What's a Plan to Do?

“Some sponsors are just starting to think about outcomes, since in the past they thought they needed a retirement plan because that’s part of what it takes to attract employees.  But they had never thought about, ‘Is the plan supposed to do something? And if it is supposed to do something, what is it supposed to do,” said Dr. Gregory Kasten founder and CEO of Unified Trust.

Dr. Kasten was among a few select experts in the field interviewed for the article Retirement Ready-or Not, recently published by NAPA.net.  The article stressed the critical role an advisor plays in helping plan sponsors answer the question, ‘what is a retirement plan supposed to do”? While that question seems simplistic in nature, surprisingly very few sponsors ever think about the true purpose or goal of their retirement plan as it relates to their employees success. Many in the industry measure success in terms of tracking participation and deferral rates, monitoring investment performance, and benchmarking fees all of which are important, but none of which independently provide a complete guide as to whether or not participants are succeeding. At Unified Trust, we believe that success is an employee being able to adequately replace their paycheck when they retire.

We also believe that success doesn’t happen by chance. That’s why Unified Trust developed the ‘benefit policy statement’ which is considered a sister document to the ‘investment policy statement.’  “If you want to manage outcomes, you are going to have to measure outcomes – and go a step further and define the outcomes you want,” said Kasten.

In these times of fee compression where it’s ever so critical to show added value, by helping a plan sponsor deliver improved outcomes for their participants, advisors can differentiate themselves in the marketplace.  As we move into the future, how successful—or unsuccessful— a retirement plan is in delivering retirement security may become a factor in determining whether or not a plan sponsor and other plan fiduciaries are meeting their fiduciary responsibilities.  Having a plan that doesn’t measure up to changing industry standards could leave the fiduciaries open to potential litigation.

 
- Jason

Hatch's remarks on Pension Reform - Financial Services Roundtable:

Really interesting read on where the thinking in this area is, the whole speech can be found in this article -->

http://www.stgeorgeutah.com/news/archive/2014/12/15/hatch-outlines-pension-reform-retirement-savings/#.VI9NpHuEzaV

Here are the parts on private Pension Reform:

"....The good news is that the private employer-based retirement savings system in the United States – particularly 401(k) plans and Individual Retirement Accounts, or IRAs – has become the greatest wealth creator for the middle class in history and represents truly shared prosperity.

The bad news is that the retirement of the baby boom generation is putting enormous pressure on public programs like Social Security and Medicare.

And, as part of the unending effort on Capitol Hill to find more revenue to pay for increased spending, some have proposed reducing the allowed contributions to 401(k) plans and IRAs.

That, in my view, would be both short-sighted and foolish. - GREAT LINE!!!

Some in Congress seem to have forgotten that this is well-covered territory.  Indeed, Congress has already examined this issue and made the policy call decidedly against contribution reductions.
In 2001, Congress increased the limits for contributions to 401(k) plans and IRAs.
Congress also added a catch-up contribution feature that allows workers to contribute several thousand dollars more per year beginning in their 50s, an age when many workers finally get serious about saving.



One thing we have learned over the years is that the key to successful retirement savings is participation by employees in a plan at work, and the key to convincing employers to sponsor a plan at work is a healthy contribution limit.


Since 2000, the year before Congress raised the contribution limits, retirement assets in defined contribution plans have grown from around $3 trillion to nearly $6 trillion, despite the market downturn in 2008.  Assets in IRAs have grown from $2.6 trillion to $6.5 trillion.

In fact, increased contribution limits worked so well that, in 2006, Congress made those provisions permanent, and the vote to make them permanent was overwhelming:  in the Senate, the vote was 93 to 5.

We have spent a lot of time in recent years defending the gains we have achieved in the 401(k) system.  But in 2015 we can, and in my opinion should, go on offense. Toward that end, we must encourage employers who don’t sponsor plans to set them up.  That’s why last year I introduced legislation to create the Starter 401(k), a plan designed for small or start-up businesses that are not in a position to contribute to a plan but still want to help their employees save.

