PLAN SPONSOR GUIDE: 90-10-90 RULE

Posted on by Jerome.Pfeffer

If you, your plan or your participants suffer from poor participation, low deferral rates or shortsighted investment decisions, you would not be alone. These are three major obstacles that sponsors need to overcome to produce better participant outcomes.  The 90-10-90 rule is a great benchmark for plan sponsors to aim for!

Download our most recent guide on the breakdown of the 90-10-90 rule!

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SHOULD YOU INCLUDE ESG FUNDS? MAYBE, MAYBE NOT.

Posted on by Jerome.Pfeffer

ESG, or environmental, social and governance funds, can be appealing to many investors, including millennials. These funds may be viewed as a proactive way to encourage reluctant and under-prepared millennials to save for retirement.  But is it a good idea to include ESG funds in your plan’s investment menu to entice investment do-gooders to boost their retirement savings? The short answer is, “it depends.”

ESG =Environmental, Social and Governance
SRIs = socially responsible investments

What are ESG funds?

Ethics-driven investment vehicles have existed since the 1970s. Initially, they sought to weed out companies that conflicted with investors’ values, including tobacco, liquor and gambling stocks.

ESG investing has come a long way since then. Today, it is used to describe “socially conscious” investments— think companies purposefully using water more efficiently in their plants, firms with eco-friendly missions, or businesses setting up shop in underserved locations. And don’t forget corporate governance, an often-overlooked feature of ESG funds that includes practices like ethical behavior, fair executive pay and forthright financial reporting.

Evaluating ESG funds for your plan

Now that you know a bit about how ESG funds work, you may be wondering how to evaluate them effectively in the context of your investment selection process. Your plan’s financial advisor can likely offer insights on specific funds and performance data. In addition, there are third parties who rate the underlying companies in ESG funds based on their sustainability or ESG practices. Even investment information and data provider, Morningstar, offers a dedicated ESG data and research platform, which rates 20,000 funds worldwide.[1] 

How about investment performance? There is a widespread perception that ESG factors may negatively impact performance.[2] However, some industry observers argue that incorporating ESG factors results in enhanced risk-adjusted returns, because companies with sustainable practices tend to be stronger, better prepared for the future, and more appealing to consumers.[3]

ESG Funds: Yay or Nay?

Thus far, the Department of Labor (DOL) has not looked favorably on the use of ESG funds in retirement plans. Although they have not ruled against using ESG options, the DOL has cautioned plan fiduciaries not to put too much emphasis on the funds’ socially responsible mission as part of the investment selection and decision-making process. [4]

Due in part to the DOL’s cautionary guidance, the uptake of ESG funds in retirement plans has been minimal — just 2%, offered as an option as of 2016.[5] That said, if you are considering adding ESG options to your plan, make sure to do the following as part of your fiduciary responsibilities:

ESG funds may benefit the world given that they seek to invest in companies with socially-conscious missions. However, whether they are beneficial for your plan and participants is, ultimately, up to your plan’s fiduciaries to decide. Choose wisely.


[1] Morningstar. “Sustainable Investing: Surfacing ESG Data and Research.” 2018.

[2] Barney, Lee. PlanSponsor magazine. “GAO Explores Why Few Retirement Plans Embrace ESG Investing.” August 2018.

[3] Hartnett, Judy Faust and Moore, Rebecca. Plan Adviser magazine. “What Would Encourage More ERISA Plans to Use ESG Investments?” November 2018.

[4] DOL. ESG Investment Considerations. April 2018.

[5] Barney, Lee. PlanSponsor magazine. “GAO Explores Why Few Retirement Plans Embrace ESG Investing.” August 2018.

IS IT TIME TO CONSIDER NEW PLAN DESIGN?

Posted on by Jerome.Pfeffer

You may have heard about a “cash balance plan” and wondered whether it would be something advantageous for your business.  A cash balance plan operates differently from other types of traditional retirement plans in that it combines features of both defined benefit and defined contribution plans.

Technically, a cash balance plan is classified as a defined benefit plan, which means it is subject to minimum funding requirements.  Likewise, the investment of cash balance plan assets are managed by the employer or an investment manager appointed by the employer.  Since cash balance plans are a “benefit,” increases and decreases in the value of the actual plan’s investments do not directly affect the amount promised to employees. 

