403(b) vs. 401(k) Comparison

Transcription

1 403(b) vs. 401(k) Comparison Erika Young, Director of Employer Plan Services Angie Whiteside, CPA, Senior Manager, Employee Benefits Carolyn Kelly, CFP, Financial Advisor

2 RETIREMENT PLAN EVOLUTION

3 The Timeline 1958 Code 403(b) was created to allow contributions to annuity contracts for employees of tax-exempt organizations 1974 Code 403(b) was revised to allow mutual funds as investment options 1978 The 401(k) plan was introduced as a retirement vehicle for nonprofit and for-profit entities 1986 Regulations were modified to prohibit tax-exempt and governmental entities to set up a 401(k) plan (k) regulations were revised again to allow tax-exempt (but not governmental) entities to set up 401(k) plans 2009 Code 403(b) regulations were updated to follow many of the same regulations as 401(k) plans

4 403(b) vs. 401(k) COMPARISON

5 Employer Eligibility 403(b) Plan 401(k) Plan 501(c)(3) organization Public school Any private, for-profit employer or nongovernmental, taxexempt employer Minister

6 ERISA Status 403(b) Plan 401(k) Plan May not be subject to ERISA Not subject to ERISA if it s a public school or a church 403(b) plan All plans are subject to ERISA, with limited exceptions All other plans will be subject to ERISA

7 Reporting and Disclosure 403(b) Plan 401(k) Plan Subject to Form 5500 filing requirement if plan is subject to Title I of ERISA Subject to Summary Plan Description (SPD) disclosure EPCRS for correction guidance Plan is subject to audit requirement if it s a large plan Subject to Form 5500 filing requirement, unless it s a Solo 401(k) plan Subject to Summary Plan Description (SPD) disclosure EPCRS for correction guidance Plan is subject to audit requirement if it s a large plan

8 Employee Contribution Limits 403(b) Plan Subject to 402(g) limit of $18,000 for 2016 for participants under age 50 Plan can be designed to allow a $6,000 catch-up contribution for participants age 50 or older 401(k) Plan Subject to 402(g) limit of $18,000 for 2016 for participants under age 50 Plan can be designed to allow a $6,000 catch-up contribution for participants age 50 or older Plan can be designed to allow a special catch-up contribution for long-term employees who have completed 15 years of service Special catch-up contribution is not available

9 Employer Contribution Limits 403(b) Plan 401(k) Plan For 2016, total employee and employer contributions cannot exceed $53,000 (under age 50) or $59,000 for participants age 50 and older For 2016, total employee and employer contributions cannot exceed $53,000 (under age 50) or $59,000 for participants age 50 and older Matching and non-elective contributions are available Matching and non-elective contributions are available

10 Requirements and Features 403(b) Plan 401(k) Plan Roth feature is available Vesting for employer contributions are available Loans are available Creditor protection is available, only if the plan is subject to Title I of ERISA (salary-deferral plans are generally not subject to ERISA) Plan does not need to have a trust arrangement Roth feature is available Vesting for employer contributions are available Loans are available Creditor protection is available Plan is required to have a trust arrangement

11 Requirements and Features 403(b) Plan 401(k) Plan Investment options: Annuity contracts Custodial accounts holding only mutual funds Retirement income account (church plans only) Investment options: Individual stocks and bonds Limited partnerships Life insurance Mutual funds Annuity contracts Real estate investment trusts, as long as the value of the securities can be determined

12 Distributions and Taxation 403(b) Plan QDRO feature is available Distributable events: Age 59 ½ in-service Death/disability/hardship Plan termination Rollovers to/from eligible plans are available Plan is subject to required minimum distributions (RMDs) 401(k) Plan QDRO feature is available Distributable events: Age 59 ½ in-service Death/disability/hardship Plan termination Rollovers to/from eligible plans are available Plan is subject to required minimum distributions (RMDs)

13 Distributions and Taxation 403(b) Plan 401(k) Plan Joint & survivor annuity not required unless subject to ERISA Joint & survivor annuity generally not required unless employer has money-purchase pension dollars from a former plan merged into the 401(k) plan

14 Participant Eligibility - Contributions 403(b) Plan Elective Deferrals: Universal availability 401(k) Plan Elective Deferrals: Requirements can be imposed Employer Contributions: Requirements can be imposed Employer Contributions: Requirements can be imposed

15 Coverage Testing 403(b) Plan 401(k) Plan Subject to coverage testing if employer contributions are allowed: Requires either passing the 70% ratio test or a two-part test consisting of the nondiscriminatory classification test and the average benefits test Both employee and employer contributions are subject to coverage testing Employee deferrals are not subject to coverage testing because of the universal availability requirement

