of trust, integrity and ethics. We collect only the information necessary to enable us to consistently deliver the best products and services for our clients. We have implemented security standards and processes to ensure that access to client information is limited to your EJReynolds Plan Consultant.

Our Best Practice Cybersecurity Protocols Include:

–    Secure File Sharing with Citrix ShareFile©

EJReynolds’ secure file sharing link provides a safe and secure way to transmit sensitive information online. This assures that files are sent and received with bank-level encryption. You will be required to register through ShareFile’s one-time enrollment process to send and receive files securely.

–    Networks Are Secured with State-Of-The-Art Advanced Firewall Security

EJReynolds’ Firewall Security system protects our computer network from being attacked online by hackers, worms, viruses, etc. It is designed to stop unauthorized access to the EJReynolds computer systems.

–    Internal Networks Are Completely Protected with Industry Leading Threat Protection

Advanced Threat Protection (ATP) helps to protect our organization from malicious attacks by:

  • Scanning email attachments for malware
  • Scanning web addresses (URLs) in email messages and office documents
  • Identifying and blocking malicious files in online libraries
  • Checking email messages for unauthorized spoofing
  • Detecting attempts to impersonate users or organization’s custom domains

    –    Two-factor Authentication

EJReynolds implemented programs that require our Plan Consultants to use a two-factor authentication to protect our clients’ sensitive information. Once an EJReynolds employee logs into an account and enters their password, they receive a code via text or email at a pre-determined address. This code must be entered in a certain amount of time in order to access the account. This helps to ensure that any unauthorized attempts at drafts, distribution requests or other identity theft tricks are halted immediately.

–     Ongoing Training

Along with monthly training on the latest rules and regulations in the retirement plan area, each EJReynolds employee is required to complete a Phish Threat Security Awareness Training. Since the hackers are constantly changing their game, so must our defenses.

Our commitment to your security is just one more reason to trust your retirement planning to EJReynolds.

Solo (k) Plans

Are you a Small Business Owner? Are you Self-Employed? The same retirement plan options available to companies with 10, 20 or 200 employees are also available for your business. Many Small Business Owners may be more familiar with a Simplified Employee Pension (SEP) IRA. With a SEP you can deduct up to 25% of your earned income. However, it may make sense to look at a one-participant 401(k) plan. This combines a traditional employee retirement savings plan with a small business profit-sharing plan. This may make for a larger overall deduction comparable to the same earned income.

Contribution limits in a one-participant 401(k) plan – The business owner wears two hats in a 401(k) plan: employee and employer. The owner can contribute both:

  • Elective deferrals which reduce compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
    • $19,000 in 2019 ($19,500 in 2020), or $25,000 in 2019 ($26,000 in 2020) if age 50 or over; plus
  • Employer contributions up to:
    • 25% of compensation, as defined by the plan, with special calculations for sole-proprietor and partnership entities

Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed the lessor of: 100% of compensation, or $56,000 for 2019; ($57,000 for 2020). In addition, the 401(k) limit on elective deferrals is an individual, calendar year limit, not a limit for each plan. If a business owner is also employed by another company and participates in its 401(k) plan, the total of all elective deferrals cannot exceed the annual contribution limit.

Contribution limits for self-employed individuals – If the business entity is a sole-proprietor or partnership, a special computation must be made to determine the maximum employer contribution. When calculating the contribution, it is a circular calculation. Compensation, or “earned income,” is the net earnings from self-employment after deducting both your share of the employer allocation and one-half of your self-employment tax.

Note: The IRS Publication 560 provides rate tables and worksheets for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions.

Testing in a one-participant 401(k) plan – A business owner with no common-law employees doesn’t need to perform nondiscrimination testing for the plan, since there are no employees who could have received benefits under the plan. The no-testing advantage vanishes if the employer hires employees. If the business hires employees, the plan must satisfy all coverage and non-discrimination requirements as any other 401(k) plan, once they become eligible.

Note: The Plan Document should be flexible enough to protect the employer if employees are hired in the future.

Reporting Requirements (Form 5500) – If plan assets exceed $250,000 at the end of a plan year, the plan will be required to file a Form 5500-EZ, or Form 5500-SF until the plan is terminated and all assets are disbursed.  A one-participant 401(k) plan with fewer assets is exempt from the annual filing requirement. When determining the $250,000 threshold, all plans of the entity are considered; if you sponsor more than one plan, the filing requirement starts when the sum of the assets combined in all plans exceeds $250,000 at year-end.

Note: Failure to file Form 5500 when required can result in substantial penalties on audit.

Most Small Business Owners are familiar with a SEP IRA. Planning for retirement with a 401(k) plan can offer a great degree of flexibility. The basics start with a 401(k) plan; and adding a defined benefit pension plan can greatly increase the potential tax deduction available to a successful business owner. Whether you are adopting a plan for the first time, or have one that needs cleaning up, EJReynolds is here to help.

New 2020 IRS Retirement Plan Limits Announced

The Internal Revenue Service publishes, on a yearly basis, certain Pension Plan Limitations for the coming year.  We have outlined the most commonly applied limits for your reference.