For example, if Jane is promised through a cash balance plan a $10,000 account value, then she is entitled to a $10,000 payment, whereas, the actual value of Jane’s account could be $8,000.  The employer is responsible for making Jane’s account whole.  Or, vice versa, her account could be worth $12,000, yet she is only eligible to claim the $10,000 that is her accrued benefit.[1]

Typically, however, an employee benefit is expressed as a hypothetical account balance, giving it a defined contribution “feel.”  A participant’s account is credited each year with a “pay credit,” usually a percentage of pay, and also with an “interest credit,” either a fixed or variable rate that is tied to an index.  When a participant is eligible to receive benefits under a cash balance plan, the plan is treated as if it were a defined contribution plan with distributions available at termination of employment in the form of an annuity or a lump sum that can be rolled over into an IRA.

Who are cash balance plans best suited for?

Cash balance plans are especially suited for self-employed or small business owners with high incomes, since these plans allow high-earning business owners to save more than the $56,000 currently allowed for profit sharing/401(k) plans.  Cash balance plans have generous contribution limits – upwards of $200,000 in annual wage deferral.

These plans allow for large annual tax deductions because the limitation is on the annual distribution that the plan participant may receive at retirement ($225,000 for 2019), not on the annual contribution to the plan as is the case with profit sharing or 401(k) plans.  Employer contributions to a cash balance plan could potentially be three to four times their profit sharing/401(k) contributions and will vary depending on age, income, employee payroll and how much is currently invested in the plan.

Most cash balance plans are designed for the primary benefit of owners or executives of a company. Some candidates include professional practices (doctors, lawyers, accountants, architects, agencies, family owned businesses, to name a few examples) who would like to minimize taxes by putting away their hard-earned dollars into tax-deferred accounts.  Additionally, cash balance plans can be appropriate when the owner or executive-level employees are several years older than most of the non-highly compensated employees. For more specifics, it’s best to speak with a retirement plan advisor and third-party administrator for a sample plan design proposal.

This sounds too good to be true, so what’s the catch?

Downsides to sponsoring a cash balance plan include the need to commit to annual minimum funding levels, annual administration fees, investment management fees, and actuarial fees associated with the annual certification requirement showing that the plan is properly funded.  Typically, the tax savings are advantageous and outweigh many of the disadvantages.

Interested, but should I be concerned about cash flow fluctuations?

Businesses that may not want to make the commitment to a cash balance plan or that are not good candidates for it, but would nonetheless like to optimize retirement benefits for executive and other highly compensated employees, may want to consider a profit-sharing plan with an allocation method known as “new comparability” or “cross-testing.” 

With the new comparability plan, profit sharing contributions are allocated using the time value of money as a basis to allocate larger contributions to participants closer to retirement age.   Depending on the demographic make-up of a company’s work force, the new comparability allocation method can be an effective means of targeting contributions to certain senior highly-compensated employees without committing to funding a defined benefit plan.

What should I do next?

Plan design is largely dependent on the demographics of a business as well as the level of contributions with which the business is most comfortable.  For these reasons, consulting with a third-party administrator is highly recommended.  This third-party administrator will create customized illustrations using your company’s particular demographics to provide alternative plan designs for review and consideration. 

Proper retirement plan design can help you fulfill your company’s retirement plan objectives, such as maximizing benefits to key employees, tax deferral and efficient ways to minimize cost to the company.


1 This example is a hypothetical illustration. It is not representative of any specific situation and your results will vary.

Q2 2019 LIFT RETIREMENT

Posted on by Jerome.Pfeffer

Financial wellness has many components that can affect and benefit your workplace. This quarter, our newsletter highlights three engaging topics with insights on the many ways you can incorporate financial wellness into your workplace with the goal of improving retirement outcomes!

Quarterly Retirement Newsletter

VIDEO: WHAT’S IN YOUR FIDUCIARY FILE?

Posted on by Jerome.Pfeffer

Ever wonder what documents should be in your retirement plan committee fiduciary file?

If the Department of Labor were to ever knock on your door, we want you to be prepared! Applying the essential requirements and best practice ideas on how to safely store fiduciary documents could help to lessen the possibility of litigation.

Watch this 90 second video to learn more about:

What’s in Your Fiduciary File?

PARTICIPANT GUIDE: THE POWER OF 1%

Posted on by Jerome.Pfeffer

Do you know how much your 401(k) participants should save per year?

Participants needs guidance when it comes to preparing for retirement, and they often look to their employers, HR department, and company retirement plan committee for direction – that would be you!

Information your plan participants should know includes the importance of saving sooner rather than later, what is compound interest, and how it can benefit them. Need some help explaining? Download our participant guide, “The Power of 1%” to educate and inform participants on how their retirement savings has the potential to grow over time.

