Retirement Plan Fundamentals Zero to Sixty. Todd Kading, CFP, ChFC, RF LeafHouse Financial Advisors

Transcription

1 Retirement Plan Fundamentals Zero to Sixty Todd Kading, CFP, ChFC, RF LeafHouse Financial Advisors

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3 Meet Our Speaker Todd Kading Managing Director LeafHouse Financial Advisors Top 10 Most Dependable Wealth Managers in Texas - Texas Monthly Magazine 2007 Top 50 Plan Advisors Under 40 - National Association of Plan Advisors 2014 One of the first Registered Fiduciaries in the nation

4 The Fastest Growing RIA ERISA Specialist 2014 RIA RANKING FIRM NAME LOCATION % GROWTH IN ASSETS LeafHouse Financial Advisors Austin, Texas #1 in Texas #1 in America LeafHouse is the nation s Fastest Growing Retirement Plan Specialist Investment Advisor according to rankings by Financial Advisor Magazine. LeafHouse is the only ERISA specialist to be honored in the overall National Top 10 RIA rankings and the only firm to achieve a Top 10 spot for the past three consecutive years. Per current ADVs

5 What We Will Cover Benefits of Having A Retirement Plan Types of Retirement Plans Defined Contribution (DC) Defined Benefit (DB) Choosing the right one Fiduciary Responsibility Service Providers: Roles and Evaluation

6 Benefits to Employers Reduce your tax burden Employer contributions to retirement plans reduce the company s taxable income May be eligible for tax credit through establishing a qualified plan Attract and Retain Employees Retirement plans can be valuable recruiting tools for attracting and keeping talented workers

7 Benefits to Employees Tax Benefits Employee contributions are tax deductible and grow tax free Some plans may allow Roth contributions which are taxable upon entry but grow tax free and are tax free upon withdrawal No income restriction, unlike Roth IRAs Potential Employer Match Incentivizes employees to save in order to receive matching funds Convenient Savings Vehicle Access to a simple and easy way to save Professionally managed investment choices and advice

8 Types of Retirement Plans Defined Contribution (DC) Plans Specifies how much money goes into a retirement plan today Generally less costly to the employer May give employees control over investment decisions Defined Benefit (DB) Plans Specifies the benefit payable at retirement, usually based on a formula factoring in years of service and salary Typically more costly to employers Forces employer to take responsibility for investment choices and performance

9 Defined Contribution Plan Types 401(k) Allows workers to make contributions from their paycheck on a pre-tax basis Some plans allow Roth contributions All investments are employee-directed Many include an employer matching contribution to encourage saving Moderate setup costs but ongoing fees can be paid by participant accounts Profit Sharing Often a supplement to a 401(k) Allows employers to make different contribution each year based on company success Typically investments are employee-directed but a few are determined by the employer

10 Defined Contribution Plan Types (cont.) Simplified Employee Pension Individual Retirement Account (SEP IRA) Helps self-employed individuals or small business owners get access to tax-deferred savings Contributions made by employer Wide variety of investment options, just as an IRA All employees must receive same benefit Solo-K Same rules and requirements as a traditional 401(k), but with only one participant Great for self-employed individuals Only for businesses with no common law employees

11 Defined Benefit Plan Types Pension Employer makes tax-deductible contributions toward a collective pool of funds set aside for an employee s future benefit Participant benefits based on formula, typically age & years of service Employer makes all investment decisions Employer assumes all investment market risk Typically more costly and administratively burdensome for employer Few new pensions are being established and many are being phased out Funds do not belong to the employer and cannot be seized in bankruptcy Cash Balance DB plan that looks like DC: Accrued benefits for each participant are stated as an account balance rather than an annuity payment More portable than a traditional pension plan Much higher contribution limits than DC plans

12 What s the right fit for you? For independent businesses or self-employed business owners: A Solo-K plan is most likely the best choice For small business owners: A SEP-IRA plan can be a good choice (<10 employees) A 401(k) is good for small businesses who can afford the administrative costs and plan on growing For medium to large firms: 401(k)/profit sharing allow the company to contribute significant amounts in tax advantaged compensation while letting employees retain control over their retirement Pensions, although they are usually the most costly to employer, allow employers to offer some of the highest and most secure levels of retirement benefits

