Blog Articles

Yes, Any Size Business Can Offer A 401K Solution

Small business owners recognize that offering employees a 401K savings plan as part of their overall compensation package delivers several significant benefits. Previous generations of workers often planned for their futures using more predictable savings vehicles like traditional pensions. However, many of today’s employees don’t have pension plans. Instead, these workers rely heavily on 401K plans to supplement any social security income they may have once they leave the workforce, making them a highly coveted employer benefit.

As a result, smaller organizations offering retirement plans to staff can use these services as a major differentiator when sourcing top-tier talent. Of course, 401K plans are more than just a valuable recruiting and retention tool. Yes, offering a retirement savings strategy demonstrates an organization’s commitment to investing in its workforce, but a 401K plan also provides potential tax savings opportunities to business owners, which makes these savings vehicles a win/win for both employer and employee. 

Small Businesses Can Leverage Automated Digital Solutions To Support 401K Benefits

The bad news? Traditional 401K programs were typically unattainable for startups and smaller organizations. Administrative burden and the threat of non-compliance penalties often made offering a plan to employees too risky and cost-prohibitive for smaller organizations. The good news? Retirement savings options have evolved significantly over the last several years, becoming far more attainable for small business owners who were deemed too small. Online, automated platforms leveraging state-of-the-art technology has redefined available options as part of their compensation plans. Knowing the basics of how these innovative and flexible digital solutions work can help you decide if it’s a good fit for your organization.  

Even The Smallest Companies Can Access A 401K Plan for Employees (Yes, Really)

The first thing to know about automated retirement savings plans is all small businesses can access and offer a 401K plan for staff members without exorbitant fees and heavy penalty risks. A dynamic online solution delivers far more flexibility than traditional products that have limited features and stock design options. These innovative, automated plans include a wide range of savings features, including Safe Harbor Plans, Roth and Traditional options, and other components that further customize the plan offered to employees. Business owners and HR leaders can curate their selections and are charged one flat monthly fee per employee for an affordable and convenient experience. 

Online 401K Plans Deliver Several Significant Benefits to Small Businesses 

Beyond customization options, an online retirement savings model delivers multiple benefits to small business owners who don’t have the time or resources needed to coordinate a retirement savings program manually. A capable provider will offer an automated solution that eliminates the need to input employee and plan data by hand. Additionally, a digital 401K savings plan puts complete control into the hands of employees. Every user can log-in to their specific page to monitor results and make changes as needed. Best of all, an automated 401K savings plan will fully connect with your existing payroll system for seamless integration that accelerates paycheck withdrawals accurately and compliantly. 

Contact 401GO Today

401GO helps business owners, HR specialists, and financial advisors create customized 401K savings strategies for employees and clients. Contact us today to learn more about our affordable and innovative retirement benefit solutions.

Pay off debt first or contribute to 401(k) first: How to solve your confusion

Americans who are having debt-burden on their shoulder, this question whirls up to their mind again and again.

 “Whether to pay off the debt first or contribute to 401(k) first?”

With this question, a dilemma runs on an American’s mind: how much of your earnings will you use for debt repayment and how much money will you contribute to your 401(k) account?

There is plenty of advice that you have listened to already and are going to listen to that you can pay off your debt first and then you may think about saving in the 401(k) and to your other retirement savings plans.

Yes! This idea or advice is right. You can follow it but there is a glitch to the plan.

Your age will be the vital factor to decide whether to repay your debt first or to save for retirement first.

If you are still young, it means you have time to save for retirement. You can repay your student loan, multiple credit card debts then you can slow save for retirement. You have time as you are young.

But this plan to pay off your debt first and then save for retirement won’t work for you if you have already crossed 30. Because you don’t have that much time in your hand like the early 20s young Americans.

 So, what is the ideal way? The correct way is to pay off your debt and save for retirement; both at the same time.

Look at yourself in the next 2 or 3 years

If you are determined to repay at least your unsecured debts in the next 2 to 3 years, you may be free of debt in the next 3 years but you are going to miss the retirement savings for the next 3 years.

If you have a 401(k) account and if you are not contributing at least your company’s match to pay off your debt first, then you are going to miss the next 3 year’s retirement savings.

Maybe, in the next 3 years, you were successful in repaying a major portion of your debts but you have to start all over again with your retirement planning. 

So, to pay off your debt first and then concentrate on saving in the 401(k) along with other retirement savings is not going to work for you.

You have to create a balance between retirement savings in 401(k) and debt repayment.

What is the benefit of contributing to a 401(k) account?

The 401(k) is an employer-sponsored retirement plan. You can lessen your taxable income by accepting the 401(k) offer because your company will deduct your contribution on a pretax basis. It means the 401(k) deduction will reduce your taxable income. You have to pay less income tax as an employee after contributing to your company’s 401(k) plan.

Besides the tax benefits, many companies match a part of its employees’ 401(k) contributions. The match establishes a portion of the employees’ compensation. Most of the time, the contribution by the employer is 3% on an average of the employees’ salary but they can give up contributing to an employee’s 401(k) account if the employee does not contribute his/her portion in the 401(k).

So, in brief, for receiving the benefits of the 401(k) account, you have to contribute to the 401(k) also.  

Listen to what personal finance experts are saying

Personal finance veterans who are experiencing such types of problems for years, have chalked out a well-balanced plan for you. Thus, you can pay off your due debts and save money to your 401(k) account at the same time.

Read the 3 Points financial recommendations created for you by the financial veterans.

1. You may start with repaying your high-interest credit card debts and payday loans if you have any payday loan. While making payment to your high-interest credit card debts and trying for a payday loan settlement, you may try to match at least your company’s contribution to 401(k). Thus, you can maintain a monetary contribution to 401(k) as well as paying off your high-interest credit card debts and payday debts.

2. When you’ll make the complete payment of your high-interest credit card debts, concentrate on your relatively low-interest credit card debts or the other debts you have. You may pay more than the minimum amount to your low-interest debts. Along with it, you must continue contributing to your 401(k) account.

You can start an Emergency Fund bank account if you think you may again be compelled to take out high-interest debts. The emergency fund will save you from taking out high-interest debts. So, the dilemma of paying off your debt first or continuing to contribute in 401(k) first, will never emerge in your mind. 

3. When you will be able to repay a major portion of your low-interest debts, then pay your full attention to increase your retirement savings that include the 401(k).

If you adopt this plan of 3 Simple points, your debt payment will be over and you can maintain your contribution to the 401(k) and other retirement savings accounts.

You can take the expert’s help also to get a permanent solution to your dilemma

If the article is not able to solve your confusion then there will be no harm if you accept the expert’s advice to get a permanent solution to your dilemma.

According to David Blanchett, Head of CFP, CPA, Retirement of Morningstar, 40% of Americans who have accepted the expert’s advice, get a perfect and correct solution to their paying off debt versus contribution to 401(k) first problem.

The survey says the Americans who have not consulted any professionals, are still struggling with both paying off debt and contributing to the 401(k) problem.  

Your consulting expert can help you to create a plan to get out of your debts, making appropriate contributions to your 401(k) account, and how to maximize your other retirement savings.

So, you can ask a financial expert if you have any dilemma regarding how to find a permanent solution to your financial problem.

Final words,  

Overall, you need to maintain a balance between your debt payment and contributing to the 401(k). For example, you need to pay off your high-interest credit card debts and the payday loans first but there is no need to show any hurry to repay your mortgage loan as it has a low-interest rate. So, the better idea is to take care of your debt payment as well as concentrate on your future savings also.

Author Bio: Catherine Burke is a financial writer for online payday loan consolidation. She provides information on successful cash loans and payday loan consolidation to help people get over a difficult patch. She lives in Kansas and has earned a frame in the matter of payday loans. 

Why a Safe Harbor 401(k) Plan?

When it comes to selecting a 401(k) plan, you may not know where to start. You may also be confused by the options that are presented to you, and in many respects do not know what questions to ask even when the opportunity is given.

I want to help everyone understand why you should add what is called a “Safe Harbor” provision to your 401(k) plan. There are a couple things to look over before this option makes total sense.

Let’s first look at one thing that is actually a pretty big deal when it comes to offering a 401(k) Plan. That’s the nondiscrimination testing and how it affects you and your retirement benefit.

Quite simply, every year, every 401(k) plan must go through the nondiscrimination testing. There are multiple tests within this that we don’t necessarily need to unpack, but two of these tests in particular are important to know.

Nondiscrimination Testing

The two prominent nondiscrimination tests are the following:

  • ADP/ACP Test
  • Top Heavy Test

I’ll only provide a short summary here for these tests to give you perspective.

ADP/ACP – Average Employee Deferrals/Employer Contributions

The ADP/ACP looks at all those highly compensated employees (anyone that earned over $125,000 in 2019 would be considered highly compensated) and/or has over 5% ownership in the company. This test then compares the average contribution by these highly paid individuals to those that don’t fit that criteria (we’ll refer to those as “staff employees”). This test happens every year. If the participation from the highly compensated employees exceeds a certain percentage of those staff employees, we’ll say by 2%, this test will fail.

  • E.g. If the average of the highly paid employees and/or owners is 8%, while those staff employees is 4%, the plan would fail this test. The 2% threshold would mean the highly paid and ownership group couldn’t exceed 6% for their average.

The result? There would need to be a refund of some (perhaps all) contributions made by those highly compensated employees (this includes owners regardless of pay). OR you can make an employer contribution to all employees that are not highly compensated. It isn’t exactly this cut-and-dry, but I think you should know that possible refund or mandatory contribution is required if this test is failed.

Top Heavy Testing

The Top Heavy test looks at those “key” employees, which are your executives and owners. If at the end of the year the total 401(k) plan balance (everyone) has over 60% from these key employees (executives, owners, etc.), then the plan fails the Top Heavy test and would have to make a contribution up to 3% to all non-key employees (this could even include some of those highly compensated employees) in any year afterward that those key employees make contributions.

More info can be found in this article HERE.

  • E.g. If the total 401(k) plan assets are $200,000, and $122,000 (61%) of those total assets are key employee assets, then it is a Top Heavy failure.

Now that we have the confusing testing portion out of the way, let’s look at the Safe Harbor option and why they are great for a small business.

A Safe Harbor 401(k) Plan is one in which you, as the employer, agree to using a certain formula to match or provide contributions to your employees that participate in the plan. The biggest perk to having this Safe Harbor provision is that it gives you an exemption from the tests previously mentioned. Yes, that’s right, EXEMPTION. So, if you fail any or both of those tests, you’re exempt from the results if you are Safe Harbor.

Safe Harbor Choices

What are your options for Safe Harbor?

Here are the different Safe Harbor options by name:

  • Basic Safe Harbor
  • Enhanced Safe harbor
  • Qualified Automatic Contribution Arrangement (QACA) – “Safe Harbor Auto-Enrollment”
  • Safe Harbor Non-Elective (Profit-Sharing)

Let’s go through each one of these so you can understand how they work and more fully know the options and costs.

Basic Safe Harbor

This is the lowest cost Safe Harbor if you don’t add an auto-enrollment. Essentially, you only match what is deferred into the 401(k) plan by employees participating.

Formula – Match 100% up to 3% of employee deferred pay and 50% after up to 5%. Total expense is 4% if an employee puts in 5% or more.

E.g. – An employee is paid $1,000 on a pay check and wants to put in 5% of pay. This is a total of $50. As an employer using this Safe Harbor you would match 4% (max), and it would be $40 in this example.

Any employer matching contribution is 100% vested. That means, once it goes into the employee’s 401(k) account, it is theirs.

Enhanced Safe Harbor

This is considered a very rich employer match for your employees.

Formula – Match 100% up to 4% OR 5% OR 6% of employee deferred pay. You would have to pick one of these formulas, you couldn’t switch between them.

E.g. If you selected Enhanced Safe Harbor 4%, an employee paid $1,000 and wanting to contribute 4% of pay, which is $40, would receive a match of $40. Again, 4% is the maximum employer match.

Any employer matching contribution is 100% vested.

Qualified Automatic Contribution Arrangement (QACA)

This is typically referred to as a “Safe Harbor Auto-Enrollment.” That is because it combines the component of auto-enrollment (if your employees don’t “opt-out” from being enrolled into the plan, then they will be automatically enrolled).

Formula – Match 100% up to 1% and 50% after up to 6%. Total expense to the employer is 3.5% if the employee puts in 6%. (Please note, although the total expense is lower and the employee has to defer more of their pay in order to receive more match, the auto-enrollment part of this shouldn’t be overlooked. It will pull more employees into the 401(k) plan through inertia.)

E.g. If you selected a QACA Plan, an employee paid $1,000 and wanting to contribute 6% of pay, which is $60, would receive a match of 3.5% or $35. The maximum is 3.5% employer match. So, even if an employee put in 20% of pay, the employer would only be putting in 3.5%.

You can choose between a few vesting options. You could select a 2-year cliff (1 year – 0%; 2 year 100%), a 50-50 split (1 year – 50%; 2 year – 100%) or 100% vested immediately.

Safe Harbor Non-Elective

This is a Safe Harbor profit-sharing. It can be up to 6% of employee pay, but is typically at 3% of annual pay. You would have to make that decision annually, and cannot reduce 6% down to 3%, for example.

Formula – Employer non-elective (not related to employee deferral contributions) is 3% of eligible employee’s gross pay (required annually). Eligible pay is $285,000 in 2020 (so if someone has over that amount it would cap there and would be 3% of the $285,000).

E.g. If you have 5 eligible employees and their gross pay $300,000, then your required Safe Harbor Non-Elective contribution would be $9,000 (3% of pay respectively).