16 Top-Heavy and Nondiscrimination Requirements 403(b) Plan 401(k) Plan Not subject to top-heavy minimum requirements Employer contributions are subject to nondiscrimination testing (e.g., ACP test for matching contributions) Employee contributions are not subject to nondiscrimination, but are subject to universal availability Subject to top-heavy minimum requirements. No more than 60% of the account balances can be allocated to key employees: Generally not a problem for nonprofit organizations Both employee and employer contributions are subject to nondiscrimination testing, including ADP and ACP testing

17 Pre-Approved Document/Correction Pre-approved document available for 403(b) plans: IRS won t offer a mechanism for individual determination letters, therefore: Adopting a pre-approved plan is the only way an employer can have reliance that the form of the plan complies with the rules under 403(b) Must include the necessary compliance provisions without referring to any other documents (e.g., investment contracts) Six-year restatement cycle for 403(b) plans, similar to 401(k) plans

18 COMMON PROBLEMS

19 403(b) Plans Improper application of universal availability Plan document not restated in 2009, per required legislation Misinterpretation of participant count rules for plan audit requirements

20 401(k) Plans Improper exclusion of eligible employees Late contribution deposits Uses incorrect definition of compensation: Improperly excludes bonuses/commissions, etc.

21 SAMPLE PLAN ANALYSIS

22 Your Current Investment Lineup This report will help your team: Review your plan s investment options Assess and identify potential gaps, opportunities and areas of improvement within your plan Aid conversations concerning your plan

23 Fund Analysis Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

24 Fund Analysis Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

25 Fund Analysis Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

26 Fund Analysis Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

27 Fund Analysis Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

28 Fund Performance Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

29 Participation Rate vs. Industry 80 Participation Rate Participation Rate Plan Industry Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

30 Contribution Rate of Plan vs. Industry 4.50% Average Contribution 4.00% 3.50% 3.00% 2.50% 2.00% Average Contribution 1.50% 1.00% 0.50% 0.00% Plan Industry Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

31 Contribution Rate of Plan vs. Industry 7.00% Average Contribution 6.00% 5.00% 4.00% 3.00% Average Contribution 2.00% 1.00% 0.00% Plan Industry Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

32 Breakdown of Fees In Dollars In Percentages TPA Fee $3, % Recordkeeping Fee $6, % Weighted Fund Expense $22, % Advisor Fee (not included in total-paid through 12b-1) $10, Annual Plan Cost $32, % Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

33 Benchmarking Your Plan Fees This report will help you determine how your retirement plan fees compare to plans of the same size ($1-5 million). 2.50% 2.00% 1.50% 1.00% 0.50% 1.48% 95th Percent 75th Percent 50th Percent 25th Percent 5th Percent 0.00% Total all-in costs Hypothetical and for illustrative purposes only. This slide is intended only to be used as an example of the layout and types of information that can be found in our Fund Analysis. Nothing contained herein is intended to act as, or as a substitute for, investment or financial information or advice.

34 Avoiding Conflicts of Interests Broker/Dealer Registered Investment Advisor Third Party Providers $ $ Third Party Providers $ $ Client Consultant/ Advisor Client Consultant/ Advisor Suitability Standard of Care Inherent conflict of interest in this business model Fiduciary Standard of Care Increased transparency is provided in this business model

35 Bundled vs. Unbundled 401(k) Plans There are two primary delivery structures for 401(k) plans bundled and unbundled. A bundled provider manages and oversees all service components of the plan sponsor s retirement plan recordkeeping, third-party administration (TPA), investments and education. An unbundled provider offers the plan sponsor the flexibility to select separate providers for each service component of their plan.

36 Next Steps

37 Your Presenters Erika Young is the Director of Employer Plan Services. Erika specializes in retirement plan design and assessment for start-up companies, nonprofit organizations and small-to-medium-sized businesses. She also provides expertise on ERISA compliance, reporting and regulatory standards. Angie Whiteside, CPA, is the Senior Manager of Employee Benefits. Angie specializes in the administration and consultation of 401(k) plans, profit-sharing plans, money-purchase pension plans, employee stock ownership plans (ESOPs), 403(b) plans and cafeteria plans for businesses and nonprofit organizations. Carolyn Kelly, CFP, is a Financial Advisor. Carolyn primarily focuses on retirement planning for small businesses, while also providing expertise on ERISA compliance and regulatory standards.

38 Important Disclosure Hewins Financial Advisors, LLC d/b/a DZH Phillips Wealth Management ("Hewins") is a proud affiliate of Wipfli LLP. Hewins is an SEC-registered investment advisor, and Hewins' ADV Part 2A discussing Hewins' services and fees is available upon request or at Neither Wipfli LLP or Hewins is a law firm or provides legal advice. Hewins does not provide accounting, tax, recordkeeping or third-party administrative services. The information contained herein is for educational purposes only and should not be used as, or as a substitute for, financial, legal or other professional advice. If you have questions about which employee benefit plan type is best for your situation, please engage Wipfli LLP professionally or consult with your employee benefit plans attorney. DZH Phillips LLP and Hewins are separate and unaffiliated entities.