 

Maximum Defined Contribution Annual Additions Limit: 

 

In a Defined Contribution Plan, which includes Profit Sharing and 401(k) Plans, the Internal Revenue Code sets limits on contributions made to a participant’s account.  The Code uses the term “annual additions” which represents both employee and employer contributions as well as reallocated forfeitures.  Effective January 1, 2020, the annual dollar limit for defined contribution plans increases to the lesser of 100% of compensation or $57,000.

 

Maximum Defined Benefit Limit:

 

Ultimate benefit that may be funded for at retirement.  Effective January 1, 2020, the annual dollar benefit under a defined benefit pension plan increases to the lesser of 100% of compensation or $230,000.

Annual Compensation Limit:

Effective January 1, 2020, the annual compensation limit increases to $285,000.

Compensation in excess of the limit will be disregarded for all computation purposes.

Key Employee defined for Top Heavy determination:

  1. A 5% owner, without regard to compensation, or
  2. 1% owner whose annual compensation is over $150,000, or
  3. Officers with annual compensation in excess of $185,000.

Highly Compensated Employee (HCE) defined for 401(k) / 401(m) testing:

  1. A 5% owner of an Employer or an Affiliate in the current or the immediately preceding plan year, or
  2. Any employee earning more than $125,000 in 2019 ($130,000 for 2020)
  3. Constructive ownership rules apply attributing ownership to spouses and lineal ascendants and descendants (parents, grandparents, children and grandchildren) of the owner in both of the above employee definitions.

Maximum Limit on 401(k) Elective Deferral Contributions:

A participant’s elective deferral contributions under all 401(k) plans in which he or she participates during any taxable year increases to $19,500 for the 2020 Calendar Year. 401(k) plans may permit participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2020, the limit increases to $6,500.

Maximum Limit on SIMPLE 401(k) or SIMPLE IRA Deferral Contributions:

A participant’s elective deferral contributions under a SIMPLE 401(k) plan or SIMPLE IRA account in which he or she participates during the year is increased to $13,500 for the 2020 Calendar Year. Participants who have reached age 50 by the end of the plan year to make annual catch-up contributions once the annual dollar limit or a plan-imposed limit on elective deferrals has been reached.  For calendar year 2020, the limit remains at $3,000.

Taxable Wage Base:

The Taxable Wage Base for 2020 increases to $137,700.

Please call us with any questions you may have. To print out the 2019 plan limit EJReynolds report, click here.

Hiring an Advisor for your company’s 401(k) Plan

Hiring the right advisor for your company’s 401(k) retirement plan is one of the most critical decisions you will ever make as a Plan Sponsor.

 

Contrary to popular view, the main purpose for hiring a retirement Plan Advisor is not to pick stocks and funds or chase the highest rate of returns. It is the knowledge of process by which investments are selected and fiduciary standards are put into practice that makes good 401(k) advisors indispensable.

 

You will be choosing your closest and most trusted ally to protect the best interests of your plan’s participants, and therefore, to manage your monumental fiduciary liability as a Plan Sponsor.

 

Minimize your risk

 

The right Plan Advisor candidate has the comprehensive background and team to minimize the risk of huge losses, including individual out-of-pocket penalties, arising from:

  • Lawsuits.
  • Accusations of mishandling.
  • ERISA and Department of Labor audits and investigations.
  • Penalties for noncompliance.

 

The top five reasons Plan Sponsors hire 401(k) Advisors

 

At the end of the day, what you want to assess is how well your advisor will help you:

  • Offload or limit your fiduciary liabilities.
  • Understand your fiduciary responsibilities.
  • Help your plan participants understand their options, benefits and how to make changes.
  • Help your plan stay updated and comply with government regulations
  • Help you structure a solid plan and adhere to it, as mandated by law.

 

Highest fiduciary comfort zone – ERISA 3(38)

 

Your 401(k) Plan Advisor can be a broker or a registered investment adviser, but brokers are not on the hook to be a fiduciary to you unless their boss (the broker-dealer) allows them to accept that liability. The safest comfort zone for a Plan Sponsor is to bring in a registered investment manager qualified under ERISA regulations 3(38). Because 3(38) investment managers assume discretion and control of plan investments, they will assume nearly all fiduciary liability in this regard.

 

Get it in writing

 

In either case, you will want your potential advisors to spell out exactly their fiduciary levels, whether they will assume a 3(38) role, a co-fiduciary role, a fiduciary role under 3(21), either full-scope or limited-scope, or any combination, under an ERISA benefits plan.

 

Interview questions for potential 401(k) Retirement Advisors

 

Here is a checklist of some interview questions you might want to ask:

  • How often do you hold regular meetings with Plan Sponsors?
  • How would you help develop or review our Investment Policy Statement (IPS)?
  • How often would you check that our investment options line up with our IPS?
  • How will you provide investment education for plan participants?
  • How would you help us meet new 408(b)(2) fee disclosure rules?
  • How often do you review fees of the Plan’s fund managers?
  • What process do you have for disclosing management fees to participants?
  • What is your process for ensuring investment fees are “reasonable” as mandated?
  • Who are your other service providers that would work with us?
  • What would be the exact level of the provider fiduciary responsibilities/liabilities?
  • What are your policies for handling rollovers brought by previous plan participants?
  • What expertise do you or your providers have on ERISA and plan administration?
  • There are so many fund share classes, how do you evaluate them for different plans?
  • Would you bring in a Third Party Administrator (TPA)?
  • Would the TPA provide mostly basic administrative services, or do they possess

more specific expertise, such as analyzing plan designs to save taxes for highly

compensated employees?

