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What are Multiple Employer Plans (MEPs)?

Multiple Employer Plans (MEPs) have been around for decades, yet, many people have never heard of this type of retirement plan.  A multiple employer plan is a plan maintained by two or more unrelated employers.  MEPs are often coordinated via a trade or business association.  For example, an MEP could be sponsored by a state dental association or a group of companies spread across the U.S. that share a common nexus, such as auto part manufacturers.

Why consider forming an MEP?

Let’s expand upon the concept of an auto manufacturer MEP.  Taking advantage of economies of scale, each auto manufacturer that adopts into the MEP shares in the benefits of its collective structure.  By pooling their investments, administration and governance structure, the MEP members could garner greater efficiencies and purchasing power. MEPs are formed to minimize costs while adding value-added services, typically offered at a premium to stand-alone retirement plans.  Just as important, plan sponsors can often minimize their fiduciary liability by participating in an MEP.

What are some of the main benefits of MEPs?

Plan Costs – By participating in an MEP, plan sponsors can potentially benefit from a reduction in:

  • Staff time and labor used to administer the plan
  • Recordkeeping costs
  • Plan audit costs
  • Investment expenses
  • Form 5500 costs
  • Plan amendment and restatement fees

Administration – Employers can outsource many of the responsibilities associated with plan administration to the MEP sponsor.  Some of these duties include:

  • Approving loans and hardship withdrawals
  • Approving distributions and qualified domestic relations orders (QDROs)
  • Plan document and operational compliance
  • Form 5500 administration
  • Plan audit, when applicable

Investments – Employers can benefit from the aggregate plan`s assets and by being able to outsource investment management responsibilities.  Some of the benefits include:

  • Investment menu selection
  • Ongoing investment monitoring
  • Access to institutionally priced investment options

Governance – Employers can outsource certain plan sponsor roles to the MEP

  • The MEP is structured to assume an administrative fiduciary role
  • The MEP is structured to assume the investment fiduciary role
  • The member company shifts its Fiduciary liability to the MEP

Though you may not have heard of an MEP, they are quite common in the corporate 401k space.  They are also gaining popularity with legislators, who want to provide coverage for small businesses (regardless of a common nexus) that are not offering employees any type of vehicle for retirement savings. These are called “open” MEPs and a timely reference is the Retirement Enhancement Security Act (RESA) of 2018. Further, we are seeing higher education organizations create MEPs that are structured as a 403(b) plan rather than a 401(k).  For example, 14 independent colleges in Virginia recently decided to create their own MEP to share in the outsourcing of education and advice, the monitoring of investments and fees, administration and fiduciary responsibilities.

MEPs come in all shapes and sizes and even offer sponsors flexibility with different plan designs. However, MEPs must adhere to certain plan qualification rules under IRC 401(a), such as with vesting, eligibility and distribution rules.  In other words, some of the rules may apply to the aggregate plan while others to the adopting plan sponsor.  Here is additional insight.

Hopefully, you now know a little more about Multiple Employer Plans and don’t confuse them with other plan types.  Quite often, people mistakenly refer to them as Multiemployer Plans, which are those created for unrelated companies covered under a collective bargaining agreement.  But, that is a whole other story.

For further information, please contact us at info@www.thirtynorth.com

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The Biggest One Day Loss Ever…Really?

After the recent volatility in the market, I once again recall a few reasonable tips that help me maintain a long-term focus on investing.

 

Tip Number 1 – First, although you may be watching the “financial” news or an “investing” expert on your local news, remember they are selling news first and foremost and shock value sells.  I always remind myself to take what I hear with a grain of salt.  Don’t get me wrong, I gather valuable information from the financial media.  However, when, like on Monday, February 5th, I hear experts on the news discussing the fact that the Dow dropped the most ever in a day, I take pause.  What does that really mean?