This is 100% vested.

Now, why would you choose Safe Harbor if you have to provide for an employer contribution and follow a specific set formula? The two main reasons are the exemption from the nondiscrimination testing and the reduction in business taxes from that employer contribution. Employer contributions into a 401(k) plan go in pre-tax. So, figure your total tax liability and consider your pre-tax contributions.

It’s always recommended to talk with a tax professional for more details on the tax benefits, but in general, if you could give a benefit to your employees instead of paying that amount in taxes, would you do it?

At 401GO we have many different plan design options, including all the Safe Harbor plans mentioned in this article. Plus you can get set up in under 15 minutes. It’s easy to use, and handles all aspects of the required annual administration. Talk to us today to more fully understand these options.

Why a 401(k) Syndicate is the Best Option for a Chamber of Commerce

When it comes to the 401(k) retirement benefit, it’s important to make it easy-to-use and flexible. In fact that is why technology can do so much in the ways of simplifying and improving how saving for the future is viewed and implemented. When you combine the use of technology with organizations, such as a chamber of commerce (chamber), you’ll find a very powerful and unique relationship.

In an effort to build out a network and expand a retirement offering like the 401(k) plan, you could simply leverage an already established network found within a chamber. This is easier said than done, but the reciprocal benefit found from a chamber aligned with what 401GO offers, referred to as a 401(k) Syndicate, opens up a completely new and exciting opportunity.

To give a little history, the traditional offering for a retirement benefit plan with a large group of employers, such as those members within a chamber is to create or sponsor a multiple employer plan or MEP. However, I have to say that the MEP is simply the wrong fit for this type of organization.

For a number of reasons an MEP doesn’t work for a chamber. Here are the top three:

  1. An MEP puts the fiduciary responsibility onto the chamber. In other words, the chamber must be the sponsoring organization, which means they will hold a trustee role and be required to oversee the MEP’s operations and service providers.
    • There are options coming down the pipeline that would allow other organizations to take much of this from the chamber, but it comes at a cost.
  2. The cost of an MEP should always be understood before starting down that path. It’s expensive to get off the ground, and requires many service providers, which then adds even more to that number down the line. Not to mention, once this is started a chamber is hooked into it. It’s not easy to just walk away once you get going (like a boulder barreling down a mountain, it won’t stop until it’s made an impact).
    • Consider the time expense and if the chamber would have to hire someone to keep up and maintain that MEP.
  3. A chamber’s model doesn’t make sense with an MEP. They are a resource for their members, and would instead want to provide an offering or benefit instead of being the sponsoring organization. It also blurs the line with some of their members in the financial services. While some organizations are more aptly suited, such as an association or even a PEO, an MEP might make more sense.
    • If the MEP is costing the chamber money it can quickly become the focus and distract from the resources and education for which they are wanting to provide.

As states ramp up Secure Choice retirement plan alternatives, it would be timely to look at how a chamber can be a player in providing an option to their members. Additionally, there are many opportunities that come up with the SECURE Act with regard to costs and grouping retirement benefits (you can find more information about this here). Moreover, a group 401(k) plan gives flexibility to the chamber in terms of providing a resource to their members, instead of sponsoring something that puts them in a bit of a pickle with those members that are trying to provide similar or the same services. That is why the 401(k) Syndicate meets and matches most of the criteria previously mentioned.

A 401(k) Syndicate:

  1. A 401(k) group offering in which the chamber has no fiduciary obligation or responsibilities.
  2. This runs outside the chamber in a way that does not disrupt the resources they are trying to provide their members. Instead it is something more easily referenced for those members in which overlap in the industry (benefit and investment advisors more specifically).
  3. Each employer is setting up their own 401(k) plan within an automated railway. The plan design options are ideal and easily adopted through the 401GO platform. (A 15-minute setup should certainly save on the time expense.)
  4. The chamber can co-brand to allow for their members to look to the 401(k) Syndicate as a cohesive retirement benefit. They would continue to rely on the chamber for those services without the contradictory pushiness of an MEP that has the underlining pressure of joining instead of being optional.
    • Think of the co-branding as having the chamber logo for all those businesses when they login, on both the employer and employee level.
  5. As mentioned numerous times in this article, one of the best things about a 401(k) Syndicate is the flexibility. If there is a business member in the chamber that works with a financial advisor that they would like to link up for their 401(k) plan, they don’t have to give that up. A 401(k) Syndicate can accommodate many financial advisors within it.
  6. Cost may be last on this list, but certainly not unimportant. A chamber can offer a 401(k) Syndicate to businesses with under 50 employees for $9 per participating employee a month (no setup, document, filing, administrative fees, etc.).
    • A chamber can also arrange an even more reduced cost to the $9 per participant per month or receive a referral credit.*

Keep in mind, there are a lot of options out there, but when it comes to the benefit in the retirement space for 401(k) plans, automation is king. Not only does it open options such as the 401(k) Syndicate, but it also creates efficiencies that only improve features and reduce cost.

At 401GO we think a partnership with a chamber is the ideal combination to leverage the network of members and power of automation. For more information on partnering with 401GO, please visit our partner site here or schedule a meeting here.

Additional resource pertaining to this article:
https://www.cnbc.com/2019/09/30/small-firms-may-have-a-new-way-to-offer-401k-plans-to-their-workers.html

State Secure Choice Programs: Helping Your Clients Navigate Their Options

  • A guide for Advisors, Accountants, Benefit Brokers, Payroll Providers and other practitioners to help guide your employer clients with employees in the affected states.

Overview

Everyone deserving the option to retire is a noble philosophy that modern U.S. society has embraced.  Paying for this, on the other hand, has been a mixed bag.  Social Security provides a bare minimum of benefits which leaves us with personal savings such as 401(k)s, 403(b)s  and IRAs and for a dwindling fortunate few, defined benefit pension plans.  Many states (and some large) cities have taken action to thwart the looming social costs of supporting millions of elderly who won’t have sufficient personal retirement savings.

These states have put into place Secure Choice programs where employees will have access to a workplace retirement account. Most states such as CA, OR, IL, MD, NJ, CT and NM are making it mandatory for employers (based on a minimum number of employees) to participate in Secure Choice OR have their own qualified employer-sponsored retirement plan such as a 401(k) plan, SEP IRA, SIMPLE, 403(b) plan, or defined benefit pension plan.    Secure Choice programs have thus far withstood numerous court challenges (specifically, California) and opposition from the federal government (since 2017).

Some other states such as NY, VT, WA and MA have voluntary programs (not a mandate) such as open Multiple Employer Plans (MEPs) or state facilitated marketplace programs.  Many states are actively filing legislation to develop Secure Choice programs or study them in more detail.

Secure Choice may be a great fit for many employers and their employees.   However, between the required work placed on the employer and the costs to employees, there are other options available. The purpose of this guide is to help you as a trusted partner for your clients to help them make the right choice.

What do the Secure Choice Programs look like?

(based on IL, CA and OR thus far)

  • Roth IRAs (Traditional IRAs planned for future availability)
  • Institutionally priced investment options including:
    • Target Date Funds
    • Capital Preservation Fund(s)
    • 1-3 Index funds
    • ESG fund (CA only)
  • Automatic enrollment at a 5% default rate
  • Payroll deducted contributions
  • Annual increases of 1% (except IL)
  • Employee paid/ No Employer fee
  • Not an employer sponsored plan and exempt from ERISA

For CA and OR the 1st $1,000 for each employee goes into a Capital Preservation fund (money market fund) unless the employee opts otherwise. Account balances over $1,000 are then defaulted into an age-appropriate target date fund.  IL has  a 90 day period where contributions are held in a cash fund and then moved to an age-appropriate target date fund.

Employers (or their designees)  must add and update employee rosters, send payroll deductions and make changes to employee deductions as directed by the Secure Choice program administrator.  As of this writing, there is no automation with payroll providers to facilitate this however, Ascensus (the program administrator for all 3 states currently in operation) is developing it.  File Transfer Protocol (FTP) file transmission is available too. Some programs hold the employer responsible for providing enrollment materials to employees or providing the program administrator their email address.

The employer is expected to be unbiased and have no role in helping employees to decide to participate or how to invest.  This is intended to protect the employer from ERISA fiduciary liability. That said, the current federal government doesn’t share this view and there is the potential for additional litigation.

Ascensus, the program administrator, handles employee service, withdrawals, beneficiary designations, etc. They also provide the employer portals and tools for employers to perform most of their administrative responsibilities under the Secure Choice Programs.

Enforcement of employer responsibilities is handled by the States and not Ascensus.

Even if you have a client that already has a workplace retirement plan, each state with a Secure Choice mandate does require each employer to register their exemption with the program to avoid future notifications regarding compliance.  There are no direct penalties thus far about complying with this requirement, just the implied harassment factor.

Here is a summary of the 3 states that have mandatory Secure Choice programs and 4 key considerations for each state’s respective program.

State/ ProgramWhen Effective/Required EmployersWhen must employees be added (from their hire date)?Employer Fines for Non complianceEmployee Fees (annually)

Illinois Secure Choice

NOW in effect! 25 or more employees and  2 years in operation60 daysUp to $500 per Employee annually0.75%

Oregon Saves

NOW in effect! Employers with 5 or more  employees

 

Employers with 4 or fewer employees: by January 15, 2021

60 days$100 per eligible employee, up to a maximum penalty of $5,000 per year~1.0%

California

CalSavers

Open now

 

>100 employees by September 30, 2020 

>50 employees by June 30, 2021

5 or more employees  by June 30, 2022

30 daysUp to $750 per Employee0.825% to 0.95%

States with Secure Choice Programs in Development

State/ ProgramLatest Progress/ When expected?Required EmployersOther
MarylandSavesApril 30, 2002 Deadline for provider RFPs10 or more employees that work 30 hours/weekPlans to have a managed payout fund (retirement income)

 

Offering $300 credit for each employer

New JerseyExpected, March 28, 2021. Can be pushed back by 1 year.

 

To be rolled out in phases, with large employers going first.

25 or more employees (2 years of operation)$500 per employee fine for failing to timely enroll employees with potential increasing penalties for multiple violations.

 

Employers that fail to deposit any portion of contributions will be subject to a penalty of $2,500 for a first offense and a penalty of $5,000 for the second and each subsequent offense.

ConnecticutApril 2020, selected Sumday, a subsidiary of BNY Mellon, as the administratorMore than five employees that are at least 19 years old and making at  least $5,000 annually 
New MexicoSigned into law Feb. 2020  

Top 10 Types of Employers That Should Use a 401(k) Plan Instead of Secure Choice.

Please note, there are options other than 401(k) plans an employer can adopt that exempt mandatory participation in Secure Choice.

1. Does the employer have a lot of employee turnover and/or a lot of part time employees?

Many employers such as ones in retail, food service, agriculture and temporary labor often experience high rates of employee turnover especially within the first 3-6 months of employment.  Secure Choice essentially requires all W2 employees (age 18 or over) to be added to the employer’s roster through Ascensus within 30-60 days of hire. This can be quite an administrative burden for most employers.  Plus, there is the risk of fines for non-compliance.

A 401(k) plan can limit eligibility to employees who work 1,000 or more hours in a year and/or have 1 year of tenure.  With the recently passed SECURE Act, part time employees are allowed to participate in a 401k after achieving 500 hours of service each year for three consecutive years.

2. Would automatic enrollment cause confusion for their employees?

As effective as automatic enrollment has been to help nudge better individual savings behaviors, it has had the unintended consequence of creating employee HR communications problems for employers. Employees may not see or understand communications and may realize what is happening after they notice a change in their take home pay.  They will typically inquire with their employer’s HR /payroll function about what is happening.  Even then, the employee must then contact Ascensus to stop or change the deductions, risking more confusion and delays.

3. Are there a lot of highly paid employees or employees that already have personal IRAs?

Keep in mind Secure Choice programs are basically Roth IRAs subject to IRA contribution limits that fall on the individual employee to monitor.  This is made especially more challenging for employees automatically enrolled (as mentioned in #2) who may not be paying attention.  Roth IRAs are also subject to annual income limits up to $124- $139K for single filers & $196K- $206K for joint filers as to how much can be contributed.  This table breaks it down in more detail.

FeatureSecureChoice  Roth IRA401(k) Plan Retail Roth IRA
ProviderAscensus onlyMany optionsMany options
Investment optionsState Board selects

 

Employer has no say.

Very limited: Target Date funds, Capital Preservation fund and 1-3 Index funds.

No advice or management available.

Employer can select

 

Usually more options available plus advice and management options.

Employee can select

 

Most options available plus advice and management options.

Employee Contribution limitsRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits$19,500 Pre Tax and Roth ($26K for Age 50+)  Key & highly compensated employees potentially limitedRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits
LoansNoYesNo
Ease of withdrawing fundsEasy, any time and reason) Tax impacts though.

 

More exemptions to early w/d penalty

No Fee

More restrictive,

 

Typically charges a fee.

Easy, any time and reason) Tax impacts though

 

More exemptions to early w/d penalty

Fees vary

Employer Contributions (ie Company Match)NoAllowed, optionalNo
Automatic EnrollmentMandatoryOptional (depending on provider)Not applicable, Individual chooses
Fees/CostsEmployer- None

 

Employee- (0.75-1.00%) of account balance

Employer- Varies (some are 0)

 

Employee- Varies (some are 0)

Average Total cost is 2.23%  per 401k Averages Book

Employer- NA

 

Employee- Varies (many are free)

4. Does the employer have employees in multiple states especially in states with mandatory Secure Choice programs?

If so, this can be an administrative nightmare and can create an unfair balance of benefits in employees varying by their state of employment.   It would likely be much easier to have a 401(k) plan for ease of administration and consistency with employee benefits.