13 Am I a Fiduciary? Plan Fiduciaries are responsible for acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them Fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any losses to the plan Examples of Fiduciaries include parties who: Are plan sponsors & administrators (always fiduciaries) Have control or discretion over the plan or its administration Are members of the benefits or investment committee Have influence in selecting committee members Sign the DOL Form 5500

14 Using a Prudent Process Plan Sponsors & Administrators should regularly Submit Request For Proposals to service providers Negotiate fees of providers Draft/revise the Investment Policy Statement Select & review investment choices Monitor & coordinate education Conduct and document regular meetings Maintain a detailed compliance file Stay informed on evolving regulations Must always act in the sole interests of the plan and its participants

15 Department of Labor Enforcement The Department of Labor enforces the fiduciary duty provisions of ERISA Focus is on the process used by fiduciaries, not necessarily the ultimate decision made Fiduciaries should: Be aware of their roles Meet regularly Document meetings (i.e. dates, agendas) Avoid taking advice from non-fiduciaries The DOL has been proactive in enforcing ERISA fiduciary duty rules

16 Prohibited Transactions ERISA prohibits certain transactions between a plan and third parties who may be parties-in-interest Can result in both DOL fines and IRS taxes and penalties Fiduciaries can be liable for making the plan whole Common situations when a plan sponsor may be engaging in a prohibited transaction: Using a relative or close friend as a service provider Utilizing service providers who may be customers/clients Discounts in payroll services in exchange for plan business

17 Prudent Expert Rule ERISA established the Prudent Expert Rule, not Prudent Man, as the standard of care In Liss v. Smith, the court said: where the trustees lack the requisite knowledge, experience and expertise to make the necessary decisions with respect to investments, their fiduciary obligations require them to hire independent professional advisors. U.S. Department of Labor (DOL) as well as a number of courts have taken the position that if the fiduciaries are not qualified to fulfill their duties, they are required to seek help.

18 Service Provider Roles: Recordkeeper Most commonly referred to as The Provider Typically big-name investment or insurance companies May also have proprietary investment products Duties Provides an online portal for employee accounts Performs custodial duties for the plan s assets Issues participant statements Tracks contribution amounts and types (employee vs. employer, pre-tax vs. Roth) Handles rollover contributions Coordinates deposits from payroll May conduct participant education & enrollment meetings

19 Service Provider Roles: Administrator May be same company as recordkeeper or an independent Third Party Administrator (TPA). TPAs are typically smaller local firms with more hands-on service Duties Performs daily admin functions such as loans, hardship withdrawals, and QDROs Annual nondiscrimination testing Files the DOL Form 5500 Drafts & manages plan documents Prepares the Summary Plan Description Works with CPAs for annual audit Can assist with plan design issues

20 Service Provider Roles: Actuary Generally only necessary for defined benefit plans Use mathematics, statistics, and theory to study uncertain events Purpose is to make sure plan is contributing enough today to meet future obligations to participants

21 Service Provider Roles: Advisor Companies not extremely well-versed in retirement plans may want to hire a professional consultant A select few are able to accept fiduciary responsibility to reduce the company s risk 3(21) non-discretionary status > Some risk reduction 3(38) discretionary status > Maximum risk reduction Duties Regular meetings with the plan committee Investment selection & monitoring Conduct service provider RFPs & negotiate fees Plan design consulting Group or one-on-one financial advice for participants Provide regulatory updates

22 How to Evaluate Service Providers The best way to do evaluate service providers is through a comprehensive Request For Proposal process Evaluation metrics can include: Quality of Client Service Fee Competitiveness & Transparency Fiduciary Status & Resources Specialization & Competency RFPs should be conducted regularly to ensure that pricing and service quality are competitive This will also help compliance with DOL 408(b)(2) fee disclosure regulations

23 Fund Choice and Fee Transparency Many plans use retail share classes that simply have one all-encompassing fee. This makes benchmarking difficult and negotiation impossible. XYZ Large Cap Fund A XYZ Large Cap Fund Institutional Fund Management Recordkeeping Admin Advisory Negotiated Savings Institutionally priced shares make fee disclosure easier and allow plan sponsors to negotiate lower costs.

24 You Need an Action Plan Consider your organization s objectives in order to: Determine what type of retirement plan is right for you Establish goals for improving an existing plan Be aware of your fiduciary status and duties Establish prudent and well documented committee practices Continually evaluate service providers based on cost and service quality

25 Questions?