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Retirement Plans

Is Socially Conscious Investing a Breach of Fiduciary Duty?

On June 23, 2020, the Department of Labor issued a proposed rule addressing the circumstances under which a fiduciary of a qualified retirement plan can base investment decisions on socially conscious factors.

What is Socially Conscious Investing?

Socially conscious investing, otherwise known by the acronym ESG, is a form of investing designed to promote social goals.  Under an ESG strategy, an investor screens potential investments based on environmental, social and governance criteria.  Environmental criteria consider how a company’s business practices treat the environment.  Social criteria consider how a company manages its relationship with its employees, customers and its community.  Governance criteria considers a company’s management practices, such as executive pay and shareholder rights.

Under What Circumstances is ESG Investing Allowed?

The proposed rule reiterates that the purpose of a qualified retirement plan is to maximize the retirement benefits of the plan participants.  To that end, investment decisions must be made with one goal in mind – maximizing investment performance.  Because ESG subordinates investment returns to non-financial objectives, it may run afoul of the fiduciary standard set forth in ERISA.

The proposed rule makes five points:
  1. ERISA requires plan fiduciaries to make investment decisions based on financial considerations “relevant to the risk-adjusted economic value of a particular investment or investment course of action”.
  2. ERISA’s “exclusive purpose” rule prohibits a fiduciary from subordinating the interests of plan participants in retirement income to non-pecuniary goals.
  3. A fiduciary must consider all investments available to meet their duty of prudence and loyalty under ERISA.
  4. ESG factors in investment decisions can be a valid pecuniary consideration if required economic analysis establishes that the ESG investment presents economic risks or opportunities that a qualified investment professional would find acceptable.
  5. A 401(k) plan may provide designated investment alternatives.

In announcing the proposed rule, Secretary of Labor Eugene Scalia said that:

Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan.  Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.

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Retirement Plans

The SECURE Act of 2019

On December 20, 2019, President Trump signed into law the Setting Every Community Up For Retirement Enhancement Act of 2019 (the “SECURE Act”).  The SECURE Act is probably the most significant piece of retirement legislation since the Pension Protection Act of 2006.  Here are a few of its most relevant provisions.

  1. Increasing the Age for Required Minimum Distributions

Under current law, participants are required to begin taking minimum distributions from a retirement plan beginning the later of (i) April 1 of the year after they turn 70½ or (ii) the year in which they retire.  The SECURE Act raises the age for required minimum distributions to 72.  This change in law applies to individuals who turn 70½ after December 31, 2019.  It does not affect people who have already begun receiving their required minimum distributions or who turned 70½ last year and are, as a result, required to begin taking distributions by April 1, 2020.

  1. Elimination of “Stretch IRA”

Under current law, if the beneficiary of a decedent’s IRA was a so-called “designated beneficiary”, the beneficiary could take required minimum distributions from the IRA over the lifetime of the beneficiary.  Under current law, the term “designated beneficiary” could include the decedent’s adult children.  Under the SECURE Act, most adult children will no longer be considered a “designated beneficiary”.  As a result, distributions from the decedent’s IRA must be completed within ten years of the death of the decedent.  A decedent’s spouse is still considered a “designated beneficiary”.

  1. Coverage of Part-Time Employees

Under current law, an employer can exclude any employee who does not work at least 1,000 hours in a year.  The SECURE Act changes the law for 401(k) plans.  Under the SECURE Act, a 401(k) plan will be required to permit any employee who works at least 500 hours for three consecutive years to contribute to the plan.  The SECURE Act does not change the rules regarding employer contributions to a 401(k) plan.  So, employers are not required to make contributions for these so-called “long-term part-time employees”.

This change in the law goes into effect beginning in 2021.  This means that the soonest that a long-term part-time employee must be allowed to contribute to a 401(k) plan is 2024.