5. Could the employer and employees be subjected to Ascensus’ marketing and sales?

Ascensus is a large, well known provider of retirement and savings products and is well regarded in the industry.  Vanguard entrusts its small plan 401(k) plans to Ascensus. Thus far, IL, OR and CA have selected Ascensus as their sole Secure Choice provider.  Ascensus provides its own suite of retirement plans and other employee benefits. States may have limitations in their contracts with Ascensus regarding direct marketing of their products.  Even so, employees and employers will have a relationship with Ascensus through Secure Choice.   Entering the Secure Choice business is certainly an entrepreneurial endeavor for Ascensus who is taking the risk that it will eventually be profitable.  That said, Ascensus has had its fair share of setbacks between private equity firms exchanging ownership stakes, a botched IPO plan  and a recent acquisition binge.

6. Is the employer sensitive about sharing private data with a provider they have not vetted themselves? 

Employee data such as Social Security Numbers (SSNs), e-mail and mailing addresses and other personal information as well as the employer’s Tax ID number and bank information must be shared with the program administrator, Ascensus.  By all accounts, Ascensus has the requisite cyber security bonafides, but what if there is a breach?

7. Is the Employer technology-challenged/overwhelmed?

The employers’ responsibilities under Secure Choice require the employer (or its designee) to regularly add/update employee records, remit payroll deductions and other tasks by logging into an online employer portal and coordinating with their payroll vendor.  As mentioned previously,  there is no automated payroll integration with Ascensus, currently. This may be too much for some employers to bear where 401(k) plan administration can be handled by full-service providers (some high touch/low tech or vice versa) and payroll integration is widely available.

8. Where a flat % payroll deduction can be problematic.

When an employee’s payroll deduction is percentage-based it often results in unintended fluctuations in take home pay.  This is especially true for many hourly and variable compensation (such as commision-based) employees who would prefer a dollar-based election like $20 per week.  The current Secure Choice programs allow only a percentage based election.  401(k) plans will often allow more flexibility that allows payroll deductions to be dollar-based, percentage-based or both.

9. Can the employer afford to pay?

Even if they can afford a little bit there are many low cost 401k options available and some are zero cost to the employer.  Also, with the federal start-up 401k plan tax credits this can make it even more palatable.

10. Is the employer comfortable being a fiduciary?

The sponsor of a 401(k) plan always has some fiduciary responsibility (for the DOL’s expectations for plan fiduciaries see here).  An employer can enlist co-fiduciary professional specialists to handle administration such as a 3(16) fiduciary and/or an investment professional (such as an advisor) to act as a 3(21) or 3(38) fiduciary to minimize their fiduciary obligations.

Which Employers Should Consider Secure Choice over 401(k) and other plans?

  • Do many of its employees not communicate in English?

Many Secure Choice programs are offering employee materials and support in a variety of languages that typically aren’t available with other retirement plan options at a comparable cost.

  •  Did the employer have an ERISA plan previously but got into trouble?

If an employer mishandled a prior ERISA plan such as a SEP-IRA, 401k plan or even a non-retirement benefit plan, they may be prohibited from sponsoring another ERISA plan by the IRS, DOL or other authority.  Similarly, maybe they ran afoul of rules and voluntarily terminated a plan but will be under tighter regulator scrutiny should they sponsor another plan or should just completely avoid this responsibility entirely. In these cases, Secure Choice with its non-ERISA status (at least how the States interpret ERISA) would be preferable.

  • Wants no fiduciary responsibility, whatsoever.

Limiting and eliminating fiduciary liability is a real concern for many employers. 401(k)s and other plans have ways to limit this liability, but Secure Choice programs were deliberately designed to be exempt from ERISA fiduciary obligations by the states that created them.

Ways to help Employers

Help them weigh the costs.  Even though there is no fee for Employers, they incur costs for handling payroll and employee data through Secure Choice.  There is no payroll integration automation currently. For example:

  •  Estimated 5 minutes to add or remove each employee
  • May have to distribute program materials (new hire packet)
  • Estimated 15-30 minutes to remit payroll deductions each payroll
  • Typos, mistakes, errors, questions can take hours or days to resolve

Also, they should consider these potential costs:

  • Risk of fines/penalties for not adding employees or failing to remit contributions
  • Dealing with employee relations especially for auto enrollments
  • Opportunity cost of gaining assets in an employer sponsored plan to get better terms. Remember: Roth IRAs cannot roll into 401(k)s!

If the Employer already has an eligible retirement plan:

  • Check in to see if they have registered their exemption with the State and offer to help them if they haven’t. See these links for more info: Oregon, Illinois, &  California. Note, CA requires an initial access code. If the employer doesn’t have one they can request it here. It can take 2 days to obtain it.
  • See if they would be interested in using Secure Choice for ineligible employees of their current retirement plan(s). Employees can sign up and fund it directly & the employer can opt to facilitate payroll deductions.
  • Inquire about how they are doing with their current plan and providers, maybe they are considering terminating their plan but would then have to participate in Secure Choice anyway.

If the Employer is already subject to the mandate (i.e their deadline has passed), ask if they are participating

–           If they are,  inquire how it is going and f they are having trouble with it

–           If not, inform them of the requirement and potential fines.  Help them with their options.

If the employer has their Deadline coming up:

  • Inform them of the requirement, discuss their options
  • Could join Secure Choice now, determine if it’s a good fit and then make a decision later about getting a 401(k) or other eligible plan, instead.

Opportunities to help Employees impacted by Secure Choice

Employees have limited investment options in the Secure Choice Roth IRA programs and no advice or management of their accounts is available either.  Investment professionals can offer a lot of help to employees who need guidance. Also, some employees may be better served with a Roth IRA through another provider, a Traditional IRA or other individual accounts because of their specific situations or income considerations.

The Future of Retirement and the 401(k) Syndicate

Many Americans tend to think that a 401(k) plan is an auxiliary benefit, much like taking vitamins to stay healthy, but when it comes to actual “serious” benefits it’s lower on the list of absolute necessity. This might be attributed to the converging views of cost versus value—and if you add in the ingredient of complexity and time along with that overall cost the value decreases even more. That same group of Americans may hear the noise of other investment opportunities that provide for far better returns. The perspective could also come from dissenting voices within the retirement industry itself after having been “behind enemy lines” and seen the amount of waste, cost, complexity, inefficiency, and nay we say it, greed.

Regardless, the stigma of superfluous or unnecessary exists and is very much attached to what would appear to be the primary retirement vehicle in the United States today. How did we get here? The “Father of the 401(k) Plan,” Ted Benna, has long been outspoken about what has happened to the 401(k) plan since its emergence in the 80s. He said: “I’ve been quoted saying I would wipe out the whole thing. Really, what I was referring to was the investment structure, not the 401(k) entirely. I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.” Essentially, the investment options have gone out of control with way too many choices for the sake of diversification, and then the costs have been historically shifted from employer-paid to employee-paid.

Technology: Killing Two Birds with One Stone

The primary goal of a 401(k) plan is to save for retirement (whatever that may look like differs by individual but the purpose is the same), and instead of that plan and path being straightforward and clear, it has been riddled with obstacles, exceptions, and distractions. Obstacles such as cost and lack of technology create roadblocks, as well as other “more important” benefits taking the focus away from a business keeping retirement and a 401(k) plan on the essential benefit list. However, even when you get past those things, you then face the biggest hurdle, the amount of time. Those gearing up to start on such a metaphorical and also literal journey may not realize how much they will need to pack for the trip. Like the traveling King Arthur in Monty Python and the Holy Grail in search of a crew and crusade, never realized that he’s been the butt of the joke to the viewers, the employer taking steps to sponsor a 401(k) plan may indeed feel the inadequacy of navigating that quest. Imagine if the journey was in a straight line with plenty of signs and alerts along the way, no detours or “side quests,” how much more appealing would the 401(k) plan be? This is where technology comes in and this is where things change. Technology will be the savior of the 401(k) plan, and the results will be quite evident.

Technology changes an industry, and in a very real way normalizes simplicity. When have you ever heard someone say, “You know, I used this tool to make things harder and more complex?” Never. Unless of course it’s for a workout, then it would still be providing for desired results from the user (better physical shape). Technology is the “king of the hill” in every fight for the top. It just may take a little longer for it to make it up there for some of these battles. The change that technology provides takes longer because of a couple reasons: fear of change and cost. The “If I pay that much doesn’t that mean it’s better quality?” or “I’ve done it this way a 1,000 times, why would I change it?” questions also pop up.

There are many examples of how technology has upended an industry and created an uncomfortable disturbance, but in most cases it is for the benefit of the consumer and longevity of that industry.

Let’s take, for example, buying a car. How has that industry changed? There are so many different services and apps available to us to buy a car. You can see all of the options clearly and do side-by-side comparisons, as well as pull up reviews and comments from the millions of others doing the same thing. You can order a car and have it delivered to you! No more of the sitting at a dealership with the back-and-forth negotiation on price and options. Technology has made it simple so you can see what you’re getting and knowing what it costs. Transparency and efficiency.

Path of Automation

That same principle should be applied to a 401(k) plan.

The amount of time that goes into the creation of a 401(k) plan can be sluggish and somewhat archaic if you compare it to any other industry in which they’ve accepted the transition to new technology. Checklists and manual reviews of forms and documents to determine what a company wants for a 401(k) plan just shows how far we’ve strayed from the Ted Benna vision. How much paperwork do you have to go through before the plan has officially started?

It’s imperative that you incorporate automation to the retirement industry and more specifically 401(k) plans. If this is going to be prevalent, affordable—which it should be—it is only through technological advances and methods to get there.

Let’s automate the plan design options for immediate setup of the 401(k) plan. Let’s automate the enrollment process so the manual hours used to set it up and sit down and go back and forth is eliminated. Let’s automate the nondiscrimination testing, the annual notices, and lastly the tax filing. Automation is the time saver and in the end the equalizer for pricing and accessibility.

With automation in place it leaves much more time for the important elements that shouldn’t be snuffed out. Connecting with people and reinforcing the importance of saving and setting goals. Let the other “complicated” stuff turn and move like the cogs in a watch. Keep the time, serve its purpose, but not be a distracting contraption strapped to your wrist.

The 401(k) Groups

It is said that the multiple employer plan (MEP) was created to help small businesses. This type of arrangement is designed so you can group many employers under one 401(k) plan managed by experts. This would hopefully take the burden off the small business with fiduciary responsibilities assisted and costs being aggregated in one place.

There is a closed MEP and an open MEP (which will eventually change January 1, 2021).

The closed MEP can be sponsored by many types of organizations, more specifically associations, professional employer organizations (PEOs), chambers of commerce, and other type of employer groups. In other words there has to be a level of commonality connecting these type of employers under a closed MEP. The purpose of an MEP is to provide a one-size fits all solution for those businesses joining it. Not to mention the single Form 5500 filing.

One simplifying example of an MEP is buying products in bulk. You buy multiple items to get a discounted price. That discounted price should then carry into the overall cost. Therefore, an MEP should have better investment options, lower cost, and overall level of services rendered. At least, that is how they are advertised and promoted.

An open MEP does not have the commonality component to join employers together. There is still a plan document for each employer, and separate tax filings with the Form 5500. The idea is to have enough employers grouped together to demand pricing (see bulk buying example above) that is lower and additional have better access to high quality investments.

The next option, which is a version of an open MEP, is an Exchange Plan. Typically you have a third-party administrator that manages the Exchange for the administration and tax filing purposes, but all the employers are separate other than assets grouped together on one record-keeper. These are simply the precursor to a pooled employer plan.

These types of plans do, however, give a false sense of separation for the employer to the MEP in regard to fiduciary responsibility and costs—I would even say investments as well. All of the service providers in place come with a certain cost to managing the MEP, and it should be examined how these type of setups can ostracize businesses of a certain size. Furthermore, if the goal is to display the 401(k) as a benefit that should be simple and available to all, it’s not doing a good job of that in terms of leveraging technology over bulk pricing.

Think of it this way, if you can produce something without having to expend a lot of manual labor and the process is automated, it will be more affordable without the need to buy bulk. Another good example of this comes from the automobile industry again. The technology behind the assembly line and the ability to more easily make the automobile is what led to affordability.

So, what changes have happened in the retirement industry to allow for technology to dramatically reduce cost and raise saving potential?

The last couple decades we have seen an increase in contribution limits, auto-enrollment, and more recently with the SECURE Act the re-birth of what will be lovingly referred to as the “PEP” or Pooled Employer Plan.

The PEP is not new, but will certainly be in a new “form,” effective January 1, 2021 and will give opportunities for anyone to sponsor an MEP. No more commonality requirement, increased size for the MEP without a required audit (if none of the employers are over 120 participants), and a benefit group that can be established by financial organizations and business groups instead of just the expected PEOs, chambers of commerce, associations, and other employer groups.

These changes, however, do not again resolve the massive gap of Americans not saving for retirement or having a saving mindset at all. More than anything it does create a clamor of 401(k) industry professionals looking forward to how they can focus and bolster their own business by accommodating a new version of an MEP.

The traditional or legacy 401(k) providers would offer a multiple employer plan (MEP) or pooled employer plan (PEP) to solve the problem of affordable options for the small businesses, even though they know that that offering is certainly not on par for cost and efficiency.

Why buy in bulk for services that in comparison are going to cost your business less if you buy direct?