  • Would the fees for the TPA’s services be fair and reasonable per mandates?

 

Evaluate your Advisor’s resources

 

The field of investments is full of licenses and certifications. Some advisors are simply insurance licensed, and some have passed the “Series 6” exam that is administered by FINRA (Financial Industry Regulatory Authority), which allows the individual to register as a limited representative, and sell mutual funds and variable annuities. Still others have passed FINRA’s “Series 7” exam for general securities, stocks and bonds. More experience financial advisors may obtain the CFP or Certified Financial Planner designation, the AIF, or Accredited Investment Fiduciary designation, or the QPFC, or Qualified Plan Financial Consultant designation. It is a rare and valuable asset to have financial expertise and knowledge of ERISA in the same advisor. That said, a good advisor does not have to be an expert in all things ERISA, as long as they are professionally respected by their peers and consulting long enough to have built relationships with or employ providers who are qualified experts.

 

It is invaluable when a conversation arises about how to handle your unique, more complex situations and your advisor can quickly and confidentially call on a trusted ERISA attorney, TPA or Auditor to weigh in for informed decision making.

 

Summary: Hiring the right 401(k) Plan Advisor helps plan sponsors sleep at night

 

Picking stocks is a valuable skill, but not the most crucial area for Plan Sponsors to evaluate a candidate for Advisor. There are many good tools and guides for prudent investing, and most employees today opt to choose their own investment mix within your plan’s options. It is the protection of all involved from potentially catastrophic fiduciary liability that should be the guiding light for finding the best 401(k) advisor for your company’s retirement plan.

 

For more information on how the right advisor will benefit you as a fiduciary and your responsibilities as a fiduciary of a retirement plan, read our recent articles, Are you a Fiduciary, (https://ejreynoldsinc.com/are-you-a-fiduciary/) Fiduciary Responsibilities for Benefit Plans Under ERISA (https://ejreynoldsinc.com/?s=Fiduciary+Responsibilities+for+Benefit+Plans+under+ERISA), and Types of ERISA Fiduciaries (https://ejreynoldsinc.com/types-of-erisa-fiduciaries/).

Missing Participants in Retirement Plans

Missing participants in retirement plans can be a burden for plan sponsors. If actions are not taken to locate the participants and payout the benefits, potential (unintended) consequences can include:

  • Increased plan administration costs
  • Plan compliance issues, e.g. failure to follow the terms of the plan for mandatory distributions, required minimum distributions, death benefits, etc.
  • Potential for small plan filers (generally, plans with less than 100 participants) to become large plan filers (generally, plans with 100 or more participants), subject to a costly annual plan audit requirement
  • Complications with winding down a plan upon plan termination
  • Potential fiduciary risks

What steps should plan sponsors follow to locate missing participants?

DOL guidance outlines the steps plan sponsors should take to locate missing participants. The guidance is specifically for terminating defined contribution plans; however, it would be reasonable to apply this guidance for active plans as well.

  1. Certified Mail. Send notification to the participant or beneficiary via certified mail to the last known address.
  2. Other Employer Records. Review other employer records, such as group health plans, for current contact information.
  3. Participant’s Plan Beneficiary. Contact the participant’s beneficiary to request updated contact information (if there are privacy concerns, the DOL suggests the plan sponsor ask the beneficiary to forward a letter to the participant).
  4. Free Electronic Search Tools. Use free electronic search tools to attempt to locate the participant such as those for public records (e.g. licenses, mortgages, real estate taxes), obituaries, and social media platforms (e.g. Facebook, Twitter, etc.).

If the plan sponsor follows the steps outlined above but is still unsuccessful in locating the missing participant, the plan sponsor must consider whether additional steps are necessary after considering the cost of the search option (if being paid from the participant’s account) as well as the size of the participant’s account balance. The DOL states further search efforts may include commercial locater services, credit reporting agencies, information brokers, investigation databases and similar services that involve a fee.

IMPORTANT: The DOL notes failure to take such steps would be a violation of the plan sponsor’s obligation of prudence and loyalty to plan participants and beneficiaries. Strictly speaking, the plan sponsor must follow these steps to locate missing participants – it is mandatory

What if the participant cannot be found after using all available search options?

For active plans, it may be possible to rollover the missing participant’s balance to an IRA if (1) provided for under the terms of the plan, (2) the participant’s balance is less than $5,000, and (3) the plan sponsor has sufficient information regarding the participant to be able to facilitate the rollover. If the participant’s balance is $5,000 or more, this generally is not an option.

Alternatively, if provided for under the terms of the plan document, it is permissible to forfeit a missing participant’s (or beneficiary’s) balance provided the balance will be restored in the event the participant (or beneficiary) is later located.

