Steve: It's a process and a progression and again it goes back to some of the things we've talked about. It's really sitting down and what is the overall objective and goals of the company, the owner, and how do you try to structure it to be as I'd like to say, an effective and efficient plan for everybody involved?
Doug: From Rea & Associates studio, this is unsuitable, a management and financial services podcast for entrepreneurs and your business leaders and others who are ready to look beyond the suit and tie culture for meaningful measurable results. I'm Doug Houser.
Around 10,000 people each reach retirement age every day. Unfortunately, not all of them will be able to retire, a trend that promises to continue for the foreseeable future. We continue to hear that the reason older Americans are postponing their retirement is because they, frankly, don't have the financial stability necessary to sustain their current lifestyle. Today, businesses are being asked to help close the gap, not only by taking on older workers but by helping the younger population proactively save for their retirement today. Steve Frank, a wealth management advisor with Investment Partners and Angie Isakson, senior plan consultant with Rea & Associates, is here to talk about how businesses can help their employees overcome the American retirement crisis.
Steve is one of the financial advisors with Investment Partners. Securities and advisory services offered through Commonwealth financial network member FINRA SIPC, a registered investment advisor, Investment Partners Limited is a registered investment advisor. Additional advisory services offered by Investment Partners Limited are separate and unrelated to Commonwealth, fixed insurance products and services offered through Investment Partners Limited or CES Insurance Agency.
Welcome, Steve and Angie.
Steve: Thank you.
Angie: Yeah hello, how are you?
Doug: Good. Good, great to have you here. Great to have you here as we approach year-end and actually the end of the decade. It's hard to believe but here we are, right. So, talk to me a little bit about retirement plans and plan design and what you see out there in the industry today. What's missing?
Steve: Oh, what's missing, that's a different perspective than how do you make it more efficient sometimes too. What's missing is, and I think the government's trying to help with it is giving it access to everybody as much as possible, but with the companies that do have it it's, how do you make it more efficient so it's beneficial for both the company and the employees if possible, to allow them that opportunity to have a retirement vision for them.
Doug: Do you see that tilted one way or the other right now? In other words, are employees just not as aware as they should be of the benefits available to them?
Steve: I would say over the last five to 10 years I've seen more attention to the retirement plan by participants. A big part of what our practice is all about is helping the corporate retirement plans. So we do a lot of individual education and we've just seen the attention from companies to want to get their employees engaged, involved, has been on the upturn, which has been very helpful. It's also interesting, and we'll talk a little bit more about it later I'm sure, but I have, my oldest daughter just started into the workplace and she's working for a millennial company and it's great that they have a retirement plan. The only negative that I have is they don't have a person like me assisting them and she's very thankful to have a father like me to help tell her what to do. But that's where I see the attention's going to the younger generation, that they are starting to pay a little bit more attention.
Doug: So it's more like, okay, here's the plan, but nobody really says, well, here's kind of the benefits. Here are some things to think about.
Steve: I think Angie could support that. I think there's a lot of uncertainty about what's all involved with a retirement plan. A lot with the fiduciary conversation that's out there, companies are very apprehensive. Sometimes they don't want to put themselves in a bad situation. So it's one of how do you try to convey something to all demographics, to the whole workforce to say how it can be effective for the whole plan.
Doug: And Angie, so as a third party administrator, how do you see that benefiting companies? I mean, what gets brought to the table from that regard?
Angie: Well, I think it's a really good idea for companies to have a third party administrator involved. Going back to a little bit of what Steve said, because they cannot do everything on their own and they need us to be involved as the experts. So a human resource department, especially in a smaller firm, they have so many hats that they're wearing. So they need us involved just to help them on the legal side of things, to help them get connected with people like Steve on the fiduciary to help them on the fiduciary side, to help alleviate some of the pressure they have there. Help them just know what to do, give them direction and help them have more ease.
Doug: So, so beyond the compliance part of it, there's obviously the comfort part. So is that in essence you're trying to bring that sense of comfort to the table, right?
Angie: Sure, sure. And to make it more efficient for them and yeah, help them walk through it so they know who to call and how we can help them do what needs to happen. Yes.