 

Once a drop in the Dow of 250 points seemed large, but is now only a 1% move.  This may feel painful when you look at your account balance, but volatility of this nature is normal in the stock markets even if we haven’t experienced it in a while.  As Blair duQuesnay, our Chief Investment Officer, reported Monday, February 5th, the 1,175 point drop, when measured in percentage terms, was not in the top 20 historical one day moves for the Dow (https://youtu.be/me7449asL_c).  In addition, the Dow is comprised of 30 mega-cap industrial US companies.  In today’s global world, this is a narrow list of companies used to measure a much larger universe of stock investment options.

 

While the Dow is a quick proxy to the markets that is discussed prolifically, for globally diverse investors with holdings in different asset classes including bonds and alternatives, a deeper dive is prudent on these days that are characterized in the press by fear and doom.

 

Tip Number 2 – This brings me to my second tip which is that you haven’t lost money in your account unless you sell.  I often hear pundits on the news talking about how much the market lost in a day.  The correct word, in my opinion, should be the amount the market declined.  Then, it might be easier to remember that over the long-term, back to the 1920s, the market has been on a steady incline only temporarily slowed by short-term declines.

 

Yes, the value of an investment on a given day may go down or up, but it is the long-term that really matters.  Historically, on average over the long-term, the stock market has gone up delivering positive returns in spite of days that get mischaracterized as the worst down day ever.  If, in a moment of fear, you sell, then you have locked in the loss.  However, if you hold for the long-term and achieve the expected growth, you should recover the temporary decline in value and more.

 

Owning a diversified portfolio that includes investments in different asset classes all over the world can effectively help manage the volatility of a portfolio as a whole when one asset class, like stocks, is suffering a temporary decline.  I included the cartoon above hoping to make you laugh, but also because many investors feel the market ups and downs most acutely in their 401(k) accounts.  Fear raises its ugly head here almost more than anywhere because we our retirement savings are at risk.  However, taking an appropriate amount of risk in your investment accounts is paramount to achieving a successful retirement.  This is why diversification is important to control the volatility while maintaining the right level of risk in your investment strategy.  Remember, it is time in the market that matters not timing the market that is most likely to help prevent us from having to live off our belly fat in retirement.

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What do Gucci, CenturyLink and Fujitsu have in common? Read On!

I continually write on fiduciary issues and am very amazed by the number of lawsuits still being initiated and settled.  The trend is certainly not slowing down and fiduciaries, beware.  Please note that even though the service provider’s name is often in the headlines, it is the plan fiduciaries that are being sued.  Additionally, I notice that the size of the plans being sued are getting smaller, meaning no longer are just the mega-plans being targeted.

According to the Investment Company Institute (ICI), 401(k) plans held $5 .1 trillion in plan assets as of June  2017.  With these dollars, it`s not difficult for plaintiff attorneys to be motivated to get creative with the types of suits being brought against fiduciaries.  Many of the newer fiduciary breach suits against corporations, universities and plan providers involve poor decision-making for both the selection and monitoring of investment options and breaches in administrative decision-making. In addition, the suits go beyond just the use of expensive share classes and are now delving into investment strategy and sub-par performance.  As a reminder, 401k) plan fiduciaries are subject to strict duties of prudence, loyalty and avoiding conflicts of interest and acts of self-dealing.

One recent case involves CenturyLink and their decision to utilize six different investment managers for their large cap fund (5 active and 1 passive).  The fund was benchmarked to the Russell 1000 Stock Index and the suit alleges underperformance against the index for years.  More on the case can be found here:

Birse v. CenturyLink, Inc et al

Another case involves Fujitsu and their decision-making regarding excessive recordkeeping expenses and their custom designed Target Date Funds.  As a result of the suit filed on June 30th, 2016, Fujitsu decided to settle for $14 million citing the complexity and expense to litigate these types of cases.  More on the case can be found here:

Johnson et al v. Fujitsu Technology and Business of America, Inc. et al

This suit is certainly not in style, as Gucci America Inc. is being charged for several fiduciary breaches.  It is being alleged that their service provider, Transamerica Retirement Solutions, had included excessively expensive and proprietary investment options in Gucci`s $96 million 401(k) plan.  The suit alleges that participants were assessed unreasonable administration expenses and that the plan retained high cost and poor performing investments.  More on the suit can be found here:

Gucci Gulp? Another Excessive Fee Suit Filed

Another important fact to the Gucci 401k) suit is that the plan assets are only $96 million, far less than the plans typically involved in these types of cases.  This should serve as a warning to plan fiduciaries that regardless of your plan size, the fiduciary standards are uniform and applicable to ALL plan sponsors.