  1. Lifetime Disclosure Requirements

Under current law, there is no incentive for sponsors of defined contribution plans to offer a lifetime annuity distribution option.  The SECURE Act encourages the use of a lifetime annuity distribution option by requiring sponsors of defined contribution plans to provide a “lifetime income disclosure” on a participant’s benefit statement at least annually, even if the plan does not offer a lifetime annuity distribution option.  The disclosure is an estimate of a participant’s monthly benefit, if the participant were to elect a qualified joint and survivor annuity or a single life annuity.

The Secretary of Labor is required to issue a model disclosure by December, 2020.  This requirement becomes effective no more than one year after the Secretary has issued the model disclosure.

  1. Annuity Safe Harbor

The second way in which the SECURE Act encourages the use of annuity contracts by defined contribution plans is by providing a fiduciary safe harbor for plan sponsors.  The decision whether to offer an annuity option in a defined contribution plan occurs before a plan is adopted.  As a result, the decision to offer the annuity option is not a fiduciary act.  However, the selection of the annuity provider is a fiduciary act, and a plan sponsor could be held liable for the financial well-being of the annuity provider.  The SECURE Act provides a safe harbor for the plan sponsor as long as the annuity provider represents that, for the prior seven years and on a going-forward basis, the annuity provider (i) is licensed by a state to offer guaranteed retirement income contracts, (ii) files audited financial statements, and (iii) maintains sufficient reserves to satisfy the requirements of all states where the annuity provider conducts business.  This safe harbor is available effective January 1, 2020.

  1. Earliest Age for Distributions from Defined Benefit Plan

Most defined benefit plans permit distributions to a working employee upon attainment of a certain age.  Prior to 2006, that age was 65.  After 2006, that age became 62.  The SECURE Act permits in-service distributions to employees as early as the attainment of age 59½.  This is not a requirement, but a plan provision that an employer can adopt.  It becomes effective beginning after December 31, 2019.

  1. Adoption of Plan after Close of Tax Year

Under current law, an employer must adopt a qualified plan by the end of its tax year in order to deduct its contributions to the plan for that tax year, even though contributions do not have to be made until the due date, including extensions, of its tax return for such year.  So, for example, an employer would have had to have created its plan by December 31, 2019, in order to deduct its contributions in 2019, even if the contributions are not actually made until September 15, 2020.  The SECURE Act changes this and provides that the plan can be adopted as late as the due date, including extensions, of the employer’s tax return.  This change is effective for tax years beginning after December 31, 2019.

  1. Pooled Employer Plans

One of the reasons that a small employer might hesitate to adopt a qualified plan is the costs inherent in set-up and administration.  Large employers have greater negotiating power and are able to reduce their costs.  Current law permits unrelated employers to come together under a single plan as long as there is some “commonality of interest” among the employers.  Under current law, “commonality of interest” requires that the employers be engaged in the same industry or share a common geographic location.  The SECURE Act permits unrelated employers to participate in a “pooled employer plan”, even without this so-called “commonality of interest”, as long as the plan has a single trustee, named fiduciary, and administrator and offers the same investment options to all plan participants.  This provision becomes effective for plan years beginning after December 21, 2021.

  1. 401(k) Safe Harbor Plans

There are two ways to create a safe harbor 401(k) plan.  The first is through a matching employer contribution.  The second is through a non-elective employer contribution.  Under current law, a safe harbor 401(k) plan must be adopted before the beginning of the plan year and the employees must receive notice of the adoption of the safe harbor plan before the beginning of the plan year.  The SECURE Act changes the rules with respect to a non-elective employer contribution safe harbor plan.  It eliminates the requirement that participants receive notice prior to the start of the plan year.  In addition, it permits a non-elective safe harbor plan to be adopted at any time during the plan year.

  1. Penalty for Failure to Timely File Form 5500

In order to pay for some of these provisions, the penalty for failure to timely file the Form 5500 was increased to $250 per day with a maximum of $150,000.  For obvious reasons, it is vital that a plan sponsor choose its plan administrator wisely.