Both options discussed above are optional provisions, so it is important to review the terms of the plan document. If the plan doesn’t include either (or both) provisions, it generally would be permissible to amend the plan to include such features.

Note: Different rules apply to terminating plans since all plan assets must be distributed within a reasonable period following plan termination. For example, one of the available options is to roll the balance of a missing (or unresponsive) participant to an IRA, even if their balance exceeds $5,000.

Can’t we just withhold 100% in taxes and submit to the IRS?

No. The DOL specifically points out that, although this is a practice used by some plan sponsors, this is not acceptable because there is no guarantee the participant will receive their benefits.

To learn more about how to deal with missing participants in your retirement plan, let the experts at EJReynolds help you understand all of the options available to you or your company. For more information, please contact us today.

Your fiduciary responsibility regarding payment of plan fees from plan assets

In general, the fees associated with on-going administration of a retirement plan may be paid from plan assets provided they are necessary and reasonable. Certain expenses known as “settlor” expenses, however, cannot be paid for from plan assets.

What is considered to be reasonable?

The Department of Labor (DOL) requires (1) the expense is reasonable in light of the services provided; (2) the service is necessary; (3) the arrangement can be terminated without penalty (this doesn’t mean there can be a termination fee, though); and (4) the service provider has provided certain required disclosures regarding their fees and services prior to entering into the arrangement.

What are “settlor” expenses?

These are expenses that must be paid for by the employer because they are associated with the employer’s functions as a settlor of the plan trust.

Is there a simple way to determine whether a particular expense is a settlor expense?

Not really. Unfortunately, the DOL has not issued comprehensive guidance on this front, but they have issued some guidance. That said, there are two basic questions that should be considered:

  1. Is the expense necessary for the on-going administration of the plan?
  2. Is the expense discretionary and who does it primarily benefit?

In other words, if the expense is reasonable and relates to the normal operation of the plan, the expense may be paid for by the plan. If, on the other hand, the expense is discretionary and primarily benefits the employer, it would generally be considered a settlor expense.

What are examples of expenses that can be paid for by a plan?

  • Annual administration, recordkeeping, compliance testing, and Form 5500 preparation
  • Annual plan audit fees (large plan filers)
  • Investment management, advisory, trustee and custodial fees
  • Participant education, enrollment materials and required notices and disclosures
  • Required plan amendments and restatements
  • Fidelity bond
  • IRS determination letter filing fee
  • Participant distribution and loan fees
  • QDRO review

What are examples of expenses that cannot be paid for by a plan?

  • Plan design studies and projections (these primarily benefit the employer and are viewed as a settlor expense by the DOL)
  • Initial plan document, discretionary amendments and discretionary restatements (the DOL appears to view these as settlor expenses, even though the plan document is required as a matter of plan qualification)
  • Fees associated with the decision by an employer to terminate a plan
  • Fees and expenses related to plan corrections made under available IRS and DOL programs
  • Fees and expenses related to filing a late Form 5500 under the delinquent filer program

Are the rules different if the fee will be paid from the forfeiture account?

No. Amounts held in a plan forfeiture account are plan assets; the same rules apply.

Note: Some plans use “ERISA budget accounts” or “revenue holding accounts” to accept revenue sharing payments from plan investment providers and pay plan expenses. It is our view that these accounts generally should be treated in the same manner as any other plan asset.

How can eligible expenses be charged to plan participants?

Plan-level expenses may be charged (1) in proportion to participant account balances, (2) as a flat fee to participant accounts, or (3) some combination of both methods. In addition, certain plan fees may be paid for by the plan through the plan’s investment vehicles and are reflected as a reduction in investment returns.

Participant-level fees (e.g. distribution and loan fees) are typically charged directly to participant accounts.

Does the plan document need to provide that expenses can be paid for from the plan?

Generally, yes, and most plans do allow for eligible expenses to be paid for from plan assets. The plan should also state that fees may be paid for from the forfeiture account, if desired.

Does it make sense to charge eligible expenses to a plan?

It really depends on the plan and the goals and objectives of the plan sponsor. If the plan pays (whether directly or indirectly through plan investments), overall investment performance is reduced, and this can make a big difference over time. For plans of closely-held businesses, it often makes more sense for the employer to pay the expenses (they are deductible). It is much more common in large plans for the plan participants to bear most (if not all) of the related costs.

If eligible expenses are paid for by the plan, are there any required disclosures?

Yes. There are disclosure rules that apply for both plan service providers and plan participants (in participant-directed plans).

Note: Whether a particular fee or expense may be paid for by a plan is a fiduciary decision. Plan fiduciaries are charged to act prudently and in the best interest of plan participants. If a fee is charged improperly, the fiduciary(s) may be held liable so plan sponsors should exercise due care when determining whether it is appropriate for a plan to pay for a given expense.

 

Mid-Year Amendments for Safe Harbor Plans

For many years the IRS did not permit mid-year changes to Safe Harbor 401(k) plans except under very limited circumstances. In 2016, the IRS issued Notice 2016-16 relaxing the rules providing sponsors of Safe Harbor 401(k) plans with much greater flexibility throughout the year. The guidance does contain a short list of changes that are specifically prohibited, but many changes are permissible provided certain conditions are satisfied.