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A Special Report on 401(k) Best Practices

As you may recall, we have written previously on the importance for retirement plan sponsors to better understand their responsibilities under ERISA to more effectively operate their plans.  In my opinion, it is no longer prudent to default to actions being/not being taken by plan vendors not serving in a fiduciary role. ERISA specifically requires fiduciaries to adhere to a duty of loyalty, a duty of prudence, a duty to diversify plan investments and to not engage in any prohibited transaction, unless exempted.

Do you know which of your plan vendors are serving in a fiduciary capacity, and if so, to what extent?

A recent special report written by Lars Golumbic, of the Groom Law Group, discusses the types of lawsuits being brought against sponsors and offers some suggestions on reducing ERISA risks.

When interviewed by PR Newswire , Lars says “although ERISA class-action lawsuits have been around for years, we’ve recently seen an expansion in the number of plaintiffs’ law firms bringing these cases.  More and more firms are jumping on the bandwagon as they see other firms’ investments in ERISA litigation paying off.  What’s more, even the established firms have significantly expanded their fiduciary targets—and now no plan sponsor or fiduciary is immune from suit.” Read more

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Retirement Savings 101: My Grandfather Taught Me This Lesson

When meeting with clients to discuss saving for retirement, I often note that two of the most critical elements to building wealth for use in retirement are 1. starting early and 2. saving as much as possible. After all, the goal is to develop sources of income for use in retirement as a replacement for a paycheck. Understanding that fact is step one, in my opinion, to beginning to develop a plan. Sources of income in retirement can include Social Security, retirement accounts like 401(k) or IRA accounts, rental property, etc.

In the world of investing and, in particular, investing for retirement, you might easily become confused or frustrated by what seems a daunting task complicated by industry jargon. Frustration might arise because the goal of financial security seems unachievable. Concepts such as retirement readiness (an often used term for saving enough to retire) might create confusion. Further, assessing the potential types of retirement accounts to use could lead to indecision.

Lately, I have read that States are beginning to require that businesses provide access to some form of retirement savings account for their employees even if it is not a 401(k) Plan. Illinois, California, Oregon, Connecticut and Maryland, with Oregon leading the pack, have initiated legislation to do just such a thing. The interesting thing is that the current plans appear to be to mandate businesses to automatically sign up workers for Roth Individual Retirement Accounts (IRA). Workers can opt out, but must take a pro-active step to do so. Presumably, those that choose to contribute can select investments from a menu. Those that don’t opt out are automatically enrolled and if they do not select an investment option will, most likely, be invested into a default investment option, like a Target Retirement Date Fund. Read more

A Roth 401(k) Provides Real Benefits

October 1, 2017

A Roth 401(k) Provides Real Benefits

The Roth 401(k) became eligible for plan sponsor use over ten years ago, in 2006.  However, it startles me that only an estimated 58% of employers offer this feature to their plan participants (Roth 401(k) uptake). The 2017 Roth 401(k) contribution limits dwarf the limits of a Roth IRA contribution. The Roth 401(k) employee elective contribution limit is $18,000. Participants over age 50 can make an additional “catch-up” contribution of $6,000 (total of $24,000).

There are many benefits to contributing to a Roth 401K) and I have listed them in bullet point format below.  But one key advantage is their tax-free withdrawal. Participants with large 401(k) balances amassed through traditional pre-tax contributions should start hedging their tax liability.  Roth 401(k) withdrawals (both contributions and earnings) are not taxed provided it`s a qualified distribution.  To qualify, a distribution must be held for at least five years and made because of the attainment of age 59 1/2 or later, a disability, or upon death.