A Starter 401(k) is a new kind of plan that does not come with all the administrative burdens or expenses of a traditional 401(k) plan.  The plan allows employees to contribute between $8,000 and $10,000 per year, which is a little bit less than what would be allowed under a traditional 401(k), but much more than an IRA.



I believe the Starter 401(k) plan in my legislation could help to revolutionize retirement savings for employees of small businesses throughout the country.  My bill also allows unrelated small employers to pool their assets in a single 401(k) plan to achieve better investment outcomes, lower costs, and easier administration.  This idea, which is called an “Open MEP” is one that many on both sides of the aisle in Congress support.  It’s an idea whose time has come.


Of course, we cannot talk about retirement savings without discussing the importance of lifetime income.  We have fought for years to enact policies that will encourage greater savings and investment.  But, I don’t think our efforts will provide much to comfort those whose retirement assets run out before the end of their lives.

That’s why the legislation I introduced last year encourages the purchase of fixed annuity contracts for retirement.  In fact, the bill is called the Secure Annuities for Employee Retirement Act, or the SAFE Retirement Act.

Why life insurance annuity contracts?  Well, lifetime income is a form of life insurance.  Most people tend to think of life insurance as insurance against the risk of living an unexpectedly short life.  And that is certainly true.  But life insurance also includes insurance for the possibility that someone might live an unexpectedly long life.

We call that form of life insurance a life annuity and it only makes sense to encourage the use of annuities to provide retirement security.

My legislation encourages the use of annuities in 401(k) plans.  First, we remove obstacles to adding annuity-purchase options to 401(k) plans and, second, we provide employers a liability safe-harbor.  That way, employers are encouraged to add annuity options to their plans and employees are encouraged to use them......"

Senator Hatch goes on a bit about public pension reform as well, but key takeaways from this.  There's a strong advocate for the proliferation of the 401(k) and future versions of it in Congress now, who's thinking smartly and creatively about ways to expand coverage, reduce barriers to usage and protect participants.  That's leadership that I can get behind.  Let's hope that these measures make it through and become law.

- Jason Grantz

Cash Balance Plans - Simplified

So, what's all of this noise about this "new" kind of Retirement Plan that's all the rave, called a Cash Balance Plan and how do I 'Cash In'? 

The following information is meant to be informative, while not necessarily all encompassing.

What is a Cash Balance Pension Plan?
A cash balance plan is a type of Defined Benefit (DB) plan that looks and feels like a Defined Contribution Plan (DC) such as a 401(k) or Profit Sharing Plan.  However, just because it looks like a DC plan doesn't mean that it is one, in fact it has more similarities to its' brother the traditional DB pension than it does to its' cousin the 401(k) Plan.  Like traditional DB plans, Cash Balance plans are backwards-looking in that that they guarantee a determinable benefit to eligible participants and use annual contributions plus investment earnings to get to that end benefit at some later date. 

What do you mean it looks/feels like a DC plan?
The allocation formula and the promised benefit are stated as a hypothetical account balance.  They are hypothetical because they do not reflect the actual contributions to and gains/loses allocatable to the account.  Rather they are attempting to give the participant a fair estimate of what their "balance" is in the plan.  Realistically, the benefit they receive is the predetermined balance defined by the plan that won't be achieved until that participant reaches retirement age.

How does it work?
Like all DB plans, the investments are pooled and set up in a trust, allowing for economies of scale to be gained on investment expenses and eliminated the need for "daily valued" record keeping.  Also like other DB plans, these plans are tax-qualified under the IRC and governed under ERISA .  They are required to have fiduciaries in charge, namely the Plan Sponsor, Trustee and Plan Administrator and require the use of an Actuary.  Many of these functions can be outsourced as well.

In a typical cash balance plan, each participant's hypothetical account is comprised of two parts; the pay credit and the interest credit.  The pay credit is typically a fixed amount (such as $25k/year) or a fixed percentage of compensation, like 5% for example.  The interest credit is either a fixed or variable rate linked to an index, such as the 30-Year Treasury. 