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Retirement Plans

Maximum Pension Limits for 2019

Each year, the IRS sets limits for pension plans. These limits are reviewed annually and adjusted for inflation. The following are some important limits in effect for 2019:

  • Maximum compensation for plan purposes is $280,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $18,750 with an annual benefit $225,000
  • Highly Compensated Employee compensation $125,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $56,000
  • Maximum SEP Contribution $56,000
  • Maximum 401(k) Contribution $19,000. Catch-up Contribution for age 50 and over $6,000
  • Maximum SIMPLE Contribution $13,000

CLICK HERE for a PDF copy of the 2019 limits.

Categories
Retirement Plans

401(k) Participation and Deferral Rates Rising

The number of small businesses that have adopted a defined contribution plan is growing significantly.  According to a recent study by Vanguard, both the number of plans and the number of plan participants has increased six-fold since 2013. In addition to increased coverage, many of the plans adopted by small businesses have new and exciting features that radically improve the retirement readiness of employees.

While higher-paid and older employees are still the most likely to enroll in 401(k) plans, the Vanguard study found that nearly two-thirds of all eligible employees participated in a 401(k) plan in 2017. And, for employees, whose plans offered automatic enrollment, participation rates increased to 83%.  This is compared to a participation rate of 58% for plans with voluntary enrollment.  In addition, the deferral percentage for contributions is also up to 9.7% in 2017, from 9.3% in 2016.  The study also found that many plans are now offering a Roth option.  In fact, the study found that over eighty percent of plans offer the opportunity to make after-tax contributions.  This option is particularly attractive to Gen X and Millennials, because it permits tax-free distributions upon retirement.

The increase in participation and deferral rates in defined contribution plans is good news to RMC.  We have been a global leader in pension administration for over 45 years.  For a long time, we have believed that profit-sharing plans with a 401(k) component have been underutilized in the small business market. Below is a quick sales guide to identifying prospects for a defined contribution or 401(k) plan and the benefits offered:

Ideally Suited For:
  • Smaller employers with younger employees
  • Larger employers
Key Features:
  • Flexible contributions
  • Plans benefit all employees, including rank and file
  • Salary deferral
  • Benefits at retirement based on contributions and investment gains or losses
Key Markets:
  • Younger owners and individuals looking for market exposure
  • Ideal for companies with fluctuating income
Plan Types:
  • Profit Sharing
  • New Comparability
  • Age Weighted
  • 401(k)

RMC Group offers IRS-approved documents, plan implementation, training assistance, and a proprietary online proposal system. We will review qualified retirement plan options with you, and help you determine which plan design works best for your client. Additionally, we will help you evaluate your client’s goals and expectations to formulate a plan that works best for your client. To request a quote or discuss retirement plans, contact RMC Group today at 239.298.8210 or [email protected].

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Retirement Plans

Why 401(k) Plans Fail

RMC Group is a proponent of all types of qualified retirement plans; we have been designing, implementing and administering pensions for nearly fifty years. However, we have witnessed a trend regarding defined contribution plans, specifically 401(k) plans that are not fully preparing employees for the financial burden of retirement.

The 401(k) plan was originally conceived as an arrangement to supplement self-funded savings. It was never intended to serve as America’s primary retirement income vehicle, and it is not structured or designed to create retirement readiness. In fact, no defined contribution plan is comprehensive enough to take into consideration factors impacting retirement, like tax planning, health care needs, life expectancy, lifestyle choices, actuarial tables or a host of other financial retirement considerations.

If we assume that the average employee would like to retire at age 65, then an employer that helps its employees become financially ready to retire will have a significant advantage in attracting and retaining good employees over those that don’t.  Unfortunately, a 401(k) plan, as an employer’s sole retirement vehicle, will generally fall short in delivering what most employees need from an employee benefit plan.  While many in the financial industry push 401(k) plans, we believe that an employer that provides only a 401(k) plan will not be helping its employees achieve retirement readiness.