In most cases, the MEP option can be overkill for a small business. Overkill on price, overkill on services, and overkill on what is needed. So, the original statement about an MEP being made for the small business isn’t exactly true if you look at the prior examples of what technology does. Is it what a small business needs? In my opinion, no. The technology is out there to produce a competitively priced and meaningful 401(k) plan without the buying in bulk option.

Keep in mind, it will be the same organizations of service providers looking for the opportunity to promote an MEP that have been doing it for years. The PEP will be a new face and may help close the retirement gap by a very small percentage.

The 401(k) Syndicate

Now there have been a roll out over the years of Fintech companies offering “simplified” solutions for the 401(k), each having a different approach whether on pricing or what their technology can do. Make no mistake, these companies are trailblazers. They have made the path much easier to travel, but we are still left with a real dilemma on market saturation. There are still millions of Americans not saving for retirement and businesses not making the step to sponsor a 401(k) plan.

The old verses new tug-of-war is happening. Those most to benefit in this exchange, however, is the small business. The new Fintech wave of 401(k) providers is gathering to come crashing down (in a good way) on the small business, and the small business doesn’t even realize it. Also, it may seem odd as previously the small business was the least pursued by industry providers for the less than blatant reason of expense and time it takes to manage these smaller-sized plans and the ultimate payout for them.

But what if you could have a 401(k) group, a syndication, that allows all business sizes in with pricing and options that larger organizations command? A 401(k) Syndicate is a group of employers (mostly small businesses) that create a 401(k) plan on a Fintech solution, such as the platform 401GO offers. This platform is the perfect stage for every type of organization, including the financial advisors, PEOs, chambers of commerce, associations, medical groups, manufacturing groups, CPAs, payroll companies, etc.

The 401(k) Syndicate is a simplified version of the MEP. Think, MEP Lite. For example, imagine an association having a 401(k) offering, branded with their group, an automated structure in regard to administration, testing, notices, and annual filing, and the association holds no fiduciary burden nor a required expertise to offer such benefit. The automation makes plan setup fast, administration simple, integration with the flip of a switch, and most importantly, costs so low that the old or legacy service providers can’t fathom how something like that can be offered and remain in business.

This is what technology does. It simplifies, and it makes any industry adjust the baseline costs of an offering. Everyone can be ready for retirement; everyone can have access to a 401(k) plan. Instead of sponsoring an MEP or PEP as is predictably advertised, organizations should think about creating a 401(k) Syndicate. There now becomes the freedom of choice instead of the lack thereof.

A financial advisor can establish his or her own 3(38) investment lineup and provide their own models for a guided portfolio Robo-Advisor for their very own co-branded 401(k) Syndicate, and feel comfortable knowing these things are in place for businesses of all sizes to join.

The other more miraculous feature of a 401(k) Syndicate is that it can be set up in hours and not months. Also, there isn’t the locked-in mechanism that is so discretely masked with sponsoring an MEP. Furthermore, it can be a game changer for groups looking to provide a 401(k) benefit to member businesses—especially the small business!

In addition to the speed and efficiency of setting up this type of plan group is the transparent pricing. For 401GO the employer fees of $9 per participating employee a month (PEPM) are affordable for even the smallest business. Why charge a setup fee or a document fee when automation handles it? The manual steps, the data input, the process has all been simplified. As it should be! From the plan setup to the annual administration, the funnel into a 401(k) Syndicate is consistent and co-branded for the employer to have the look and feel of an MEP, but not all the extra expense.

Ultimately, there is no “release date” for a 401(k) Syndicate because it’s available now. No waiting until a legislative session. The technology is currently in place at 401GO, and more importantly will only make things easier, more affordable, and commonplace for a small business to have a 401(k) plan.

Come join us at 401GO to spread the vision of everyone ready for retirement, and 401(k) plans being simple and affordable for all.

The Free 401(k) Plan

A “401(k)” generally has a stigma of being too expensive and too time-consuming for small businesses in particular. The reality is that it doesn’t have to be. It can be simplified and it can be affordable. It’s that perspective that we hope to change at 401GO. Simple and affordable 401(k) plans shouldn’t be out of reach or a byword for complicated.

If a company hasn’t thought about sponsoring a 401(k) plan or some retirement plan for its employees, we would encourage a switch in thought. Saving for retirement and preparing for the future may seem a distant goal, but it would be even farther out of reach if there is no plan in place. The first step is to decide to have a 401(k) plan. I would suggest that this is something that is included in your discussion of other benefits, and not tossed in at the last second as an “add-on” for employees. Look at it as a crucial benefit that you wouldn’t want your employees to go without.

Why? Because it is every bit as important as any other benefits offered.

401(k) plans can be simplified and made easy through technology and automation. We cut out the difficult portion through the plan design offering to make it easy and understandable. Now, if you can simplify a 401(k) plan, what do you do about cost?

Well, the reality is that if you have 10 employees or less, you can essentially sponsor a 401(k) plan for free. Free? Yes, free! “Free.99.”

Here is how it works:

  • Setup a plan through 401GO with *auto-enrollment
  • 401GO helps with all the difficult stuff after you get it set up.
  • You pay $9 per participating employee each month (no other costs outside of that)
  • At the end of the year you claim two tax credits for your 401(k) plan.
    • First, there is a startup tax credit for new 401(k) plans in which the limit is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-Highly Compensated Employees (non-HCEs) eligible for plan participation or (b) $5,000. This credit cannot exceed 50% of eligible startup costs (administration fees paid to 401GO). This is for the first three years of your plan’s existence.
    • Second, you can claim a tax credit of $500 for having an auto-enrollment on your plan for each year you have it up to three years.
  • So, let’s recap. If you have 10 employees and ALL 10 of those employees are participating, then your total cost for the year is roughly $1,000 through 401GO. You cut that in half with the setup cost tax credit, so you are left with around $500. Now you add in the auto-enrollment tax credit $500 and BAM! You now have the most affordable 401(k) plan ever along with the technology and automation of an amazing provider like 401GO.

Win. Win. Win.

For more information on the free 401(k) plan, please reach out to info@401go.com. We’ll help answer any questions you may have.

Everyone Ready for Retirement: MEP or not to MEP

Have you ever watched a child try to put a triangle-shaped block into a square-shaped hole? You know, that shape-sorting game in which the right shaped block goes in the right hole of the wooden box. It’s a timeless game that has been used from generation to generation. The child picks up a specific shaped block and feels around to make sure it fits into the correct hole. The block then drops inside the box once the pairing is done correctly. This is similar to how a company fits with a Multiple Employer Plan (MEP) or not.

For those that aren’t aware of an MEP, it is a 401(k) plan that has two or more unrelated employers within it. The largest MEPs are sponsored by Professional Employer Organizations (PEOs), associations, and in some cases chambers of commerce. Regardless of who is sponsoring the MEP, I wanted to take a moment to look over the MEP option for small businesses and examine how it fits in regard to retirement and a 401(k) plan.

It’s important to look at the benefit of an MEP compared to a business directly sponsoring a 401(k) plan on their own. I’ve listed four things that make an MEP something to consider.

MEP

  1. Group Pricing – The more employers that join and participate in the MEP the more the assets and potential annual contributions will be. This allows for a reduced pricing from most service providers. Reduced pricing can help a small business that normally wouldn’t have the same access or buying power. “Economies of Scale” is the phrase most commonly used.
  2. Investment Selection – When you have the size you can negotiate and in some cases demand better investment selections. Without going into the details, there are better investment opportunities in reference to the size of the 401(k) plan. An MEP provides such opportunities based on size and growth.
  3. Provider Services – An MEP typically has three service providers to help navigate the 401(k) plan through the complex waters of ERISA. These include a financial advisor, third-party administrator, and record-keeper. Additionally, there have been an increase in adding another service provider, which is referred to as a 3(16) administrator.
  4. Fiduciary Relief – There are quite a few things that are involved with a 401(k) plan, and a small business typically would have a difficult time keeping up with them. The organization sponsoring the MEP can elect a trustee or trustees to oversee the MEP, which means that the liability upon the employer is reduced (not removed…reduced).

Those four points listed above seem to meet all the criteria for a small business, correct? All the shapes go into the correct hole, and everyone is happy, right? It would seem so, but there is something missing. If this relationship with an MEP was so serendipitous, then why aren’t more small businesses starting up their 401(k) plan with an MEP, and why aren’t MEP sponsoring organizations pursuing them?

According to the DOL, there are 38 million employees of small businesses that do not have access to a 401(k) plan. 85% of those within businesses that have 100 employees or more have access to a retirement plan, while only 53% of those within businesses of less than 100 employees have access to a retirement plan. Many of those businesses reference cost as the primary reason to not start a 401(k) plan.

Group Pricing

If being part of an MEP provides such a luxury as reduced costs for employers, and these type of plans are tailored for the small business, then why aren’t they flocking to them? Sure, you could say that there is outreach to small businesses from the MEP sponsoring organization, but you can bet your bottom dollar that the attention is not on the smaller fish. Why would it be? An MEP full of small businesses would take much longer to be at a size that demands attention.

Bigger businesses bring higher assets and more contributions, and higher assets and more contributions bring more buying power. The small business doesn’t have much to offer in that respect. So, you couldn’t fault the MEP for not pursuing the small business, but it makes the option less available.

In addition to not necessarily being pursued, many small businesses that join an MEP and have under a certain amount of participation or assets are charged a separate annual fee. This is typically a fee to make up for the maintenance and administration costs that the small business has created, but hasn’t been making up for in assets and participation. I know that it sounds unfair, but it’s hard to keep up with the costs of an MEP and when a smaller business with only a handful of employees wants to join it just looks like more overhead expense.

Investment Selection

When comparing the type of investments available to a participating employer in an MEP to what is available on its own, there is a difference, but let’s not completely throw out the opportunity that investments, such as index funds, give to a small business sponsoring a 401(k) plan on its own. However, when the investment selection is considered “better” within an MEP it is just to say that their are more opportunities for the service providers to make more money. Revenue sharing on assets can often be found within these MEPs, and in many cases those aren’t considered appropriately in the overall expense for those participants in the plan (see 408(b)(2) information). It’s important to be aware of that and use that information when determining the total cost benefit to businesses within the MEP.

Keep in mind, I’m not giving any advice on where to put investments nor on how a business should invest. I’m merely saying that there are investment offerings that are low expense and available outside of an MEP. So, the idea that a small business gets the short end of the stick on investments because they aren’t bundled into an MEP solution, simply isn’t true.

Provider Services

An MEP is a complex 401(k) plan. It requires multiple service providers to successfully run it. That complexity comes with a cost. You have sign-up/document fees as well as quarterly and annual costs from the TPA, not to mention potential asset fees. The financial advisor takes his/her cut typically through an asset fee as well, and then the record-keeper has their fee (sometimes built into certain investments). The point is the costs for an MEP are relative to the size and scope of each of these service providers.

That being said, smaller MEPs can find themselves in a place of higher expense but no buying power to reduce those conglomeration of costs. In an effort to remedy those expenses, the MEP seeks out existing larger 401(k) plans to quickly balance the cost to service model. Larger 401(k) plans would, in some cases, have to perform an audit from an outside firm. This comes with a cost as well. So, what is done about it? Well, this is typically sold with the “Hey we can consolidate your audit fees in our MEP, and so the burden is held on many shoulders.”

Where does this leave the small business? With the recent SECURE Act the audit expense can no longer be spread out over assets of participating employers that wouldn’t, on their own, have to do an audit. In other words, the MEP has less need of a small business in their 401(k) plan because it lends no assistance on the audit costs. These MEPs are gold mines for auditors as well, as the complexity of the plan increases the costs for the audit.

You see where I’m going with this? Grouping together businesses into an MEP is a great idea, but when the overall focus is less on providing the 401(k) benefit to small businesses that wouldn’t normally offer it on their own, and more on existing large 401(k) plans, then opportunity and access to retirement is diminished, and the small business is again relegated to the corner. And “nobody puts baby in the corner.” (Sorry, I couldn’t help myself.)

Fiduciary Relief

This is a big one when you think about the complexities surrounding a 401(k) plan and the requirements quarterly, semi-annually, or annually are a burden or even a nuisance for a small business that is primarily focused on their bottom-line and staying afloat. That is a big selling point for a small business. Join an MEP and you will find the help with the fiduciary responsibilities that you don’t have time to do. This is a huge help for any business, and that is something that can’t be said enough. Whatever help you can provide and expertise to the small business in the same way with large businesses, then you are a-okay in my book.

I do want to mention, however, that even this point to an MEP isn’t exactly straightforward. A company owner always has fiduciary responsibilities. The MEP may handle the lion’s share, and the look and feel may be that the business is free from that liability, but for the sake of transparency you must know that that is not 100% the case. The business has selected the MEP, and has the responsibility to monitor them as a service provider. Additionally, if data that is provided to the MEP is flawed, the business would then have to correct it.

One way to see this more clearly is when a participating employer (business) does something that is “out of compliance” or requires a correction. The MEP’s sponsoring organization will (predictably) make efforts and take steps to show how they had upheld compliance for that particular employer and it was the employer who was at fault. Furthermore, the “bad apple” rule no longer applies to the overall MEP. What that means is that if one participating employer is out of compliance, the whole 401(k) plan is not out of compliance.

Keep in mind, the majority of the MEPs that I know out there do the right thing. If they are at fault, they correct it. If the employer is at fault, they work with them to correct it. What I’m trying to get at here is that the employer has liability, and is still a fiduciary. Joining an MEP does not remove that responsibility or liability from them. That message should be clear.