These contributions are made annually and invested.  The earnings on investments ought to be engineered to achieve the Interest Credit as a return, no more no less.  The goal most often associated with Cash Balance plans is to maximize tax deductible contributions for the owners, key personnel and highly paid group.  Unlike DC plans, however, contribution amounts from year to year can be theoretically unlimited since the contributions over time must equal what is needed to finance (fund) the promised benefit.  This allows contributions to often go well north of the DC Plan 415 limit of $52,000.  Often these contribution amounts could near $200,000/year for an individual person.

Who would use a Cash Balance Plan and why?
Cash Balance plans are popular among companies that are very rich in revenue while maintaining a fairly low number of employees.  Employers such as law firms, professional groups, CPA firms and medical practices come to mind.  These business' often have strong cash flows historically and prospectively, large budgets, relatively low numbers of employees where most of them are making substantial wages (north of $125k for example), have multiple owners or partners, max out on DC contributions and have mostly an older highly paid workforce.

What about costs and other barriers?
The main costs associated with Cash Balance plans are the contributions themselves since they tend to be much higher and are employer funded plans.  Administrative costs are typically not more burdensome than other plan administrative expenses and sometimes less.  Investment expenses are typically low due to the need to pool investments in a trust and the conservative nature of the investing.  Cash Balance plans can be for any type of employer, however, note that they must be contributed to for a minimum of three years.

Hopefully, this was helpful in explaining some of the main points about Cash Balance plans.  Obviously, this was an overview.  If anyone has questions, they can comment on this post or reach me directly at jason.grantz@unifiedtrust.com.

 

Fixing the 401(k) Makes Sense - Let's look at it

Earlier in January, an article was published that caught my eye.  The title alone, "Five Ways to Strengthen the 401(k)" was compelling enough for a Pension Geek like myself to read it.  As I dove into the article, linked here --> http://www.investmentnews.com/article/20130106/REG/301069978, I started to analyze and think about the issues raised by the author.  His perspective was to implement common-sense reforms that could make dramatic differences in generating better retirement readiness.

These are the 'Five Ways' as the author wrote them, and my comments in red.

1.) A Focus on Fees.  New 401(k) fee disclosure rules are a good first step, but employers and participants need to focus on investment costs in plans, as investment costs represent 84% of a plan's fees. Unnecessarily high fees will eat away at the value of retirement savings over time.  This is a true (albeit obvious) statement.  I think more important for employer's to understand is the relationship between investment costs and subsidies delivered to service providers like record keepers, TPAs and custodians.  It's great to compress investment expenses by selecting institutional class investments and the like.  We are certainly advocates here, but a dialogue about the reaction of the vendors on billable costs needs to be assessed as well.  If the service provider fees are unaffected by swapping expensive funds for inexpensive "equivalents", that makes a lot of sense to do.  If it results in an increase of billable costs to the employer, it must be well vetted before implementing.

2.) Mandates for savings. The single most effective step that Congress could take to increase retirement savings is to set mandates requiring employers to offer some form of a retirement savings vehicle along with mandating an employer match and employee participation in the plan. By providing access to a savings vehicle, forcing contributions at some level and automatically enrolling participants on day one, mandates will jump-start retirement savings for millions of Americans.  This is a great idea in theory, one that we've actually posited at our firm quite a bit.  See this article that I co-authored a few years ago that identifies Savings Rate as the significantly most important factor in creating Retirement Success
linked here --> https://www.unifiedtrust.com/documents/PositiveOutcomesFactorsv43.pdf

Many states have considered mandating employer sponsored retirement plans at the state level.  The furthest along on this is California.  Mandating an employer match or mandating employee participation in the plan will prove more difficult.  Many employers, if mandated to contribute to the plan, will do so by way of reducing current employee salaries accordingly.  Ultimately, this will not necessarily help the employees and may, in fact, hurt them.  Similarly, mandating employee contributions to the system has been done before, it's called Social Security.  The difference offered here is that this forced contribution would be in a privatized 401(k) setting.  Yes it will jump-start retirement saving, but may come at a current lifestyle price.  This is a very slippery slope, and my sense is that if they go down the path of mandating contributions, it most likely won't be to the benefit of the private system, but rather it will likely be done in a public setting benefiting the govt.