Download the Guide >>

SHARE CLASS ABCs: CHOOSE WISELY

Posted on by Jerome.Pfeffer

Share Class ABCs: Choose Wisely

Choosing mutual funds for your retirement plan’s investment lineup can feel like wading through a sea of alphabet soup. Fund companies typically offer multiple share classes, each sporting its own unique letter. A shares, C shares, I shares, R shares — what does it all mean? Luckily, you don’t have to be a mutual fund expert to understand the different share classes. Here’s a brief primer to help you understand the basics.

ABCs of Fees

Before diving into the share class alphabet soup, first, a brief word about fees. Each share class of a mutual fund owns the same underlying securities (stocks, bonds, etc.); the only difference is the cost. These come in two basic varieties: expense ratios and sales “loads.”

Expense ratios are the percentage of a fund’s assets used to cover administrative, marketing and distribution (12b-1 fees), and all other costs. Typically paid by participants, these fees are calculated annually as a percentage of an investor’s assets. For example, a participant would pay $150 for a $10,000 balance invested in a share class with a 1.5% expense ratio.   

Additionally, certain share classes charge significant sales loads. However, these are typically waived for mutual funds purchased through 401k plans.[1] If this is the case, neither the plan nor its participants pay these fees.

How to Compare Shares

Now, let’s talk share classes. Here’s a primer of the most common share classes:

A shares: Charge a front-end load for sales commissions for financial planners, brokers and investment advisors. It’s paid when shares are purchased and is calculated as a percentage of the original investment. For example, if the opening balance is $5,000 with a 5% front-end load, the fee is $250, making the invested balance $4,750. Within retirement plans, these costs are generally waived in retirement plans.

C shares: May be “no-load” funds, or those that carry a back-end load, in which an investor may pay a sales charge — typically 1% — if shares are sold within a specific period of time (generally less than a year). However, within retirement plans, a back-end charge is typically waived. Class C shares also carry higher expense ratios than A shares.

I shares: Known as “institutional” share classes, I shares typically carry much lower fees than A or C shares. While A and C shares are available to most plans of all sizes, they are mostly accessible to larger plans.1

R shares: Specifically designed for retirement plans, R shares range from R-1 to R-6. R shares typically don’t have front- or back-end loads; however, they may potentially carry a revenue-sharing component. As such, expense ratios vary: those with 12b-1 marketing and distribution fees may range from .25% to .1%.[2] It is worth noting that R-6 shares generally have no 12b-1 or servicing fees, although they are typically only available to plans with assets of $10 million to $250 million.[3]

CITs: Collective Investment Trusts (CITs) are the new kids on the investment block. They are similar to mutual funds; however, there are major differences. CITs are not registered; therefore, their administrative expenses are typically lower than those of mutual funds because they are not subject to the many regulations that mutual funds must abide by.  Mutual funds are open to the public, whereas CITs are not, and are designed to be part of a specific 401(k) investment strategy.  Keep in mind that CITs do not have traditional Ticker Symbols, so while they might have lower costs, there is also a lack of investment transparency. As a plan fiduciary, it is a best practice to truly understand the investment structure, weigh the potential cost savings, and compare the benefits with implementing CITs.[4]

What’s more, new share classes — T and “clean” shares — have emerged in response to changing regulations. These share classes are designed to promote greater fee transparency and level the playing field on commissions for financial professionals, while enabling plan sponsors to distinguish investment costs from plan costs.

The bottom line: when selecting and reviewing mutual funds for a plan’s investment menu, it’s important for sponsors and fiduciaries to understand the different share classes and their related fees, as well as how they impact plan costs and participants’ ability to optimize their retirement savings. As you review the many different options available out there, remember: “you must choose, but choose wisely.”[5]


[1] Simon, Javier. Planadviser. “Understanding Share Classes in DC Plan Funds.” May 2017.

[2] Investopedia. “What is a 12B-1 Fee?” Aug 2016.

[3] Simon, Javier. Planadviser. “Understanding Share Classes in DC Plan Funds.” May 2017.

[4] Morningstar Office. “What is a Collective Investment Trust?” November 2018.

[5] Boam, Jeffrey; Kaufman, Philip; Lucas, George & Meyjes, Menno. “Indiana Jones and the Last Crusade.” May 1989.

PLAN SPONSOR GUIDE: FIDUCIARY AUDIT FILE CHECKLIST

Posted on by Jerome.Pfeffer

Is your 401(k) plan documentation file ready for an audit?

As a retirement plan sponsor, a fiduciary audit file checklist will help you to compile documents to keep your fiduciary audit file up-to-date and assist with periodic reviews of your plan.