So, what does this all mean? Is a small business the right shaped block for the MEP box? It could be, but due to costs and the complexity of an MEP, it may be better for the small business to look at what technology can provide.

The Alternative to an MEP

There are other options out there for a 401(k) group. At 401GO we refer to them as a 401(k) Syndicate. Each company is aggregated under one co-branded 401(k) benefit group. This is an affordable option for all those involved, from a PEO to an association. Even a CPA could offer their own 401(k) Syndicate for their clients. It is imperative to us that a small business is given the same features and benefits of a retirement plan with a low-cost, high-quality 401(k) plan.

Ultimately, an MEP in my opinion gets a B grade. Why? Because they are providing a wonderful benefit to many businesses out there, and creating an awareness and need to save for retirement. The reason for a B grade is also because of the affordability and perceived access for a small business. The reason we don’t see a lot of small businesses flocking to an MEP is probably because the door hasn’t been opened to them.

401GO CARES

At 401GO we hold the vision that everyone should have access to a 401(k) plan, and that it should be affordable and portable. Costs should be low and technology abundant. However, given the current events we are also realistic and understand that businesses may not be looking at the 401(k) plan as much as other more pressing matters take precedence. We want to put your mind at ease. We take care of the 401(k) plan so you can focus on navigating the difficult economic dilemma prevalent in the United States today. When it comes to saving for the future, even the eventual goal of retirement, it is usually with the perspective of anticipated and expected outcomes. The outcome hopefully of having sufficiently saved up or that things will be better off when that future event or moment arrives. The unprecedented spread of COVID-19 has changed all of that for many people. In that respect, we understand that access to the 401(k) account can have a life-altering outcome. On March 27, 2020 the over $2 Trillion dollar Coronovirus Aid Relief and Economic Security (CARES) Act was passed. This legislation has multiple provisions in it to help with the situation that many face, but more specifically it provides unique access to the 401(k) account for those participating. All of these changes concerning the 401(k) can be immediately implemented by 401GO. There is no lapse or break in time to prevent our ability to accommodate these things for our existing and new clients. It is important to people and therefore important to us. Those changes to the 401(k) plan from the CARES Act are summarized below: Withdrawals
  • Withdrawals taken in 2020 (January 1 to December 31) can be taken penalty-free up to $100,000 from the 401(k) account
    • Those who have been directly or indirectly affected by the COVID-19 outbreak are eligible for this withdrawal, whether themselves, spouse, or family member has suffered from the illness or economically through the loss of work, benefits, business, etc.
  • Certification of eligibility is done on the participant level (in other words, the participant can certify the need and not the plan sponsor)
  • The withdrawal can be paid back up to three years after it is taken either into the 401(k) plan from which it was withdrawn or another retirement account, such as an Individual Retirement Account (IRA). If it is not paid back then it is taxable to the participant.
Loans
  • Existing loans from March 27, 2020 to December 31, 2020 can be delayed for one year. Although it is delayed it would still accrue interest for the time it is delayed.
  • The loan can also be extended out one year from the original term.
  • Loans can be taken from 100% of the vested account balance for up to a max of $100,000.
Required Minimum Distributions (RMDs)
  • Distributions that are required for those of a certain age (originally 70 1/2 and now 72) are waived for 2020.
  • In other words, if it’s the first RMD that would be taken April 1, 2020 it is waived from having to be withdrawn.
These changes are available to those that are sponsoring a 401(k) plan and can be made upon request. The plan document will eventually need to be updated. The deadline for that is January 1, 2022. If you have any other questions or want to discuss these changes, please reach out to support@401go.com or call 801-214-2125.

What To Expect When You’re Expecting a 401(k) Plan

The time has come: you are expecting to have a 401(k) plan. All your business-owner friends have raved about having one, and you’ve been the one excluded from their group conversations and in most cases you’ve been confused by some of the things they’ve said. What do they mean about matching costs? What do they mean about possibly doing a profit-sharing at the end of the year? Employees have to work how long before they are eligible to participate?

Photo by Nik Macmillan
Measure twice, cut once!

The bigger question is what commitment is having a 401(k) plan going to be on you? Will you be able to pay for the benefit?

Here is a good summary of questions to consider as you prepare to have a 401(k) plan:

·        How many employees do you have?

·        Do you plan on putting in a matching contribution?

·        What is your budget?

·        How much time is this going to take?

·        What do you have to do each year?

Now that you’ve done your research and are ready to take the leap and have a 401(k) plan, let’s go through some of the questions listed above to help expound on what you need to know.

Photo by Alex Kotliarskyi

How many employees do you have?

This question seems pretty straightforward, but the reason behind it has to do with cost and the type of plan you want to sponsor as an employer. If your company is you and your spouse/partner, then you may not need to have a 401(k) plan, and your goals could be accomplished with a Solo K (see HERE for more information on a Solo K).

If you have employees other than you and your significant other, or you plan on having employees, you would want to go the route of having a 401(k) plan. Another thing to consider is the demographic of those you have hired or will be hiring. This doesn’t take away from the fact of having a 401(k) plan, but this does help in narrowing down what type of 401(k) plan offering fits your company.

Ultimately, offering a 401(k) plan does add extra value for those individuals you’re trying to employ. If it was a choice between your company that was offering a 401(k) plan and one that wasn’t, you would have the competitive advantage.

Photo by Fabian Blank

Do you plan on putting in a matching contribution?

It’s important to consider whether you will be matching your employees’ deferral contributions or not. This is why it’s good to know an estimate of cost. Matching contributions would go into the 401(k) plan pre-tax, which does help you with your tax burden and also provide a benefit, but how much of reduction will this be, and also what do you anticipate in terms of participation from employees? Making the decision to match employee deferral contributions is the first step as it increases the benefit and value of your 401(k) plan. After all, those who have retirement in mind or saving for the future will also see the “free money” going in as a match and padding their total account balance.

For example, if an employee is deferring 3% of their pay, and you’re matching up to 3% of that same pay, he/she is getting a total of 6% going into the 401(k) account.

Are you planning on participating?

This question may seem out of place, but it’s actually an important one. If you have a small business and you want to participate in a 401(k) plan with your employees, you would want to have a Safe Harbor plan. A Safe Harbor plan (if followed specifically) provides an exemption to required nondiscrimination testing that takes place every year. If you didn’t have a Safe Harbor plan you could, and most likely would, fail the nondiscrimination testing, and would be required to refund your contributions and/or make a contribution to those employees that are eligible to participate in the 401(k) plan.

Almost all the Safe Harbor plans require 100% vesting of your employer contribution. In other words, what you put in for the participating employee is his or hers for retirement.

Here are the primary Safe Harbor plan options:

Basic Safe Harbor – Employer is required to match 100% up to 3% and 50% of the next two percentage points up to 5%. In other words, if the participating employee defers 3% of their pay, you as an employer would match 3%; if it was 4%, you would match 3.5%; 5%, 4%. These employer contributions would be 100% vested.

Enhanced Safe Harbor – Employer is required to match 100% up to 4% or 5% or 6%. Basically, you would have to choose one of those three caps (up to 6%) that you would match. If the participating employee defers 4% of their pay, you as an employer would match 4%; if it was 5%, you would match 5%; 6%, 6%. These employer contributions would be 100% vested.

Qualified Automatic Contribution Arrangement (QACA) – This is basically a Safe Harbor auto-enrollment. The difference is the matching formula. The employer is required to match 100% up to 1% and then 50% up to 6%. In other words, if the participating employee defers 1% you would match 1%; 2% it would be 1.5%; 3%, 2%; 4%, 2.5%; 5%, 3%; 6%, 3.5%. 3.5% is the total amount you would match. This can be under a vesting schedule, as long as 100% vesting is given with 2 years credited service.

What is your budget?

This question is important in relation to whether you want to provide a match or not because you have to also consider the fees/expense outside of that.

How much does the setup cost?

Are there these fees?

·        Setup/Startup Fee

·        Document Fee

·        Record-keeping Fee

·        Financial Advisor Fee

·        Other Service Provider Fee

All of these add up and should be considered. Keep in mind, there are some new tax credits that are available for which you can take advantage. Here is an article telling you everything you want to know about the new law: https://www.linkedin.com/pulse/getting-know-secure-act-jared-porter-qka/

If you have to pay thousands of dollars up front to start the 401(k) plan, then you should make sure you’ve budgeted for that cost as well as putting in a match (if you’re going the route of a Safe Harbor plan).

If these fees aren’t upfront when you’re asking about them, then I would suggest doing additional research before moving forward. After all, as a business-owner, you are a fiduciary for your company and employees. Here is an article telling you everything you wanted to know about being a fiduciary: https://www.linkedin.com/pulse/everything-you-didnt-want-know-being-fiduciary-more-jared-porter/

How much time is this going to take?

This is actually a very relevant question. Your time is valuable. It should be clear how much time and money this whole thing is going to take. Ask this question from the get-go. Traditional options typically take 8 weeks to get up and running. Also, there could be multiple service providers involved that require information. Make sure you’re not duplicating efforts and wasting your time.

The most time-consuming part of the process is reviewing what your 401(k) plan will look like.

 Is it a Safe Harbor plan?

How long does an employee have to work before he/she can enter the plan?

Are you excluding anything from pay (bonus, commissions, etc.)?

Do you want to allow for loans?

I would always suggest asking questions and making sure you know what any of this means. Whether you’re getting help during this process or not, be very aware of your choices.

Photo by Amy Elting

What do you have to do each year?

As the employer that is offering the 401(k) plan you are the trustee. Your responsibility would entail everything from notifications to employees that are eligible to join the plan, annual notices, nondiscrimination testing, and even the Form 5500 tax filing for the 401(k) plan.

All of that would be your responsibility, but that doesn’t mean you can’t get some help from someone. Simplicity, clarity, and cost should be your driving motivation when picking a service provider to help you. You should know what is covered, how they will help you, the costs, and then what you would have to do as you’re still the business-owner.

I know there are lots of options out there, and the overwhelming feeling of complexity and cost may deter you from having a 401(k) plan, but let me tell you right now that once you have a 401(k) plan and see the benefit and value it adds to your company, you will wonder why you didn’t have one sooner!

For more information about 401GO and our 401(k) plan options, please visit www.401go.com or email info@401go.com.

The Free 401(k) Plan

A “401(k)” generally has a stigma of being too expensive and too time-consuming for small businesses in particular. The reality is that it doesn’t have to be. It can be simplified and it can be affordable. It’s that perspective that we hope to change at 401GO. Simple and affordable 401(k) plans shouldn’t be out of reach or a byword for complicated.

If a company hasn’t thought about sponsoring a 401(k) plan or some retirement plan for its employees, we would encourage a switch in thought. Saving for retirement and preparing for the future may seem a distant goal, but it would be even farther out of reach if there is no plan in place. The first step is to decide to have a 401(k) plan. I would suggest that this is something that is included in your discussion of other benefits, and not tossed in at the last second as an “add-on” for employees. Look at it as a crucial benefit that you wouldn’t want your employees to go without.

Why? Because it is every bit as important as any other benefits offered.

401(k) plans can be simplified and made easy through technology and automation. We cut out the difficult portion through the plan design offering to make it easy and understandable. Now, if you can simplify a 401(k) plan, what do you do about cost?

Well, the reality is that if you have 10 employees or less, you can essentially sponsor a 401(k) plan for free. Free? Yes, free! “Free.99.”

Here is how it works:

  • Setup a plan through 401GO with *auto-enrollment
  • 401GO helps with all the difficult stuff after you get it set up.
  • You pay $9 per participating employee each month (no other costs outside of that)
  • At the end of the year you claim two tax credits for your 401(k) plan.
    • First, there is a startup tax credit for new 401(k) plans in which the limit is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-Highly Compensated Employees (non-HCEs) eligible for plan participation or (b) $5,000. This credit cannot exceed 50% of eligible startup costs (administration fees paid to 401GO). This is for the first three years of your plan’s existence.
    • Second, you can claim a tax credit of $500 for having an auto-enrollment on your plan for each year you have it up to three years.
  • So, let’s recap. If you have 10 employees and ALL 10 of those employees are participating, then your total cost for the year is roughly $1,000 through 401GO. You cut that in half with the setup cost tax credit, so you are left with around $500. Now you add in the auto-enrollment tax credit $500 and BAM! You now have the most affordable 401(k) plan ever along with the technology and automation of an amazing provider like 401GO.

Win. Win. Win.

For more information on the free 401(k) plan, please reach out to info@401go.com. We’ll help answer any questions you may have.

Everyone Ready for Retirement: MEP or not to MEP

Have you ever watched a child try to put a triangle-shaped block into a square-shaped hole? You know, that shape-sorting game in which the right shaped block goes in the right hole of the wooden box. It’s a timeless game that has been used from generation to generation. The child picks up a specific shaped block and feels around to make sure it fits into the correct hole. The block then drops inside the box once the pairing is done correctly. This is similar to how a company fits with a Multiple Employer Plan (MEP) or not.

For those that aren’t aware of an MEP, it is a 401(k) plan that has two or more unrelated employers within it. The largest MEPs are sponsored by Professional Employer Organizations (PEOs), associations, and in some cases chambers of commerce. Regardless of who is sponsoring the MEP, I wanted to take a moment to look over the MEP option for small businesses and examine how it fits in regard to retirement and a 401(k) plan.

It’s important to look at the benefit of an MEP compared to a business directly sponsoring a 401(k) plan on their own. I’ve listed four things that make an MEP something to consider.