An employer that really wants to prepare its employees for retirement should adopt a defined benefit pension plan, either as an alternative to a 401(k) plan or in addition to a 401(k) plan.  Unlike a 401(k) plan, a defined benefit pension plan provides a pre-determined retirement benefit at normal retirement age.  The benefit does not depend upon the performance of the investments in the employee’s individual account.  A defined benefit pension plan generally will require larger contributions and will provide a greater retirement benefit to employees.  By adopting a defined benefit pension plan, an employer can ensure that its employees will be financially able to retire at normal retirement age.

Employers that offer defined benefit pension plans have an advantage in attracting and retaining good employees over employers that do not. Unfortunately, many employers do not fully understand the different types of retirement plans or the competitive advantage provided by a defined benefit pension plan.  RMC Group can help you and your clients find the best retirement plan for their employees.  We can help you and your clients ensure that their employees will be financially ready for retirement.

Call RMC Group today to request a defined benefit pension plan quote today, or to learn more about how to design, implement, and sell defined benefit pension plans.  We can help you with traditional defined benefit pension plans and fully-insured 412(e)(3) plans. Contact your RMC regional representative today or our pension office at 239.298.8210.

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Life Insurance Retirement Plans

Optimizing Beneficiary Designations for Retirement Plans

As IRAs, 401(k) and other retirement plans become more popular, it is important for advisors to understand the rules regarding the distribution of plan assets after the death of the IRA owner or the employee. The timing of distributions from a qualified plan will depend upon whether the decedent has a “designated beneficiary” and may also depend upon whether the “designated beneficiary” is the decedent’s surviving spouse, children or a trust. Having a “designated beneficiary” may stretch out the period over which plan assets must be distributed; thereby allowing plan assets to remain in the plan longer and continue to grow. As a financial advisor, your clients will expect you to be familiar with the “designated beneficiary” rules.

The rules for qualified retirement plans are found in section 401(a) of the Internal Revenue Code (the “Code”). The rules for individual retirement accounts (“IRAs”) are found in section 408(a). Section 401(a)(9) of the Code provides that a plan is not a qualified plan unless it requires the entire interest of the participant in the plan to be distributed to the participant beginning not later than the required beginning date (the “RBD”). Section 408(a)(6) provides that rules similar to the rules of section 401(a)(9) shall apply to IRAs. Generally, the RBD for both qualified retirement plans and IRAs is April 1 of the calendar year after the calendar year in which the participant or IRA owner turns age 70 ½. Once begun, distributions will generally be made on an annual basis over the life expectancy of the plan participant or IRA owner. The required annual distribution is determined using actuarial tables contained in the treasury regulations under section 401(a) of the Code. But, what happens if a plan participant or IRA owner dies before his entire interest in the plan has been distributed? This is where it becomes important to understand the rules regarding the designation of a beneficiary.

Like any other asset owned by an individual, funds held in a retirement account or IRA pass to a decedent’s heirs after his death. The manner in which plan and IRA assets pass to a decedent’s heirs depends upon a number of factors. First is whether the plan participant or IRA owner dies before his RBD. Generally, if a plan participant or IRA owner dies before his RBD, plan assets must be distributed within five years. Second is whether the decedent’s beneficiary is a “designated beneficiary”. The term “designated beneficiary” is defined in section 401(a)(9)(E) of the Code as “an individual designated as a beneficiary by the employee”. Whether a beneficiary is a “designated beneficiary” is of utmost importance. If the decedent has a “designated beneficiary”, then the distribution may occur over the life expectancy of the “designated beneficiary”, whether or not the plan participant or IRA owner dies before his RBD. Third is whether the “designated beneficiary” is the decedent’s spouse. A spouse may further delay the distribution of plan assets. In certain circumstances, a trust can qualify as a “designated beneficiary”. Your clients will depend upon your advice in determining whether and how to choose a ‘designated beneficiary”.

Here are some of the rules regarding the distribution of plan or IRA assets after the death of the plan participant or IRA owner.