Roth 401(k) Points:

  • Unlike with Roth IRA contributions, there are no income limitations to participate
  • After-tax Roth 401(k) contributions and earnings accrue tax-free, thereby creating tax-free distributions in retirement
  • 2017 participant contribution limits are $18,000 with an age 50+ catch-up contribution of $6,000. Please compare this to Roth IRA contribution limits of $5,500 and an age 50+ catch-up contribution of $1,000
  • Plan sponsors can also provide a match to Roth 401(k) contributions
  • Participants can contribute to both the pre-tax 401(k) and after-tax Roth 401(k)s (aggregated to $18,000/$24,000 maximum) to create a tax hedging strategy when taking withdrawals in retirement
  • Loans and certain withdrawals are permissible
  • Please note, that Roth IRAs do not have Required Minimum Distributions (RMD) at age 70 ½. To take advantage of this benefit, your 401(k) plan may allow rollovers of your Roth 401(k) balance to the Roth IRA.  This will reduce your total 401(k) account balance and thereby reduce your RMD amount.

If your 401k plan already has a Roth feature then I suggest contributing to it immediately, even if it is only a one-time contribution.  The five-year qualified distribution clock starts ticking from the date of initial contribution. Five years is a requirement to make qualified distributions.  Starting the clock earlier than later can help toward satisfying that requirement.

Many of us are unsure of which tax bracket we may fall into at retirement and/or what tax brackets will be in the future. Building a pool of Roth 401(k) assets helps avoid taxable distributions on a portion of withdrawals in the future. Avoiding taxes is an effective way to help achieve retirement success.  Check with your employer if the Roth feature is available in your 401(k). If not, then perhaps you should inquire further as to why not.

Have Defined Contribution Plan Fees Hit Rock Bottom?

I recently read the results of the 12th Annual NEPC Defined Contribution Plan and Fee Survey, showing that fees remained steady from those reported in 2016. Specifically, the survey found that “DC (defined contribution) plans have a median recordkeeper, trust and custody fee of $59 per participant, a slight increase from $57 in 2016. The asset-weighted average expense ratio for DC plans is currently 0.41%, consistent with the ratio reported in NEPC’s 2016 survey (0.42%).”

So, are the survey results showing a potential bottoming–out in plan fees? In my opinion, providers and other retirement plan stakeholders are now balancing the scale on costs vs. the value being delivered to plan sponsors. Being viewed in a commoditized fashion is not the goal of any plan recordkeeper. Logically, DC plan recordkeepers can only lower fees so much until they start reacting with lesser services and customization.

It appears there have been two primary forces behind the seven-year long downward trending in DC plan fees. First, fee litigation has certainly put sponsors on alert and has prompted them to know not only what the fees are in their plans, but how they are actually being assessed (i.e., revenue sharing). The second driver was the Department of Labor`s ERISA 408(b)(2) fee disclosure regulation that was implemented in 2012 mandating plan sponsors to proactively determine fee reasonableness.

Hearing from the plan provider community is important, so I reached out to a friend and peer, Tim Rouse, Executive Director of the SPARK Institute. The SPARK Institute helps to shape national retirement policy by providing research, education, testimony and comments on pending legislative and regulatory issues to members of Congress and relevant government agency officials. SPARK also represents the largest recordkeepers of defined contribution plans. I posed a couple of questions to Tim on the topic:

Jonathan: “What is your overall view of the plan provider landscape and is more consolidation on the horizon?” Read more

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When Is The Last Time You Successfully Timed A Disaster

I lived through Hurricane Katrina while running a small distribution business here in New Orleans. The business was flooded for 28 days and operations were extremely curtailed for months after. I share this with you because we benefitted from the fact that we had documented our business files and in this case properly backed-up those files electronically. Unfortunately, and like many others, the company needed to make a business interruption claim on its insurance policy. Thankfully, we had the proper records to justify the claim and were able to present them to the adjuster in an organized binder that made following the facts of the claim simple. The adjuster took a look at the binder and said, “You will be just fine.” The truth is that my claim was successful because I had taken the advice of my insurance agent and prepared before the disaster. I am thankful to this day that he gave me the advice he did and that I followed it. In the end, it made that part of the recovery much more efficient.