MEP

  1. Group Pricing – The more employers that join and participate in the MEP the more the assets and potential annual contributions will be. This allows for a reduced pricing from most service providers. Reduced pricing can help a small business that normally wouldn’t have the same access or buying power. “Economies of Scale” is the phrase most commonly used.
  2. Investment Selection – When you have the size you can negotiate and in some cases demand better investment selections. Without going into the details, there are better investment opportunities in reference to the size of the 401(k) plan. An MEP provides such opportunities based on size and growth.
  3. Provider Services – An MEP typically has three service providers to help navigate the 401(k) plan through the complex waters of ERISA. These include a financial advisor, third-party administrator, and record-keeper. Additionally, there have been an increase in adding another service provider, which is referred to as a 3(16) administrator.
  4. Fiduciary Relief – There are quite a few things that are involved with a 401(k) plan, and a small business typically would have a difficult time keeping up with them. The organization sponsoring the MEP can elect a trustee or trustees to oversee the MEP, which means that the liability upon the employer is reduced (not removed…reduced).

Those four points listed above seem to meet all the criteria for a small business, correct? All the shapes go into the correct hole, and everyone is happy, right? It would seem so, but there is something missing. If this relationship with an MEP was so serendipitous, then why aren’t more small businesses starting up their 401(k) plan with an MEP, and why aren’t MEP sponsoring organizations pursuing them?

According to the DOL, there are 38 million employees of small businesses that do not have access to a 401(k) plan. 85% of those within businesses that have 100 employees or more have access to a retirement plan, while only 53% of those within businesses of less than 100 employees have access to a retirement plan. Many of those businesses reference cost as the primary reason to not start a 401(k) plan.

Group Pricing

If being part of an MEP provides such a luxury as reduced costs for employers, and these type of plans are tailored for the small business, then why aren’t they flocking to them? Sure, you could say that there is outreach to small businesses from the MEP sponsoring organization, but you can bet your bottom dollar that the attention is not on the smaller fish. Why would it be? An MEP full of small businesses would take much longer to be at a size that demands attention.

Bigger businesses bring higher assets and more contributions, and higher assets and more contributions bring more buying power. The small business doesn’t have much to offer in that respect. So, you couldn’t fault the MEP for not pursuing the small business, but it makes the option less available.

In addition to not necessarily being pursued, many small businesses that join an MEP and have under a certain amount of participation or assets are charged a separate annual fee. This is typically a fee to make up for the maintenance and administration costs that the small business has created, but hasn’t been making up for in assets and participation. I know that it sounds unfair, but it’s hard to keep up with the costs of an MEP and when a smaller business with only a handful of employees wants to join it just looks like more overhead expense.

Investment Selection

When comparing the type of investments available to a participating employer in an MEP to what is available on its own, there is a difference, but let’s not completely throw out the opportunity that investments, such as index funds, give to a small business sponsoring a 401(k) plan on its own. However, when the investment selection is considered “better” within an MEP it is just to say that their are more opportunities for the service providers to make more money. Revenue sharing on assets can often be found within these MEPs, and in many cases those aren’t considered appropriately in the overall expense for those participants in the plan (see 408(b)(2) information). It’s important to be aware of that and use that information when determining the total cost benefit to businesses within the MEP.

Keep in mind, I’m not giving any advice on where to put investments nor on how a business should invest. I’m merely saying that there are investment offerings that are low expense and available outside of an MEP. So, the idea that a small business gets the short end of the stick on investments because they aren’t bundled into an MEP solution, simply isn’t true.

Provider Services

An MEP is a complex 401(k) plan. It requires multiple service providers to successfully run it. That complexity comes with a cost. You have sign-up/document fees as well as quarterly and annual costs from the TPA, not to mention potential asset fees. The financial advisor takes his/her cut typically through an asset fee as well, and then the record-keeper has their fee (sometimes built into certain investments). The point is the costs for an MEP are relative to the size and scope of each of these service providers.

That being said, smaller MEPs can find themselves in a place of higher expense but no buying power to reduce those conglomeration of costs. In an effort to remedy those expenses, the MEP seeks out existing larger 401(k) plans to quickly balance the cost to service model. Larger 401(k) plans would, in some cases, have to perform an audit from an outside firm. This comes with a cost as well. So, what is done about it? Well, this is typically sold with the “Hey we can consolidate your audit fees in our MEP, and so the burden is held on many shoulders.”

Where does this leave the small business? With the recent SECURE Act the audit expense can no longer be spread out over assets of participating employers that wouldn’t, on their own, have to do an audit. In other words, the MEP has less need of a small business in their 401(k) plan because it lends no assistance on the audit costs. These MEPs are gold mines for auditors as well, as the complexity of the plan increases the costs for the audit.

You see where I’m going with this? Grouping together businesses into an MEP is a great idea, but when the overall focus is less on providing the 401(k) benefit to small businesses that wouldn’t normally offer it on their own, and more on existing large 401(k) plans, then opportunity and access to retirement is diminished, and the small business is again relegated to the corner. And “nobody puts baby in the corner.” (Sorry, I couldn’t help myself.)

Fiduciary Relief

This is a big one when you think about the complexities surrounding a 401(k) plan and the requirements quarterly, semi-annually, or annually are a burden or even a nuisance for a small business that is primarily focused on their bottom-line and staying afloat. That is a big selling point for a small business. Join an MEP and you will find the help with the fiduciary responsibilities that you don’t have time to do. This is a huge help for any business, and that is something that can’t be said enough. Whatever help you can provide and expertise to the small business in the same way with large businesses, then you are a-okay in my book.

I do want to mention, however, that even this point to an MEP isn’t exactly straightforward. A company owner always has fiduciary responsibilities. The MEP may handle the lion’s share, and the look and feel may be that the business is free from that liability, but for the sake of transparency you must know that that is not 100% the case. The business has selected the MEP, and has the responsibility to monitor them as a service provider. Additionally, if data that is provided to the MEP is flawed, the business would then have to correct it.

One way to see this more clearly is when a participating employer (business) does something that is “out of compliance” or requires a correction. The MEP’s sponsoring organization will (predictably) make efforts and take steps to show how they had upheld compliance for that particular employer and it was the employer who was at fault. Furthermore, the “bad apple” rule no longer applies to the overall MEP. What that means is that if one participating employer is out of compliance, the whole 401(k) plan is not out of compliance.

Keep in mind, the majority of the MEPs that I know out there do the right thing. If they are at fault, they correct it. If the employer is at fault, they work with them to correct it. What I’m trying to get at here is that the employer has liability, and is still a fiduciary. Joining an MEP does not remove that responsibility or liability from them. That message should be clear.

So, what does this all mean? Is a small business the right shaped block for the MEP box? It could be, but due to costs and the complexity of an MEP, it may be better for the small business to look at what technology can provide.

The Alternative to an MEP

There are other options out there for a 401(k) group. At 401GO we refer to them as a 401(k) Syndicate. Each company is aggregated under one co-branded 401(k) benefit group. This is an affordable option for all those involved, from a PEO to an association. Even a CPA could offer their own 401(k) Syndicate for their clients. It is imperative to us that a small business is given the same features and benefits of a retirement plan with a low-cost, high-quality 401(k) plan.

Ultimately, an MEP in my opinion gets a B grade. Why? Because they are providing a wonderful benefit to many businesses out there, and creating an awareness and need to save for retirement. The reason for a B grade is also because of the affordability and perceived access for a small business. The reason we don’t see a lot of small businesses flocking to an MEP is probably because the door hasn’t been opened to them.

401GO CARES

At 401GO we hold the vision that everyone should have access to a 401(k) plan, and that it should be affordable and portable. Costs should be low and technology abundant. However, given the current events we are also realistic and understand that businesses may not be looking at the 401(k) plan as much as other more pressing matters take precedence. We want to put your mind at ease. We take care of the 401(k) plan so you can focus on navigating the difficult economic dilemma prevalent in the United States today. When it comes to saving for the future, even the eventual goal of retirement, it is usually with the perspective of anticipated and expected outcomes. The outcome hopefully of having sufficiently saved up or that things will be better off when that future event or moment arrives. The unprecedented spread of COVID-19 has changed all of that for many people. In that respect, we understand that access to the 401(k) account can have a life-altering outcome. On March 27, 2020 the over $2 Trillion dollar Coronovirus Aid Relief and Economic Security (CARES) Act was passed. This legislation has multiple provisions in it to help with the situation that many face, but more specifically it provides unique access to the 401(k) account for those participating. All of these changes concerning the 401(k) can be immediately implemented by 401GO. There is no lapse or break in time to prevent our ability to accommodate these things for our existing and new clients. It is important to people and therefore important to us. Those changes to the 401(k) plan from the CARES Act are summarized below: Withdrawals
  • Withdrawals taken in 2020 (January 1 to December 31) can be taken penalty-free up to $100,000 from the 401(k) account
    • Those who have been directly or indirectly affected by the COVID-19 outbreak are eligible for this withdrawal, whether themselves, spouse, or family member has suffered from the illness or economically through the loss of work, benefits, business, etc.
  • Certification of eligibility is done on the participant level (in other words, the participant can certify the need and not the plan sponsor)
  • The withdrawal can be paid back up to three years after it is taken either into the 401(k) plan from which it was withdrawn or another retirement account, such as an Individual Retirement Account (IRA). If it is not paid back then it is taxable to the participant.
Loans
  • Existing loans from March 27, 2020 to December 31, 2020 can be delayed for one year. Although it is delayed it would still accrue interest for the time it is delayed.
  • The loan can also be extended out one year from the original term.
  • Loans can be taken from 100% of the vested account balance for up to a max of $100,000.
Required Minimum Distributions (RMDs)
  • Distributions that are required for those of a certain age (originally 70 1/2 and now 72) are waived for 2020.
  • In other words, if it’s the first RMD that would be taken April 1, 2020 it is waived from having to be withdrawn.
These changes are available to those that are sponsoring a 401(k) plan and can be made upon request. The plan document will eventually need to be updated. The deadline for that is January 1, 2022. If you have any other questions or want to discuss these changes, please reach out to support@401go.com or call 801-214-2125.

Why I waited to Offer a 401(K)

Why I waited to Offer a 401(K) and why you don’t have to.

I have started over a dozen companies in the past decade. I’ve had successful exits from most of them and a few failures all while gaining a tremendous amount of experience along the way. At one point, I had about 15 different companies all going simultaneously which, in hind-sight was a terrible idea. I would often have people ask how I was able to keep track of everything from a food-truck (one of the failures) to a paint distribution company (still going). The secret was in finding the right employees to delegate the day to day management and administration to. I also learned that while I could find good employees while offering average pay and benefits, it was always much better to offer above average pay and above average benefits to get above average results. This leads me to what I feel is one of the top benefits, the 401(k).

The search for a 401(k) plan

Early on in my entrepreneurial endeavors, I had a few employees and was looking at offering a 401(k) mostly as a way for me to stash more than the IRA limits would allow into a retirement plan. I’ll admit, at the time I was more concerned with my own retirement than that of my employees. The best option at that time would have cost around $6,000 the first year and another $4,000 or so each year after that. Plus, there were all the hidden fees I wasn’t even aware of at the time. Overall, it was a lot of expense for a very sub-par 401(k) plan. I ended up abandoning the idea after realizing that there wasn’t anything affordable and decent for a small company like mine. Several years passed and demand for quality employees increased while the supply decreased. In order to compete I’d have to do better than my competition in terms of benefits and pay.

Recruit, Retain and Retire

Offering better pay is easy; I simply log into my payroll providers app and change some numbers and suddenly the staff is a little happier but that isn’t very sustainable nor does it always make sense from a financial perspective. Benefits on the other hand, well, that’s a mixed bag. Sure, health benefits are a must but most employees have a hard time really seeing the value in that since, unless your company pays the full premium, the employee still shares some part of that benefit expense (their net pay decreases). I see health benefits more as a box that has to be checked in order to recruit and retain talent.

Now, the 401(k), that’s a game changer. Of all the benefits I offer employees, the 401(k) is the one they get most excited about. Maybe it’s because they don’t expect a small company like mine to offer one so it’s seen as a bonus but I think its more because this is the first time most of them have ever been offered that benefit.

Birth of 401GO

So, how did I finally find the solution for offering a 401(k)? I had a friend in the finance industry, a 401(k) advisor at the time. He put me in touch with a few people and we looked around and found there wasn’t really a good option for a company of my size. My advisor and I discussed the current state of the industry and the aversion to small plans and figured we could do better. We assembled a small team and set out to do the impossible. We found some of the most innovative leaders in the 401k space and our little team created 401GO. After a year of hard-core development, I’m proud to say, one of my businesses was the first client to join the platform.

I’m now passively involved in a few of those early companies as my time is now primarily dedicated to 401GO but I still get excited, as I’m sure my employees do, when I log into that first 401(k) plan and see 100% participation rates and the collective amount our little company is saving for retirement. Also, I’m very confident that the full benefit offering of my company competes with businesses much larger than me and allows me to recruit and retain talent that was previously out of reach. I have been able to steal away several key employees that left the ‘security’ of a large corporate organization to come work at one of my scrappy start-ups due to a better overall offering from my company. Sure, it isn’t just the 401(k) benefits but they do play a key role and I’m confident the plan we offer is better than anything they’d find elsewhere.