Which changes are permissible?

In general, most changes that would be permissible mid-year in a traditional 401(k) plan can be made in a Safe Harbor plan as long as the necessary requirements are met.

What are the requirements for amending a Safe Harbor plan mid-year?

If a permissible amendment results in a change to the information provided in the Safe Harbor notice, an updated notice must be provided within a reasonable period prior to the effective date of the change. For this purpose, the IRS considers the timing requirement to be satisfied if the updated notice is provided at least 30 (but no more than 90) days prior to the change.

In situations where it is not practical to provide the notice prior to effective date of the change (e.g. the plan is being amended retroactively as the first day of the plan year to provide for an additional match), the updated Safe Harbor notice must be provided as soon as possible but no later than 30 days after the date the amendment is adopted.

In either case, participants must also be provided the opportunity to change their deferral elections for a reasonable period of time following receipt of the updated Safe Harbor notice.

What if the change does not impact the information provided in the Safe Harbor notice?

If the change does not impact the information required to be provided in the Safe Harbor notice, there is no requirement to provide an updated notice or to provide participants with an opportunity to make changes to their deferral elections.

Keep in mind, however, the plan would generally be required to provide participants with either a Summary of Material Modifications or an updated Summary Plan Description.

Which changes are specifically prohibited mid-year?

  • Any change that would reduce the number of participants who are currently eligible to receive Safe Harbor contributions
  • Changing the type of Safe Harbor plan (e.g. changing from a traditional Safe Harbor plan to a qualified automatic contribution arrangement)
  • Increasing the number of years required to become vested in Safe Harbor contributions under a qualified automatic contribution arrangement
  • A mid-year change to add or modify the formula used to calculate matching contributions (or related plan compensation) or a mid-year change to permit discretionary matching contributions, unless certain additional conditions are satisfied

 

What are the conditions for making changes to matching contributions?

In order to increase Safe Harbor matching contributions (or to add or modify a fixed or discretionary matching contribution), the amendment must be adopted at least 3 months prior to the plan year, must be retroactive as of the first day of the plan year, and, the necessary notice and deferral opportunity requirements must be met.

Can a plan change from a Safe Harbor match to a 3% Safe Harbor nonelective contribution mid-year?

No. This is not permissible under the notice or regulations. This type of change could only be made as of the first day of the following plan year.

Did the IRS provide any example of permissible amendments?

Yes. IRS Notice 2016-16 provides several examples of permissible amendments including the following:

  • An amendment to increase the Safe Harbor nonelective contribution from 3% to 4% for future contributions
  • An amendment made prior to 3 months before the end of the plan year to increase the Safe Harbor matching contribution from 4% to 5% and to change the period for calculating match from a payroll period to plan year basis retroactively
  • An amendment to add an age 59 ½ in-service distribution feature

Can a plan be amended to reduce or suspend Safe Harbor contributions mid-year?

It depends. This is addressed under the Safe Harbor regulations. A Safe Harbor plan may only be amended mid-year to reduce or suspend Safe Harbor contributions if (1) the employer is operating at an “economic loss”, or (2) the annual Safe Harbor notice included a statement indicating that the plan could be amended to remove or suspend Safe Harbor contributions during the plan year. Additional procedural requirements must also be satisfied, and the plan essentially reverts to a traditional 401(k) plan for the plan year.

Can a Safe Harbor plan be terminated mid-year?

Yes. This is also addressed under the regulations. In general, Safe Harbor contributions must be made through the date the plan is terminated, and other conditions must be satisfied. Unless the plan termination is due to a “substantial business hardship”, or as a result of a company merger or acquisition transaction, the plan would lose its Safe Harbor status for the final plan year (i.e. the plan would be subject to ADP/ACP testing, top heavy requirements, etc.)

What changes can only be made as of the beginning of a plan year?

While many changes can be made mid-year, certain changes can only be made as of the first day of the following plan year, and the amendment must be adopted prior to the first day of the plan year. Examples of such amendments include:

  • Adding a Safe Harbor provision to an existing traditional 401(k) plan
  • Changing the plan’s Safe Harbor formula from a Safe Harbor nonelective contribution to a Safe Harbor match

How can I learn more?

Please call EJReynolds at 954.431.1774 or visit ejreynoldsinc.com

The power of the right question at the right time

Assessing a potential prospect can be tricky. Knowing what questions to ask at the proper time in the sales cycle can be the key to landing and satisfying a new client. Broad, open-ended sales questions may help find out what’s going on in your prospect’s world, but they run the risk of wasting what little precious time that a prospect may give you.

When prospecting for a 401(k) plan, there are two main decision makers: 1) the CFO with little time to waste, or 2) the HR director who typically has too much on their plate to begin with and doesn’t want more. By merely calling these prospects, you are interrupting the status quo and you must be prepared to give them a compelling argument to make a change. As they say, change only happens when the pain of staying the same is greater than the pain of making a change.