In the process of working with clients, Investment Advisors draw upon experiences gained throughout careers that often include insights gained from previous jobs not in the financial services arena. It might be argued that the ability to draw upon these “otherworldly” experiences adds to the advisor’s ability to offer in depth advice beyond the construction of a portfolio or the determination of the appropriate level of risk a client should take. After all, we advise clients who are engaged in many different types of work. Read more

Reasons for implementing a Qualified Default Investment Alternative

Participants don’t know what they don’t know.

After sifting through the June 2017 issue of PlanSponsor magazine, I found yet another staggering statistic that reaffirms not only the importance of retirement plan education, but also the positive impact that plan design can have on participant outcomes. In a recent study by The American College of Financial Services, they found that “three in four retirement-aged adults failed a quiz on ways to make their nest eggs last through retirement”. An even more alarming result was that Americans between the ages of 60 and 75 have difficulty understanding important financial topics focused on investment considerations and retirement income sustainability. Let`s not chalk this up to poor quiz taking skills, either. According to the study, “61% of respondents reported having high levels of retirement income knowledge, however, only 33% of those passed the quiz”. It`s simple, this study highlights the importance of providing proper and ongoing education to retirement plan participants. It should also prompt employers to learn more about effective plan design techniques, different types of investment vehicles and available safe harbors.

Yes, plan sponsors can help enhance participant outcomes. Read more

What fiduciary liability? I already use a low-cost provider for my 401(k) plan.

Since the first 401(k) fee lawsuits hit the plan sponsor community over ten years ago, plaintiff attorneys have been honing their skills for uncovering potential fiduciary breaches. A recent article by Nevin E. Adams, Excessive Fee Suit Comes From a New Direction on NAPA-Net, references a recent lawsuit that will hopefully; open the eyes of many plan fiduciaries (http://www.napa-net.org/news/technical-competence/erisa/excessive-fee-suit-comes-from-a-new-direction). The article mentions the suit (Barrett v. Pioneer Natural Resources USA, Inc., D. Colo., No. 1:17 –cv-01579-WJM, filed 6/28/17), where participant William Barrett alleges that the $500,187,123 in assets (and 4,410 participants), gave the plan “tremendous bargaining power to demand low-cost administrative and investment management services and well-performing low cost investment funds”.   But, rather than use the Plan`s economies of scale, “the Pioneer Defendants chose inappropriate, higher cost mutual fund share classes and caused the Plan to pay unreasonable and excessive fees for recordkeeping and other administrative services.”

The rub.

The Pioneer defendants had selected Vanguard Group as the plan`s recordkeeper and investment platform while also utilizing Vanguard`s proprietary mutual funds as investment options. The plaintiffs argue that the plan`s fiduciaries did not take advantage of economies of scale and leverage the $500 million plus in plan assets to take advantage of a lower cost institutional share class. In addition, the plaintiffs argue that the plan`s fiduciaries should have used collective trust target date funds rather than higher cost mutual funds. So, not only is this an issue on the type of share class selected, but also, the type of underlying investment vehicle used.

In a similar excessive fee case, Bell v. Anthem, Inc. , a federal district judge has moved forward most of the plaintiffs claims. Specifically, the 401(k) plan had used high fee mutual funds and paid excessive fees to Vanguard. The argument is similar in that the $5.1 billion plan should have garnered the use of lower cost share classes. In addition, the plaintiffs argue that there should have been a process to investigate the potential benefits of using different types of investment vehicles (i.e., collective investment trusts).

It`s simple, plan fiduciaries have a duty to both select and monitor their service providers and investment options for costs and value. Vanguard has supplied the market with some of the lowest cost passive funds available. However, as a plan`s assets grow and the marketplace evolves, having a due diligence process to efficiently explore alternatives is an important part of a plan sponsor’s fiduciary duty. And yes, this due diligence process applies to those that even use Vanguard.