These documents should be readily at hand in the event that a DOL auditor shows up. This becomes easier if the advisor maintains an online filing cabinet for these and other plan documents that are also accessible to the plan sponsor. 

Download the Guide >>

FOUR TIPS TO BOOST YOUR EMPLOYEES’ RETIREMENT OUTLOOK

Posted on by Jerome.Pfeffer

Four Tips to Boost Your Employees’ Retirement Outlook

As many employees look ahead to retirement, 47% of workers feel somewhat confident that they’ll have enough money saved to retire on time and then live comfortably.1 However, forward-thinking employers have the ability to help their employees work toward a confident and happy retirement. According to the 2018 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), only 17% of American workers feel very confident in their ability to live comfortably in retirement.  Additionally, their 28th annual survey found that another 47% of workers feel somewhat confident about living comfortably in retirement.[1] That means that over 64% of Americans (or 2/3 of your workforce) feel prepared for their retirement future.

To help boost confidence, here are 4 forward-thinking tips proactive employers can do to help improve your employees’ retirement outlook:

Amp Up Auto Features

The majority of plans, nearly 6 out of 10, have already adopted auto-enrollment.[2] A lot of plans started years ago; but back when many employers implemented automatic enrollment, it was at a 3% default deferral, with no auto-escalation feature.

If you’re auto-enrolling employees at a low rate like 3% and leaving the deferral rate there, consider that many retirement-savings experts believe that Americans need to save 12% to 15% every year. Relying on a 3% deferral, even with a match, may limit your employees’ chances of reaching their goals upon retirement.

We can help you figure out whether a higher initial deferral rate makes sense for your participants and for your organization’s budget constraints on match spending. Auto-escalation has become the new norm: 73.4% of auto-enrolling plans now have this feature.2

Strengthen the Match

Many employees take their cue on how much they should save for retirement from the message you send with the employer match you offer. Match 100% of the first 3% of pay that an employee defers, for example, and employees may think they need to save 3% a year to have enough for retirement. In reality, they most likely will need to save more.

We can work with you to analyze your options for a match formula that can help your employees save more for retirement. For some sponsors, this means implementing a “stretch” match that requires employees to contribute more to get the full employer match: Instead of a 100% match on a 3% deferral, for instance, a plan could match 50% up to 6%.

Other employers, realizing the long-term costs to the company if employees do not retire on time, have decided that it makes business sense to offer a more-generous match to employees. According to the 60th Annual Survey of Profit Sharing and 401(k) Plans by the Plan Sponsor Council of America, it was found that employer contributions have increased to an average of 4.8% of payroll, up from 3.8% in 2007.2

Move Forward on Re-enrollment

Even if you auto-enroll, all your eligible employees may not experience the benefits. Many employers implement automatic enrollment only for new hires, not employees already working at the company when auto-enroll started. And some new hires likely opted out of enrollment when they joined the organization, or later reduced their deferral because they faced a budget crunch at the time. They may be in better financial shape now, but most won’t take the initiative to sign up on their own for participation in the plan.

Think about re-enrolling all eligible employees currently not participating in the plan and eligible employees currently contributing less than the initial default deferral rate. So, if you use 6% as your initial default deferral rate, for example, the re-enrollment could include non-participating employees and active participants saving less than 6%. Some employers do a re-enrollment as a one-time event, while others do it every year. We can help you evaluate whether re-enrollment makes sense for your plan.

Send Targeted Messages to Low Savers

Research has shown that people respond more to communications that have been tailored to them individually. Fortunately, recordkeepers have made big strides in their data-crunching and customization capabilities in the past few years. Now they can more easily drill down and identify particular groups of participants in a plan–such as those saving below a particular percentage of their pay—and then do an education campaign targeted to that group, personalizing the communication for each participant.

Consider moving ahead with a customized communication campaign to low savers in your plan, such as those participants not currently contributing enough to maximize the match. We can serve as a liaison between you and your recordkeeper to coordinate a targeted campaign to a particular group of participants.


[1] Employee Benefit Research Institute. “2018 Retirement Confidence Survey.” April 2018.

[2] Plan Sponsor Council of America. “PSCA’s 60th Annual Survey.” Feb. 2018.  

2019 Compliance Calendar

Posted on by Jerome.Pfeffer

Your New 2019 Compliance Calendar for 401(k) Plans!

Everyone loves the compliance deadlines that should be met every year. To help you stay ahead of the curve with important deadlines and filings, please find attached our complimentary 2019 Compliance Calendar. If you have any questions about deadlines or information requested, please contact us to discuss today!

Download the Calendar >>

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