Everyone wins with 401GO

When 401GO was started, the focus was always first on the employee. We learned that the way to do what is best for the employee is to also do what is best for the employer. Through automation and technology we were able to build the industries most efficient and automated 401(k) administration platform. This leads to cost savings and massive scalability. Suddenly, we could do plans for companies as small as a single employee (often just the employer). This tech-centric approach also makes it possible to offer access to the same premium fund selections and portfolios that the ‘big guys’ can offer while keeping costs low. In fact, while the industry average asset under management fee (AUM fee) is above 1.5%, for clients on the 401GO platform that fee is ZERO. For the employer, the fees are incredibly low too, at $9 per employee per month it is certainly the least costly benefit for a company to offer and well below industry average. As for hidden fees, start-up fees, monthly minimums, we’ve set those to ZERO as well.

401GO wasn’t created just for small businesses, as business owners ourselves, we recognized the importance of businesses advisers such as CPAs, benefit brokers, insurance providers, payroll providers and such. Because of this, our platform is designed to work with them and help them make their jobs easier. For example, integration with payroll systems makes the ongoing work of administering the 401(k) virtually disappear. For financial advisors and CPAs that want to offer their clients a 401(k), we handle all the paperwork, administration and compliance associated with a retirement plan so that adviser can focus on advising and taking care of their clients more pressing needs.

For me and my small company, the search for a 401(k) resulted in a “happily ever after” ending. It took over two years to build the solution we were looking for and it is still in constant refinement but the end goal has already been met. I’m proud to say, my small business now offers a 401(k) and best of all, its a plan that is more efficient, and ultimately more beneficial to employees than anything my biggest competitor offers. Now, all small businesses can offer this amazing benefit.

The Future of Retirement and the 401(k) Syndicate

Many Americans tend to think that a 401(k) plan is an auxiliary benefit, much like taking vitamins to stay healthy, but when it comes to actual “serious” benefits it’s lower on the list of absolute necessity. This might be attributed to the converging views of cost versus value—and if you add in the ingredient of complexity and time along with that overall cost the value decreases even more. That same group of Americans may hear the noise of other investment opportunities that provide for far better returns. The perspective could also come from dissenting voices within the retirement industry itself after having been “behind enemy lines” and seen the amount of waste, cost, complexity, inefficiency, and nay we say it, greed.

Regardless, the stigma of superfluous or unnecessary exists and is very much attached to what would appear to be the primary retirement vehicle in the United States today. How did we get here? The “Father of the 401(k) Plan,” Ted Benna, has long been outspoken about what has happened to the 401(k) plan since its emergence in the 80s. He said: “I’ve been quoted saying I would wipe out the whole thing. Really, what I was referring to was the investment structure, not the 401(k) entirely. I’ve documented the history of these and how participants have been impacted, and it’s not a pretty picture. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.” Essentially, the investment options have gone out of control with way too many choices for the sake of diversification, and then the costs have been historically shifted from employer-paid to employee-paid.

Technology: Killing Two Birds with One Stone

The primary goal of a 401(k) plan is to save for retirement (whatever that may look like differs by individual but the purpose is the same), and instead of that plan and path being straightforward and clear, it has been riddled with obstacles, exceptions, and distractions. Obstacles such as cost and lack of technology create roadblocks, as well as other “more important” benefits taking the focus away from a business keeping retirement and a 401(k) plan on the essential benefit list. However, even when you get past those things, you then face the biggest hurdle, the amount of time. Those gearing up to start on such a metaphorical and also literal journey may not realize how much they will need to pack for the trip. Like the traveling King Arthur in Monty Python and the Holy Grail in search of a crew and crusade, never realized that he’s been the butt of the joke to the viewers, the employer taking steps to sponsor a 401(k) plan may indeed feel the inadequacy of navigating that quest. Imagine if the journey was in a straight line with plenty of signs and alerts along the way, no detours or “side quests,” how much more appealing would the 401(k) plan be? This is where technology comes in and this is where things change. Technology will be the savior of the 401(k) plan, and the results will be quite evident.

Technology changes an industry, and in a very real way normalizes simplicity. When have you ever heard someone say, “You know, I used this tool to make things harder and more complex?” Never. Unless of course it’s for a workout, then it would still be providing for desired results from the user (better physical shape). Technology is the “king of the hill” in every fight for the top. It just may take a little longer for it to make it up there for some of these battles. The change that technology provides takes longer because of a couple reasons: fear of change and cost. The “If I pay that much doesn’t that mean it’s better quality?” or “I’ve done it this way a 1,000 times, why would I change it?” questions also pop up.

There are many examples of how technology has upended an industry and created an uncomfortable disturbance, but in most cases it is for the benefit of the consumer and longevity of that industry.

Let’s take, for example, buying a car. How has that industry changed? There are so many different services and apps available to us to buy a car. You can see all of the options clearly and do side-by-side comparisons, as well as pull up reviews and comments from the millions of others doing the same thing. You can order a car and have it delivered to you! No more of the sitting at a dealership with the back-and-forth negotiation on price and options. Technology has made it simple so you can see what you’re getting and knowing what it costs. Transparency and efficiency.

Path of Automation

That same principle should be applied to a 401(k) plan.

The amount of time that goes into the creation of a 401(k) plan can be sluggish and somewhat archaic if you compare it to any other industry in which they’ve accepted the transition to new technology. Checklists and manual reviews of forms and documents to determine what a company wants for a 401(k) plan just shows how far we’ve strayed from the Ted Benna vision. How much paperwork do you have to go through before the plan has officially started?

It’s imperative that you incorporate automation to the retirement industry and more specifically 401(k) plans. If this is going to be prevalent, affordable—which it should be—it is only through technological advances and methods to get there.

Let’s automate the plan design options for immediate setup of the 401(k) plan. Let’s automate the enrollment process so the manual hours used to set it up and sit down and go back and forth is eliminated. Let’s automate the nondiscrimination testing, the annual notices, and lastly the tax filing. Automation is the time saver and in the end the equalizer for pricing and accessibility.

With automation in place it leaves much more time for the important elements that shouldn’t be snuffed out. Connecting with people and reinforcing the importance of saving and setting goals. Let the other “complicated” stuff turn and move like the cogs in a watch. Keep the time, serve its purpose, but not be a distracting contraption strapped to your wrist.

The 401(k) Groups

It is said that the multiple employer plan (MEP) was created to help small businesses. This type of arrangement is designed so you can group many employers under one 401(k) plan managed by experts. This would hopefully take the burden off the small business with fiduciary responsibilities assisted and costs being aggregated in one place.

There is a closed MEP and an open MEP (which will eventually change January 1, 2021).

The closed MEP can be sponsored by many types of organizations, more specifically associations, professional employer organizations (PEOs), chambers of commerce, and other type of employer groups. In other words there has to be a level of commonality connecting these type of employers under a closed MEP. The purpose of an MEP is to provide a one-size fits all solution for those businesses joining it. Not to mention the single Form 5500 filing.

One simplifying example of an MEP is buying products in bulk. You buy multiple items to get a discounted price. That discounted price should then carry into the overall cost. Therefore, an MEP should have better investment options, lower cost, and overall level of services rendered. At least, that is how they are advertised and promoted.

An open MEP does not have the commonality component to join employers together. There is still a plan document for each employer, and separate tax filings with the Form 5500. The idea is to have enough employers grouped together to demand pricing (see bulk buying example above) that is lower and additional have better access to high quality investments.

The next option, which is a version of an open MEP, is an Exchange Plan. Typically you have a third-party administrator that manages the Exchange for the administration and tax filing purposes, but all the employers are separate other than assets grouped together on one record-keeper. These are simply the precursor to a pooled employer plan.

These types of plans do, however, give a false sense of separation for the employer to the MEP in regard to fiduciary responsibility and costs—I would even say investments as well. All of the service providers in place come with a certain cost to managing the MEP, and it should be examined how these type of setups can ostracize businesses of a certain size. Furthermore, if the goal is to display the 401(k) as a benefit that should be simple and available to all, it’s not doing a good job of that in terms of leveraging technology over bulk pricing.

Think of it this way, if you can produce something without having to expend a lot of manual labor and the process is automated, it will be more affordable without the need to buy bulk. Another good example of this comes from the automobile industry again. The technology behind the assembly line and the ability to more easily make the automobile is what led to affordability.

So, what changes have happened in the retirement industry to allow for technology to dramatically reduce cost and raise saving potential?

The last couple decades we have seen an increase in contribution limits, auto-enrollment, and more recently with the SECURE Act the re-birth of what will be lovingly referred to as the “PEP” or Pooled Employer Plan.

The PEP is not new, but will certainly be in a new “form,” effective January 1, 2021 and will give opportunities for anyone to sponsor an MEP. No more commonality requirement, increased size for the MEP without a required audit (if none of the employers are over 120 participants), and a benefit group that can be established by financial organizations and business groups instead of just the expected PEOs, chambers of commerce, associations, and other employer groups.

These changes, however, do not again resolve the massive gap of Americans not saving for retirement or having a saving mindset at all. More than anything it does create a clamor of 401(k) industry professionals looking forward to how they can focus and bolster their own business by accommodating a new version of an MEP.

The traditional or legacy 401(k) providers would offer a multiple employer plan (MEP) or pooled employer plan (PEP) to solve the problem of affordable options for the small businesses, even though they know that that offering is certainly not on par for cost and efficiency.

Why buy in bulk for services that in comparison are going to cost your business less if you buy direct?

In most cases, the MEP option can be overkill for a small business. Overkill on price, overkill on services, and overkill on what is needed. So, the original statement about an MEP being made for the small business isn’t exactly true if you look at the prior examples of what technology does. Is it what a small business needs? In my opinion, no. The technology is out there to produce a competitively priced and meaningful 401(k) plan without the buying in bulk option.

Keep in mind, it will be the same organizations of service providers looking for the opportunity to promote an MEP that have been doing it for years. The PEP will be a new face and may help close the retirement gap by a very small percentage.

The 401(k) Syndicate

Now there have been a roll out over the years of Fintech companies offering “simplified” solutions for the 401(k), each having a different approach whether on pricing or what their technology can do. Make no mistake, these companies are trailblazers. They have made the path much easier to travel, but we are still left with a real dilemma on market saturation. There are still millions of Americans not saving for retirement and businesses not making the step to sponsor a 401(k) plan.

The old verses new tug-of-war is happening. Those most to benefit in this exchange, however, is the small business. The new Fintech wave of 401(k) providers is gathering to come crashing down (in a good way) on the small business, and the small business doesn’t even realize it. Also, it may seem odd as previously the small business was the least pursued by industry providers for the less than blatant reason of expense and time it takes to manage these smaller-sized plans and the ultimate payout for them.

But what if you could have a 401(k) group, a syndication, that allows all business sizes in with pricing and options that larger organizations command? A 401(k) Syndicate is a group of employers (mostly small businesses) that create a 401(k) plan on a Fintech solution, such as the platform 401GO offers. This platform is the perfect stage for every type of organization, including the financial advisors, PEOs, chambers of commerce, associations, medical groups, manufacturing groups, CPAs, payroll companies, etc.

The 401(k) Syndicate is a simplified version of the MEP. Think, MEP Lite. For example, imagine an association having a 401(k) offering, branded with their group, an automated structure in regard to administration, testing, notices, and annual filing, and the association holds no fiduciary burden nor a required expertise to offer such benefit. The automation makes plan setup fast, administration simple, integration with the flip of a switch, and most importantly, costs so low that the old or legacy service providers can’t fathom how something like that can be offered and remain in business.

This is what technology does. It simplifies, and it makes any industry adjust the baseline costs of an offering. Everyone can be ready for retirement; everyone can have access to a 401(k) plan. Instead of sponsoring an MEP or PEP as is predictably advertised, organizations should think about creating a 401(k) Syndicate. There now becomes the freedom of choice instead of the lack thereof.

A financial advisor can establish his or her own 3(38) investment lineup and provide their own models for a guided portfolio Robo-Advisor for their very own co-branded 401(k) Syndicate, and feel comfortable knowing these things are in place for businesses of all sizes to join.

The other more miraculous feature of a 401(k) Syndicate is that it can be set up in hours and not months. Also, there isn’t the locked-in mechanism that is so discretely masked with sponsoring an MEP. Furthermore, it can be a game changer for groups looking to provide a 401(k) benefit to member businesses—especially the small business!

In addition to the speed and efficiency of setting up this type of plan group is the transparent pricing. For 401GO the employer fees of $9 per participating employee a month (PEPM) are affordable for even the smallest business. Why charge a setup fee or a document fee when automation handles it? The manual steps, the data input, the process has all been simplified. As it should be! From the plan setup to the annual administration, the funnel into a 401(k) Syndicate is consistent and co-branded for the employer to have the look and feel of an MEP, but not all the extra expense.

Ultimately, there is no “release date” for a 401(k) Syndicate because it’s available now. No waiting until a legislative session. The technology is currently in place at 401GO, and more importantly will only make things easier, more affordable, and commonplace for a small business to have a 401(k) plan.

Come join us at 401GO to spread the vision of everyone ready for retirement, and 401(k) plans being simple and affordable for all.

State Secure Choice Programs: Helping Your Clients Navigate Their Options

  • A guide for Advisors, Accountants, Benefit Brokers, Payroll Providers and other practitioners to help guide your employer clients with employees in the affected states.

Overview

Everyone deserving the option to retire is a noble philosophy that modern U.S. society has embraced.  Paying for this, on the other hand, has been a mixed bag.  Social Security provides a bare minimum of benefits which leaves us with personal savings such as 401(k)s, 403(b)s  and IRAs and for a dwindling fortunate few, defined benefit pension plans.  Many states (and some large) cities have taken action to thwart the looming social costs of supporting millions of elderly who won’t have sufficient personal retirement savings.