Prospecting for 401(k) plans is a three-step process: 1) Find Promising Prospects, 2) Call The Prospect, and 3) Meet With The Prospect. It can be that easy as long as you are well prepared and know when to ask the right questions. Whether you are new to 401(k) plan prospecting or an experienced 401(k) advisor trying to train your staff, this guide will list important questions that will engage a prospect. You will also find some key questions to avoid during the sales process.

  1. Find Promising Prospects

Finding the prospect is, believe it or not, the easiest part. There are plenty of lists available for 401(k) plans to call on, the trick is to find one that you may already have a relationship with. Relationships are key in this industry, and a great 401(k) advisor will have great relationships with their clients. Working with a third-party administrator (TPA) can help you pull a listing of potential candidates in your area and provide a warm lead.

  1. Call The Prospect

Once you have a list of targets, calling on the prospect may be more difficult. Even if you have a relationship with a decision maker, it may be difficult to catch them directly on the first try. You may have to call several times before you can get the right connection, but when you do, BE PREPARED! Remember, plenty of demographic information can be gleaned from the Form 5500, which is public record and may easily be obtained at the Filing Search tab of www.efast.dol.gov.  Of course, the assets, the number of participants (both eligible and participating} and the employee and employer contributions are clearly indicated on the first few pages, as are the availability of participant loans. There are several codes detailed in the “Plan Characteristics” questions which indicate if there is an age weighted or cross-tested profit sharing allocation, if there are matching contributions, and if participants are directing the investment of their account balances. Ask a TPA to provide you a complete listing of these codes and their meaning. Maybe more important demographic questions  you could ask would be:

  • Is there a high percentage of job and skill diversity among your employees?
  • What is the eligibility requirement to join the company 401(k) plan?
  • How many shifts do you have?
  • How many locations do you have?
  • What percent of employees are within five years of retirement?

These demographic questions can be the solution in helping you build your value proposition and provide the “why” for why is it worth the pain to change to your services?

Once you have the demographics, get to the operational issues. Certain, specific questions can show your industry knowledge and spark further conversations:

  • Does your plan offer auto enrollment and auto escalation features?
  • Do you process payroll internally or through an outside vendor? Which vendor?
  • How often can eligible employee enter the plan? Change their savings rate?
  • What do your plan participants say about the plan? The website? Statements?
  • Does the company 401(k) plan allow for loans and/or hardship withdrawals? Are these provisions being abused?
  • Does the company have a Health Savings Account (HSA) program?

Large plan filers (those with more than 100 participants) must include more detailed information on the Form 5500 and related schedules since they must attach an opinion from an Independent Qualified Public Accountant. These audited financial statements include more information such as the eligibility requirements, the underlying investments and several other operational issues. They may list the auto enrollment features of the plan (if any), if the plan has a Safe Harbor Provision or in-service distribution options. What it won’t list is very specific questions regarding the plan investments:

  • Are you currently contracting with an ERISA 3(21) or 3(38) Advisor?
  • How were the investment options chosen? How often are they reviewed?
  • How do employees make investment allocation decisions? Worksheets, online questionnaires?
  • Do you have an investment policy in place?
  • Who holds the largest account balance? (A $10,000,000 plan that saves 50bp on expenses saves $50,000 a year, proportionately benefiting the largest account holders.)

Service issues and concerns are not listed in the audit, but can be important to the decision makers:

  • What are the top concerns of your employees? Are there other enhancements you want to make to the 401(k) plan?
  • Do you currently survey employees to gather their concerns and understanding of company benefit programs?
  • When was the last enrollment meeting or group education meeting? How frequent would you like someone onsite to work with your employees?
  • What types of issues arise, i.e., payroll transmission, compliance testing, notices, timely responses, that has caused you concern enough to consider a change?
  • Is Fiduciary protection, improved employee retirement readiness, or overall financial wellness for your participants important to you? Which is most important? Least?
  1. Meet With The Prospect

Once you have a meeting in place, summarize your findings to a one page sheet showing specific improvement areas and procedures that you will help put into place once you are hired. Possible opening questions can include the following:

  • Tell me what you would improve about your 401(k) plan?
  • There are two types of 401(k) programs, those that involve an Advisor to assist you and your employees and those that don’t. Which one do you have?
  • What goals are you working to accomplish with your company 401(k) plan? ‐ Increase participation ‐ Increase contributions ‐ Decrease loan usage ‐ Decrease hardship withdrawals ‐ Improve employee retirement readiness
  • How does your plan compare to companies you compete against for the same employees?
  • What would need to change for us to have an opportunity to serve your plan?

Do not automatically assume you need to change everything to show you can bring enhanced services to the plan. Taking over the plan as Broker of Record is the first goal. There may be nothing wrong with the plan that more attention and care won’t fix. Making small changes, for instance, to the investment lineup or adding some enhanced plan design options, might make all the difference in the world to the client and won’t totally disrupt the day-to-day activities of the company. Remember, you’re here to help the client.

You may also find business development value in our article “The 7 Step Guide to Growing your 401(k) Business”. Feel free to call us with additional questions on developing your 401(k) business. We love to partner with advisors for a win-win relationship.