Spouses

The distribution rules treat a spouse more favorably than any other beneficiary, especially if the spouse is the decedent’s sole “designated beneficiary”. A spouse has a number of options: Like any beneficiary, a surviving spouse may elect to take an immediate, lump-sum distribution of plan assets on a taxable basis or may take annual distributions over a period of time.
A surviving spouse may elect to treat the decedent’s account as his or her own; in which case the surviving spouse will be considered the owner of the account for all purposes If the plan participant or IRA owner dies before his RBD, and the sole “designated beneficiary” is his surviving spouse, then distributions may be made over the life expectancy of the spouse, with distributions commencing the later of the end of the calendar year immediately following the calendar year in which the decedent died or the end of the calendar year in which the decedent would have attained age 70 ½
If the plan participant or IRA owner dies after distributions have commenced, then, unless the surviving spouse elects to treat the account as his or her own, distributions must be made over the longer of the spouse’s life expectancy or the remaining life expectancy of the owner
Non-Spouses

A “designated beneficiary”, who is not the plan participant or IRA owner’s surviving spouse, has many of the same options as a spouse. However, if the plan participant or IRA owner dies before his RBD, a non-spouse “designated beneficiary” must begin taking distributions on or before the end of the calendar year immediately following the calendar year in which the plan participant or IRA owner died. A non-spouse “designated beneficiary” cannot wait until the plan participant or IRA owner would have attained his RBD if later.

Trusts

If a trust is named as the beneficiary of a plan participant or IRA owner, then the beneficiaries of the trust will be treated as “designated beneficiaries” as long as certain requirements are met. The trust must be valid under state law and must either be irrevocable or become irrevocable upon the death of the plan participant or IRA owner. In addition, the beneficiaries of the trust must be identifiable. If these requirements are met, then the trust beneficiaries will be treated as “designated beneficiaries”, and distributions will be made in accordance with the “designated beneficiary” rules.

A plan participant or IRA owner has many other issues to consider. He or she may want to designate more than one beneficiary. An IRA owner may desire to make charitable distributions from his or her IRA. The distribution rules are technical in nature and very complex. Clients need to work with experienced and knowledgeable advisors, who not only know the rules, but can help them to fill out the required forms. Periodically reviewing your clients’ beneficiary designations to make sure they reflect their current needs and desires and comply with the rules is a good way to maintain contact with your clients and add value.

For more information or helping setting up a retirement plan, contact RMC Group today at 888.599.5553 or [email protected].

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Retirement Plans

When a Profit Sharing Plan is Not Enough

Your client has a Profit Sharing/401k Plan that has been in place for several years. He is generally satisfied with the performance of the plan but desires greater retirement benefits than those provided by a Profit Sharing/401k Plan.  In addition, he is interested in putting more money away for retirement.  This is a common problem, as a business grows and becomes more successful, and is easily addressed by the adoption of a defined benefit plan.

The maximum deductible contribution to a Profit Sharing/401k Plan is currently $55,000 per participant.  If we assume that your client is age 55 and plans on retiring at age 65, and we further assume that he will make a $55,000 contribution for 10 years and earn 3% interest, he will have $720,275 at retirement.

If your 55-year old client adopted a defined benefit plan, he could make a contribution of approximately $211,060 per year for ten years and have $2,572,120 at retirement.  In addition, your client could maintain his Profit Sharing/401k Plan. However, in most cases, the contribution to the Profit Sharing/401k Plan would be limited to 6% of compensation, plus the 401k elective contribution and catch up contribution if the participant is age 50 or older.

As part of the annual review of his retirement plan, your client is depending on his advisors to assess his needs and provide options that will meet his objectives. Too often, the client’s CPA is not familiar with the rules regarding qualified pension plans, and, as a result, the opportunity to increase retirement income is not presented to him.  We urge you to discuss the merits of a defined benefit plan with your clients and CPA contacts. Your clients will thank you for it. For more information, contact RMC!