These states have put into place Secure Choice programs where employees will have access to a workplace retirement account. Most states such as CA, OR, IL, MD, NJ, CT and NM are making it mandatory for employers (based on a minimum number of employees) to participate in Secure Choice OR have their own qualified employer-sponsored retirement plan such as a 401(k) plan, SEP IRA, SIMPLE, 403(b) plan, or defined benefit pension plan.    Secure Choice programs have thus far withstood numerous court challenges (specifically, California) and opposition from the federal government (since 2017).

Some other states such as NY, VT, WA and MA have voluntary programs (not a mandate) such as open Multiple Employer Plans (MEPs) or state facilitated marketplace programs.  Many states are actively filing legislation to develop Secure Choice programs or study them in more detail.

Secure Choice may be a great fit for many employers and their employees.   However, between the required work placed on the employer and the costs to employees, there are other options available. The purpose of this guide is to help you as a trusted partner for your clients to help them make the right choice.

What do the Secure Choice Programs look like?

(based on IL, CA and OR thus far)

  • Roth IRAs (Traditional IRAs planned for future availability)
  • Institutionally priced investment options including:
    • Target Date Funds
    • Capital Preservation Fund(s)
    • 1-3 Index funds
    • ESG fund (CA only)
  • Automatic enrollment at a 5% default rate
  • Payroll deducted contributions
  • Annual increases of 1% (except IL)
  • Employee paid/ No Employer fee
  • Not an employer sponsored plan and exempt from ERISA

For CA and OR the 1st $1,000 for each employee goes into a Capital Preservation fund (money market fund) unless the employee opts otherwise. Account balances over $1,000 are then defaulted into an age-appropriate target date fund.  IL has  a 90 day period where contributions are held in a cash fund and then moved to an age-appropriate target date fund.

Employers (or their designees)  must add and update employee rosters, send payroll deductions and make changes to employee deductions as directed by the Secure Choice program administrator.  As of this writing, there is no automation with payroll providers to facilitate this however, Ascensus (the program administrator for all 3 states currently in operation) is developing it.  File Transfer Protocol (FTP) file transmission is available too. Some programs hold the employer responsible for providing enrollment materials to employees or providing the program administrator their email address.

The employer is expected to be unbiased and have no role in helping employees to decide to participate or how to invest.  This is intended to protect the employer from ERISA fiduciary liability. That said, the current federal government doesn’t share this view and there is the potential for additional litigation.

Ascensus, the program administrator, handles employee service, withdrawals, beneficiary designations, etc. They also provide the employer portals and tools for employers to perform most of their administrative responsibilities under the Secure Choice Programs.

Enforcement of employer responsibilities is handled by the States and not Ascensus.

Even if you have a client that already has a workplace retirement plan, each state with a Secure Choice mandate does require each employer to register their exemption with the program to avoid future notifications regarding compliance.  There are no direct penalties thus far about complying with this requirement, just the implied harassment factor.

Here is a summary of the 3 states that have mandatory Secure Choice programs and 4 key considerations for each state’s respective program.

State/ ProgramWhen Effective/Required EmployersWhen must employees be added (from their hire date)?Employer Fines for Non complianceEmployee Fees (annually)

Illinois Secure Choice

NOW in effect! 25 or more employees and  2 years in operation60 daysUp to $500 per Employee annually0.75%

Oregon Saves

NOW in effect! Employers with 5 or more  employees

 

Employers with 4 or fewer employees: by January 15, 2021

60 days$100 per eligible employee, up to a maximum penalty of $5,000 per year~1.0%

California

CalSavers

Open now

 

>100 employees by September 30, 2020 

>50 employees by June 30, 2021

5 or more employees  by June 30, 2022

30 daysUp to $750 per Employee0.825% to 0.95%

States with Secure Choice Programs in Development

State/ ProgramLatest Progress/ When expected?Required EmployersOther
MarylandSavesApril 30, 2002 Deadline for provider RFPs10 or more employees that work 30 hours/weekPlans to have a managed payout fund (retirement income)

 

Offering $300 credit for each employer

New JerseyExpected, March 28, 2021. Can be pushed back by 1 year.

 

To be rolled out in phases, with large employers going first.

25 or more employees (2 years of operation)$500 per employee fine for failing to timely enroll employees with potential increasing penalties for multiple violations.

 

Employers that fail to deposit any portion of contributions will be subject to a penalty of $2,500 for a first offense and a penalty of $5,000 for the second and each subsequent offense.

ConnecticutApril 2020, selected Sumday, a subsidiary of BNY Mellon, as the administratorMore than five employees that are at least 19 years old and making at  least $5,000 annually 
New MexicoSigned into law Feb. 2020  

Top 10 Types of Employers That Should Use a 401(k) Plan Instead of Secure Choice.

Please note, there are options other than 401(k) plans an employer can adopt that exempt mandatory participation in Secure Choice.

1. Does the employer have a lot of employee turnover and/or a lot of part time employees?

Many employers such as ones in retail, food service, agriculture and temporary labor often experience high rates of employee turnover especially within the first 3-6 months of employment.  Secure Choice essentially requires all W2 employees (age 18 or over) to be added to the employer’s roster through Ascensus within 30-60 days of hire. This can be quite an administrative burden for most employers.  Plus, there is the risk of fines for non-compliance.

A 401(k) plan can limit eligibility to employees who work 1,000 or more hours in a year and/or have 1 year of tenure.  With the recently passed SECURE Act, part time employees are allowed to participate in a 401k after achieving 500 hours of service each year for three consecutive years.

2. Would automatic enrollment cause confusion for their employees?

As effective as automatic enrollment has been to help nudge better individual savings behaviors, it has had the unintended consequence of creating employee HR communications problems for employers. Employees may not see or understand communications and may realize what is happening after they notice a change in their take home pay.  They will typically inquire with their employer’s HR /payroll function about what is happening.  Even then, the employee must then contact Ascensus to stop or change the deductions, risking more confusion and delays.

3. Are there a lot of highly paid employees or employees that already have personal IRAs?

Keep in mind Secure Choice programs are basically Roth IRAs subject to IRA contribution limits that fall on the individual employee to monitor.  This is made especially more challenging for employees automatically enrolled (as mentioned in #2) who may not be paying attention.  Roth IRAs are also subject to annual income limits up to $124- $139K for single filers & $196K- $206K for joint filers as to how much can be contributed.  This table breaks it down in more detail.

FeatureSecureChoice  Roth IRA401(k) Plan Retail Roth IRA
ProviderAscensus onlyMany optionsMany options
Investment optionsState Board selects

 

Employer has no say.

Very limited: Target Date funds, Capital Preservation fund and 1-3 Index funds.

No advice or management available.

Employer can select

 

Usually more options available plus advice and management options.

Employee can select

 

Most options available plus advice and management options.

Employee Contribution limitsRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits$19,500 Pre Tax and Roth ($26K for Age 50+)  Key & highly compensated employees potentially limitedRoth post tax only up to $6,500 annually ($ 8,000 for age 50+) subject to income limits
LoansNoYesNo
Ease of withdrawing fundsEasy, any time and reason) Tax impacts though.

 

More exemptions to early w/d penalty

No Fee

More restrictive,

 

Typically charges a fee.

Easy, any time and reason) Tax impacts though

 

More exemptions to early w/d penalty

Fees vary

Employer Contributions (ie Company Match)NoAllowed, optionalNo
Automatic EnrollmentMandatoryOptional (depending on provider)Not applicable, Individual chooses
Fees/CostsEmployer- None

 

Employee- (0.75-1.00%) of account balance

Employer- Varies (some are 0)

 

Employee- Varies (some are 0)

Average Total cost is 2.23%  per 401k Averages Book

Employer- NA

 

Employee- Varies (many are free)

4. Does the employer have employees in multiple states especially in states with mandatory Secure Choice programs?

If so, this can be an administrative nightmare and can create an unfair balance of benefits in employees varying by their state of employment.   It would likely be much easier to have a 401(k) plan for ease of administration and consistency with employee benefits.

5. Could the employer and employees be subjected to Ascensus’ marketing and sales?

Ascensus is a large, well known provider of retirement and savings products and is well regarded in the industry.  Vanguard entrusts its small plan 401(k) plans to Ascensus. Thus far, IL, OR and CA have selected Ascensus as their sole Secure Choice provider.  Ascensus provides its own suite of retirement plans and other employee benefits. States may have limitations in their contracts with Ascensus regarding direct marketing of their products.  Even so, employees and employers will have a relationship with Ascensus through Secure Choice.   Entering the Secure Choice business is certainly an entrepreneurial endeavor for Ascensus who is taking the risk that it will eventually be profitable.  That said, Ascensus has had its fair share of setbacks between private equity firms exchanging ownership stakes, a botched IPO plan  and a recent acquisition binge.

6. Is the employer sensitive about sharing private data with a provider they have not vetted themselves? 

Employee data such as Social Security Numbers (SSNs), e-mail and mailing addresses and other personal information as well as the employer’s Tax ID number and bank information must be shared with the program administrator, Ascensus.  By all accounts, Ascensus has the requisite cyber security bonafides, but what if there is a breach?

7. Is the Employer technology-challenged/overwhelmed?

The employers’ responsibilities under Secure Choice require the employer (or its designee) to regularly add/update employee records, remit payroll deductions and other tasks by logging into an online employer portal and coordinating with their payroll vendor.  As mentioned previously,  there is no automated payroll integration with Ascensus, currently. This may be too much for some employers to bear where 401(k) plan administration can be handled by full-service providers (some high touch/low tech or vice versa) and payroll integration is widely available.

8. Where a flat % payroll deduction can be problematic.

When an employee’s payroll deduction is percentage-based it often results in unintended fluctuations in take home pay.  This is especially true for many hourly and variable compensation (such as commision-based) employees who would prefer a dollar-based election like $20 per week.  The current Secure Choice programs allow only a percentage based election.  401(k) plans will often allow more flexibility that allows payroll deductions to be dollar-based, percentage-based or both.

9. Can the employer afford to pay?

Even if they can afford a little bit there are many low cost 401k options available and some are zero cost to the employer.  Also, with the federal start-up 401k plan tax credits this can make it even more palatable.

10. Is the employer comfortable being a fiduciary?

The sponsor of a 401(k) plan always has some fiduciary responsibility (for the DOL’s expectations for plan fiduciaries see here).  An employer can enlist co-fiduciary professional specialists to handle administration such as a 3(16) fiduciary and/or an investment professional (such as an advisor) to act as a 3(21) or 3(38) fiduciary to minimize their fiduciary obligations.

Which Employers Should Consider Secure Choice over 401(k) and other plans?

  • Do many of its employees not communicate in English?

Many Secure Choice programs are offering employee materials and support in a variety of languages that typically aren’t available with other retirement plan options at a comparable cost.

  •  Did the employer have an ERISA plan previously but got into trouble?

If an employer mishandled a prior ERISA plan such as a SEP-IRA, 401k plan or even a non-retirement benefit plan, they may be prohibited from sponsoring another ERISA plan by the IRS, DOL or other authority.  Similarly, maybe they ran afoul of rules and voluntarily terminated a plan but will be under tighter regulator scrutiny should they sponsor another plan or should just completely avoid this responsibility entirely. In these cases, Secure Choice with its non-ERISA status (at least how the States interpret ERISA) would be preferable.

  • Wants no fiduciary responsibility, whatsoever.

Limiting and eliminating fiduciary liability is a real concern for many employers. 401(k)s and other plans have ways to limit this liability, but Secure Choice programs were deliberately designed to be exempt from ERISA fiduciary obligations by the states that created them.

Ways to help Employers

Help them weigh the costs.  Even though there is no fee for Employers, they incur costs for handling payroll and employee data through Secure Choice.  There is no payroll integration automation currently. For example:

  •  Estimated 5 minutes to add or remove each employee
  • May have to distribute program materials (new hire packet)
  • Estimated 15-30 minutes to remit payroll deductions each payroll
  • Typos, mistakes, errors, questions can take hours or days to resolve

Also, they should consider these potential costs:

  • Risk of fines/penalties for not adding employees or failing to remit contributions
  • Dealing with employee relations especially for auto enrollments
  • Opportunity cost of gaining assets in an employer sponsored plan to get better terms. Remember: Roth IRAs cannot roll into 401(k)s!

If the Employer already has an eligible retirement plan:

  • Check in to see if they have registered their exemption with the State and offer to help them if they haven’t. See these links for more info: Oregon, Illinois, &  California. Note, CA requires an initial access code. If the employer doesn’t have one they can request it here. It can take 2 days to obtain it.
  • See if they would be interested in using Secure Choice for ineligible employees of their current retirement plan(s). Employees can sign up and fund it directly & the employer can opt to facilitate payroll deductions.
  • Inquire about how they are doing with their current plan and providers, maybe they are considering terminating their plan but would then have to participate in Secure Choice anyway.

If the Employer is already subject to the mandate (i.e their deadline has passed), ask if they are participating

–           If they are,  inquire how it is going and f they are having trouble with it

–           If not, inform them of the requirement and potential fines.  Help them with their options.

If the employer has their Deadline coming up:

  • Inform them of the requirement, discuss their options
  • Could join Secure Choice now, determine if it’s a good fit and then make a decision later about getting a 401(k) or other eligible plan, instead.

Opportunities to help Employees impacted by Secure Choice

Employees have limited investment options in the Secure Choice Roth IRA programs and no advice or management of their accounts is available either.  Investment professionals can offer a lot of help to employees who need guidance. Also, some employees may be better served with a Roth IRA through another provider, a Traditional IRA or other individual accounts because of their specific situations or income considerations.