The 7 Step Guide to Growing your 401(k) Business

Most financial advisors are skilled salespeople, but 401(k) advisors require a different sales approach and an entrepreneurial mindset. The buyer isn’t always the end user and sales pitches are aimed at a human resource executive, a CEO or a CFO, rather than plan participants. Most financial advisors are more accustomed to selling to individuals, whereas 401(k) plans, especially those of larger organizations, involve tailoring conversations to a decision maker or committee before any presentations are made to the ultimate users; the participants.

In addition, to be a successful retirement plan advisor the service model must be tweaked. Whereas financial advisors meet with clients perhaps a few times per year, an average 401(k) plan client requires more attention. Advisors are expected to provide investment monitoring reports, set up meetings for new plan enrollees, and facilitate fiduciary committee meetings several times a year.

For the financial advisor who seriously wants to increase 401(k) business or those who want to get started in the 401(k) business, there is plenty of opportunity. Those willing to do a top-notch job as a 401(k) advisor will find plenty of occasions to develop and increase their book of business.  Following the 7 steps below will get financial advisors closer to that success.

 

  1. FIDUCIARY DIFFERENTIATION: 

As a 401(k) advisor, you have to determine your market and which 401(k) plans you will target. Will you target larger plans or plans that are smaller in asset size? If you are a registered investment advisor, you will also have to determine what your fiduciary role will be, will you be a co-fiduciary, or a type of ERISA fiduciary? If you are a broker, be mindful of rules the Department of Labor implements that may define you as a fiduciary. Acting as a fiduciary allows 401(k) advisors to separate themselves from the crowded financial advisor competition. The fiduciary responsibility also helps to set trust by making it clear that all recommendations made are based solely on the clients’ best interest.

To understand Fiduciary responsibilities better, you can read the articles below.

 

  1. KNOW THE 401(k) BUSINESS:

There is an awful lot to learn for those that focus on retirement plans. The industry is always evolving, and anyone from novice to expert needs to dedicate time in order to keep their skills, and knowledge base, sharp. Get in-depth fiduciary training and education as well as investment analysis and consulting expertise. It’s most likely that financial advisors working in this specialized area will be deemed a plan fiduciary. They need to understand how to both assist plan sponsors in mitigating their fiduciary liabilities, as well as their own. There are a number of resources for this type of education. The National Association of Plan Advisors, part of the American Retirement Association, offers credentialed programs for the Certified Plan Fiduciary Advisor (CPFA) or Qualified Plan Financial Consultant (QPFC).

Having a working knowledge of the Employee Retirement Income Security Act (ERISA) of 1974 is pertinent. Learning the act’s rules and regulations is the main differentiator between wealth management and retirement plan advising. It’s almost like getting a quasi-law degree and advisors must be prepared to invest time acquiring this specialized kind of knowledge. There are modules on retirement plans included in the Certified Financial Planner (CFP) Designation, as well as online resources provided by the Society of Certified Retirement Plan Financial Advisors.

However, advisors don’t need to be ERISA experts. They can partner with record-keeping firms or independent third-party administrators (TPAs) who can provide that expertise. Advisors do need to have somewhat of a technical understanding of the inner workings of 401(k) plans, though. For example, knowing plan design and the functions of different vendors such as record keepers and TPAs to be able to hire and monitor experts.

  1. SEEK OUT THE 401(k) EXPERTS:

For 401(k) advisors with limited retirement plan expertise, to look smart on 401(k) plans, surround yourself with smart 401(k) people that already have the certifications and knowledge you need. Being a financial advisor is difficult enough, so you aren’t expected to become retirement plan experts. However, it is important to have enough knowledge to know when to bring in the experts so that your clients are not at a disadvantage. As a financial advisor, you need to augment your services and show why your services have a value compared to the competition and the best way to do it is to rely on retirement plan consultants and ERISA attorneys for advice, consulting, and knowledge. It doesn’t make you look bad to bring in another subject matter expert. You are the relationship manager, the “head coach’; and you have the power to influence the client to move one way or another because of your relationships. Also, remember to avoid the producing TPA. Producing TPAs are firms that also have an advisory business. While people can argue about the value of producing TPAs, you have to realize that since they are in the 401(k) advisory business, they are also your competition.

 

  1. DEVELOP STRATEGIC ALLIANCES:

Make it easier for other business professionals in your circles of influence to understand the 401(k) business. Partner with, and educate, independent payroll providers, property and casualty agents, auditing and CPA firms. Teach them about the state-of-the-art options in plan design, and tax benefits of retirement plans at both the corporate and employee level. Many of these people are very outdated in their knowledge level, which creates big referral opportunities. Getting close to those that know key decision makers in the 401k advisor hiring process makes it easier to get introduced to the right people in order to spend the right amount of time in closing and on-boarding new business.

 

  1. EDUCATE AND PROBLEM SOLVE:

Once you’ve solved a complicated situation for one client, look to apply the solution to other clients. If one client had an issue, very often so do others and often don’t know it. It’s exactly how niche markets are developed and can lead to a thriving practice.

