PAVING THE ROAD TO RETIREMENT

Posted on by Jerome.Pfeffer

Pfeffer, Blog 2

 

“Where we’re going, we don’t need roads.” However, “without a map, you’re nowhere.”

In this blog post, we are going to explore plan design concepts, so that employers can understand the macro and micro impacts of offering a comprehensive company-sponsored retirement plan (such as a  401(k), 403(b) retirement plan).

Let’s talk about plan design.  Now, just because your company offers a retirement plan doesn’t mean you have an efficient plan. To think of it another way, plan design is like a road.  It is a path that allows a rider to get from point A to point B.  Plan design is composed of the foundation rules that govern what is permissible in the plan.  For example, plan design determines:

Said another way, if you were driving from Albuquerque up through Southern Colorado, would you rather drive on a backroad with tolls, speedbumps, and potholes or a free, smooth, clean highway?

Most people would prefer the highway. As a plan sponsor, you determine the road. Let’s take a peek at the obstacles and repairs.

 

TOLLS OF ENTRY

Examples of barriers of entry in a company sponsored retirement plan include:

  1. Age restrictions – employee must be least 21 years old
  2. Service requirements – employees must complete at least one year of service
  3. Restrictive enrollment dates – limited plan year entry dates[1]

By removing the restrictions, you allow your employees to immediately participate in the company’s retirement plan.   One trend that is quickly catching on is auto-enrollment.  Many companies are now automatically enrolling employees.    If you are interested in learning which companies, click for a public list of companies that support auto-enrollment.

SPEEDBUMPS

We all save differently.  As a plan sponsor, you have the ability to offer your employees different options, such as, allowing your employees to select from pre-tax and Roth deferrals. When the Pension Protection Act of 2006 was enacted, it permitted the inclusion of Roth deferrals. Now, after nearly 10 years, approximately 1 out 2 (52%) plans offer the Roth feature.[2] In turn, this allows your employees to choose the best savings option based on their financial situation.

By giving your employees the freedom to choose which savings vehicle is best, you individualize the retirement planning choices for your employees.  Also, if your employees have older 401(k) accounts and would like to consolidate, by offering different savings account types, it is easier to roll-in account balances. The employee can just transfer the account in a like-to-like capacity.

POTHOLES

In many companies, different people are paid different incomes, and, from a 401k perspective, if you own more than 5% of the business, or if you are a direct blood relative of the business owner, or if you make more than the 414(q)(1)(B) limit, (for 2015/2016 it is $120,000 per year) then you are considered a Highly Compensated Employee (HCE).[3] Well, as you might know, there are different retirement plan testing rules for HCEs and Non- Highly Compensated Employee (NHCE).  If your plan design doesn’t support maximizing retirement plan contributions, then you might experience a failed ADP/ACP and thus you may have to make corrective distributions. Nobody likes that.

Therefore, by having a Safe Harbor plan, you avoid the ADP/ACP testing.  For more information on plan design, we recommend that you speak with an experienced Third Party Administrator (TPA) and conduct a plan design review.

Plan design is specific to each company and certain companies might not want to add certain features, which is why it is important to speak with an experienced retirement plan advisor and a TPA.

We hope you have now learned about plan entry, how to increase the types of retirement savings accounts, and the importance of working with a TPA to design a plan that fits the needs of your business.

Thank you for reading and stay tuned for our next post about the retirement planning journey.

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This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory Services Offered Through LPL Financial A Registered Investment Adviser. Member FINRA / SIPC.

 

[1] “Guide to Common Qualified Plan Requirements.” IRS. 2015. http://www.irs.gov/Retirement-Plans/A-Guide-to-Common-Qualified-Plan-RequirementTas#1

[2] 2014 PlanSponsor DC Survey.  All Industries.

[3] IRS Announces 2015 Pension Plan Limitations; Taxpayers May Contribute up to $18,000 to their 401(k) plans in 2015.  IRS.  October 23, 2014. http://www.irs.gov/uac/Newsroom/IRS-Announces-2015-Pension-Plan-Limitations-1

 

 

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