3.) Defined investment options for workers. The 401(k) has opened the door to broad investment choice, but many workers feel confused rather than empowered by the options. One solution is to simplify the investment process by automatically enrolling participants in a professionally managed investment program providing most workers with an appropriate investment for their situation based on all investment assets, not just those in the retirement plan. For those wanting to go it alone, there would be an option to do so.  Actually, I wholeheartedly agree with this point.  In fact, this actually already exists.....allow us a little self-promotion.  Our firm, Unified Trust Company has a system that works precisely as described.  Here is a link that can introduce the concept that we call The UnifiedPlan --> https://www.unifiedtrust.com/up/index.cfm

4.) Restricting distributions. Under the rules, it is too easy for workers to take withdrawals from their 401(k)s, and as a result, too many participants treat their retirement savings like a checking account. Over time, and with the power of uninterrupted compounding, individual 401(k) accounts are likely to grow and be put to use as intended — to provide an income stream in retirement.  Yes, right now within the rules a plan may allow for Loans or In-Service Withdrawals.  I think that many of us practitioners would like to do away with loans altogether.  I've heard them referred to as the bane of retirement plan record keeping.  That said employers can eliminate them altogether from their respective plan now, if they choose to. Many do not because they fear that taking that extreme position will cause lower participation, and in some cases they are correct.  I would submit that a good idea is to allow for either loans or an in-service distribution feature, but not both.  Further, I'd suggest that employers explore restricting the loans in some way or otherwise set the loan policy so that taking one is undesirable.  A few ideas:

• Maximum of one loan outstanding at a time
• Condition the loan as a Hardship loan, only approve if a verified hardship exists
• Set the interest rate to the loan as something high, for example Prime plus 2 or even higher

5.) Meeting the need for reliable retirement income. With people living longer, retirement dollars need to last longer. Throughout the 401(k) industry, there are continuing efforts to merge the best features of traditional defined-benefit and defined-contribution plans to create an investment option that guarantees income for life. More needs to be done in this area to meet growing needs for reliable retirement income. Although this seems to be a new trend in the industry, solutions are emerging that could make a lifetime of difference for retirees and their families.  See my response to item #3.  It's already here, folks just need to find it.

Thanks to the author, Tom Gonnella, for putting out good food for thought.

Benefit Adequacy is the Focus

The DOL's Assistant Secretary for the EBSA is lighting a fire under the dialogue concerning retirement income for 401(k) participants (or the lack thereof). In a recent article published by Fred Reish, entitled, "Adequate Benefit and Monthly Income", the discussion is expanded to include topics such as benefit adequacy, success measurement, distribution planning, and more. Reish presents a number of questions that providers, plan sponsors, and participants need to be able to answer comfortably. For example:

-Is your 401(k) plan providing an adequate percentage of final pay for your employees in retirement?

-How is benefit adequacy measured for 401(k) plan participants and is each participant aware of where they stand?

-How much does a participant need each year in retirement, and how do they make it last for a lifetime?

-How much can a participant feasibly withdraw each year to make their income last a lifetime?

These are all good questions. It's our belief that Fred Reish absolutely nailed it for those asking questions like, "What is the prevailing concern for most participants and plan sponsors with regard to saving for retirement?" and "What should I look for in a provider to ease participant concerns over accumulating retirement income?"

Please click here to view the article in its entirety.

Hodge Podge, Loose Ends and Good Ideas....

Over the past few months there have been a lot of topics being discussed as various bills get proposed, some get passed, many sunset and others get extended. Some of the topics that have been written about repeatedly include “Roth or Not Roth”, the issues of the proposed participant-level advice regulations, the old argument of passive vs. active and even a resurgence in the question of which is better Collective Trusts or Mutual Funds. Each one of these could render itself to lively debate on its own. Instead, what we thought we’d do is put together a few different, smaller thoughts, in one place that on their own aren’t enough to make a full discussion. Here goes:

Idea #1: For those of us operating in environments where we are fiduciaries or permitted to act as fiduciaries, a good idea is to create a value statement that acts as a good faith agreement. This idea was cited recently online called a Fiduciary Oath. This type of statement, signed by you and by the client is a great way to cement expectations. Click here to view a sample of what that could look like.