Certain types of businesses can have similar objectives for their 401(k) plans, and thus similar plan designs will work best for them. For example, medical specialist practices that have a handful of very highly-compensated doctors, as well as a handful of lower-compensated staff, are usually interested in methods to maximize the amount of money the doctors can contribute to a plan. A specific plan design, one that combines a 401k profit sharing plan with a cash balance defined benefit plan, for example, is a good way to do it. Advisors who specialize in this approach gain credibility and can win business, and referrals, from firms that are similar.

 

  1. OBTAIN ORGANIC BUSINESS REFERRALS:

The most valuable form of marketing is word-of-mouth. Many great leads can come from an advisor’s existing client base, even if the clients are not in charge of a company retirement plan. When wealth management clients are familiar with 401(k) services offered, they can provide referrals year after year. A way to ensure your client base is knowledgeable enough to refer is to provide educational platforms and experiences for clients and prospective clients that allow them to experience the level of expertise and understanding required for proper retirement strategy including extenuating industry circumstances.

However, ensure to qualify a referral and limit wasted time with the wrong person that has no influence or authority to make a decision on a 401(k) plan. Get in front of the right person and bring in the right resources to close. You have to make a conscious effort to distinguish between wealth management and retirement planning when speaking with a prospect and ensure the right questions are being asked. Here are some good qualifying and discovery questions to ask (link to the qualifying and discovery questions).You also need to know when to lean on a TPA that can come in and put a proposal together for a group-level conversation and help close the business.

  1. BE SEEN AS A LEADER:

Use your strengths as the relationship specialist to your advantage. Share informative content with your client and prospect database. Use social media, emails and blogs, if your firm allows them, to share content that will show your expertise. You can write, use videos or podcasts to get your message across. Creating this type of content is great for branding and overall business development and the most cost effective tools you can use. Developing original content can be time consuming and maybe you don’t yet have the expertise to do it. Your firm may have access to pre-approved third-party content that you can use to show you are thinking of ways to help your prospects. Distributing and sharing such material as your own helps to ensure you are top-of-mind when the opportunity arises. There is no shortage of available information, but sharing information from experts you know you can lean on to close a sale shows your client that you have a network of quality people that can ensure a quality plan design based on their needs. The EJReynolds blog regularly produces quality content geared to keeping plan sponsors informed as well as helping advisors keep their clients knowledgeable.

Building any type of business isn’t easy. If you are dedicated to your clients and dedicated to the role of a 401(k) retirement plan advisor, you will succeed as long as you show a value to the service you provide. Although the sales process is longer (these plans do not close overnight), they tend to be sticky assets that will help you retain assets under management with additional sales opportunities. With so many changes to the retirement plan marketplace which can have plan sponsors reconsider their current plan providers, it may be the opportunity you need to exploit and build a 401(k) advisory business.

Deadline Approaching to Adopt a Safe Harbor 401(k) Plan for 2019!

Have you been talking with prospective clients about adopting a new 401(k) plan? If so, the deadline for adopting a safe harbor 401(k) plan for 2019 is fast approaching, so it would be a great time to schedule a follow-up conversation!

Safe harbor 401(k) plans are attractive for many employers (especially small employers) because they provide relief from certain plan testing requirements. Specifically, a safe harbor plan is generally exempt from ADP/ACP testing enabling the plan’s highly compensated employees to maximize elective deferrals, i.e. 401(k) deferrals/Roth contributions, without limitation. Safe harbor plans may also be exempt from the top-heavy requirements if certain conditions are met.

What is the deadline for adopting a safe harbor 401(k) plan?

In general, the deadline for adopting a new safe harbor 401(k) plan is October 1, 2019. There are, however, certain notice requirements that must be satisfied, and eligible employees must be provided a reasonable period of time to make their deferral elections. In a new plan, the rule is that all eligible employees must have at least three months to make elective deferrals under the plan, so planning ahead is key!

Are there limits on the amounts that can be deferred?

No. There are no restrictions (other than the normal limits) placed on the amounts that can be deferred during this three-month period. As a result, owners, key employees and any other participants would still have time to make elective deferrals of $19,000 (plus $6,000 for participants age 50 or older). This, of course, assumes they will have enough compensation to do so within this time period.

What are the contribution requirements?

The plan must make either a safe harbor matching or safe harbor nonelective contribution.

The basic safe harbor matching contribution formula is 100% on the first 3% of deferrals, plus 50% on the next 2% (maximum of 4% match). Alternatively, an enhanced safe harbor matching formula can be used, which is most commonly 100% on the first 4% of deferrals.

Safe harbor nonelective contributions must be at least 3% of each participant’s compensation, regardless of whether they elect to make deferrals.

Note that safe harbor contributions (match or nonelective) must be 100% vested, subject to the same distribution restrictions as elective deferrals, and cannot be subject to any allocation conditions, e.g. employment on the last day of the plan year.

Tax Credit Available for Small Employers

As an incentive to establish a new 401(k) plan, small employers (generally, businesses with no more than 100 employees) may be eligible to receive a tax credit of up to $500 (per year, for the first three years) to help defray the costs associated with establishing and maintaining a plan.

Which design is best?

One-size does not fit all. It really depends on the goals of the employer and demographics of the workforce. The good news is that we can assist you in determining what will work best for your clients after considering their unique needs! Please contact us to learn more.