Idea #2: Preaching process and procedure to Plan Sponsors is a great idea. Giving them a process and procedure is a better idea. Performing the process and procedure for them is the best idea. Click here to access a guide to good Plan Sponsor health and a list of best practices from which every plan can benefit.

Idea #3: Little known or discussed, but very important is ERISA §411 which discusses the limitations imposed by the code on who may or may not serve as a fiduciary to an ERISA plan. Most plan sponsors do not routinely perform background checks on providers they hire to perform services to their company, while they do when hiring someone internally. Coaching plan sponsors and providing them a mechanism to ensure that ERISA §411 is adhered to is a value-add service that also helps in cementing the trust relationship. Click here to view a form for this use.

Lifetime Income Disclosure Act, UTC on Track

Recently (specifically, November 2009), the Lifetime Income Disclosure Act was introduced by Senators Jeff Bingaman, Herb Kohl and Johnny Isakson. This bill would require that 401(k) providers inform participants of the monthly income they would expect at retirement. This projection is intended to be modeled after the existing Social Security statements that Americans presently receive annually. The bill is intended to help the average worker to understand their present financial vulnerability. Click here for a copy of the bill.

Obviously, this is a new introduction to the Senate and will be placed on what seems to be a an ever-growing stack of proposed Retirement Plan legislation which may or may not get passed. However, this one is interesting as it supports many notions that we, at Unified Trust, have been talking about for years. Specifically, it mentions that the average American is on path to a substantial shortfall. We usually quote 80% of workers covered do not have adequate retirement savings in today’s dollars. What also is interesting is that this new type of disclosure is aimed at converting consumer (participants) thoughts from the traditional “investment account” approach to a new “benefit account” approach. I.E. Is the 401(k) actually providing me with adequate income replacement?

This is exactly what we are doing with our new service, The unifiedPLAN®. In fact, each participant enrolled in The unifiedPLAN® will be presented with a mathematically sound Success Analysis at the initial enrollment meeting and each quarter thereafter. Click here to view a sample report. This analysis will show them in today’s dollars what their projected surplus or shortfall is and offer suggestions on how to improve the outcome. In addition, based on this projection a custom tailored model portfolio will be established for the participant and adjust automatically as the math changes from quarter to quarter. This established glide path will improve outcomes for virtually all participants.

Benefit Policy Statement - New Value for Advisors

Over the last few years, as more and more professional Retirement Plan Consultants start to manage their practices as ERISA fiduciaries, the documentation process has become very important. Professionally, we have experienced the Investment Policy Statement (IPS) become a document as important to the plan file as the Plan Document, Adoption Agreement and other required documents. Various other policy documents are also normally required, but are often ignored. Some examples are a formal Loan Policy and a formal Funding Policy.

Specifically, cited in ERISA Section 402(b)(1) are requirements to have a written plan document (or documents) with a named fiduciary in charge, with the documents being required to do the following:

(b) Requisite features of plan
Every employee benefit plan shall—
(1) Provide a procedure for establishing and carrying out a funding policy and method consistent with the objectives of the plan and the requirements of this subchapter…

This requirement has been present since the beginning of ERISA, yet most plans simply don’t have one. This is a potential red flag for an auditor and impractical. Unified Trust Company is proud to announce the creation of a new Participant level document that will not only meet this ERISA requirement, but will also create a set of boundaries wherein each individual’s path to successful income replacement at retirement will be mapped out for them formally. This new document is called a Benefit Policy Statement (BPS). To view a sample of the Benefit Policy Statement, click here.

The purpose of this document is to give the participant formal notification of how the trustee intends to drive the process towards secure retirement for the participant. It will provide the Purpose, define the duties and responsibilities of all parties, provide what methods are used to determine Asset-Liability matching and more. Every participant will have their own BPS custom tailored to meet their individual needs. This document will be rolled out in conjunction with Unified Trust’s impending launch of The UnifiedPLAN®, the system of Defined Goal Investing that you’ve been hearing about from us for some time. The UnifiedPLAN® and its use of the BPS are enhancements to Unified Trust’s already successful, Unified Success Pathway™.