Doug: Right. Because I mean, I know in our typical client base, the companies that I deal with and that we run into, you're talking anywhere from maybe 25 to 150 maybe 200 employees and they might have an HR person if we're lucky, but again, their expertise certainly isn't retirement plans. It's sort of like, yeah, we have this benefit plan and they know enough to be dangerous and kind of give it to the employee and that's where it ends.
Angie: Right. And so they need us to be involved so that, the IRS is constantly changing their rules and regulations and they need us to be involved to help guide them and say, hey, this is what's coming down the pipeline. This is what you need to do right now. This is what you can worry about later. So yeah, they need us to help guide them.
Doug: And there are obviously benefits to getting more of the employee base involved, right? And so, how do we go about that process in terms of helping them increase participation, increased education and knowledge among their workforce? What tools do we use there?
Steve: Well, it's a, and I'll go back to the one comment you made, we need to get everybody involved. I think everybody, one of the key elements that I share with people is, everybody in today's environment, pensions that were typical from years gone by are not as prevalent anymore. And if anything, they're going further, further away. And when you look at it for the companies, I make a statement where the only one that's going to take care of your own retirement is yourself. And working as a personal wealth manager we have that opportunity when we sit down with an individual or a family just to sit there and say, social security is my only retirement plan is not the most apprehensive or appropriate, apprehensive bad word, but an appropriate opportunity for them. There's more than just the social security, so you got to take advantage of what's out there and then when a company offers a retirement plan, if it's a 401k, a simple SEP or whatever it may be, then the employee's end is, how do I try to maximize that?
Doug: Right.
Steve: Where, going back to the second part of your question, is something where I would say Angie and I both spend a lot of time working with clients is plan design. How do you start bringing in certain features, benefits, or programs to help alleviate some fears for the company and the employees? How to make things more efficient and systematized for them. One thing that the human element and human nature is, is procrastination and if you could help kind of overcome some of that and some uncertainties of the foreign language we speak called investments and retirement plans, and that's utilizing some auto features that are available to the plans, which could help provide some fiduciary oversight and protection for them. That's where I would say we spend a lot of time trying to work with the companies to make things appropriate for all so that the average employee can have an opportunity to eventually have the golden dream of retirement.
Doug: Yeah. So you can create the tools and get them there. It's just a matter of education and forming and staying on that path. So talk to me maybe a little bit about some of the different retirement plan structures that you see for those typical closely held businesses of employees in that range. If you go from obviously a traditional 401k, we now see more Roth 401k type plans becoming more prevalent, IRA, other things, talk to us at a high level about some of those.
Angie: Okay. Well, yeah, like you said, we have the traditional 401k, but more popular these days, especially in the smaller companies, is the safe harbor 401k with the Roth feature. As you said, there's really no complete solo Roth 401k plan. You have in those plans whether you can do a Roth deferral or, which is an after-tax deferral.
Doug: I was going to say, for those that don't know, explain the difference there.
Angie: Which is an after-tax deferral, which means that the money comes out of your paycheck after tax versus pretax and then down the road when you take a distribution, at least five years from the first time you put in a contribution, you can take that money out without paying any taxes on it, including the earnings that you accrue. So, we're seeing a lot of plans obviously add that, a lot of younger millennials or younger than that even, they're wanting that as an option. They understand that that is a benefit for them. So that is a plan design option as well as, and like I said, safe harbor plans are very popular in our smaller employers and it allows the owners to contribute the most that they possibly can while giving a benefit to the employees as well. So that's kind of a win-win.
Doug: What are some of the base requirements for a safe harbor plan if I'm a company that's got 40 employees say?
Angie: Well it depends on what safe harbor plan you go with because there's more than one variety. We have the variety where there's an automatic enrollment feature, which Steve and I are very big fans of, where you enroll somebody automatically in the plan say at like 3% and then you auto escalate them 1% a year. In the safe Harbor plans you can tap that out at 6%, but I would say Steve and I would probably agree that that's not nearly enough, that you should probably not cap out to at least 10% of pay. So if you go with the auto-enrollment and you can do a safe harbor plan where you are matching on that, but you only have to match up to like three and a half percent of someone's pay. Where in a traditional safe harbor match plan, you're matching up to 4% of somebody's pay. And there's also a safe harbor plan where it's basically a profit-sharing only where you do not have to be contributing yourself as an employee to receive it from the company.
Doug: It's discretionary on the-
Angie: It's discretionary.
Doug: ... based on the company.
Angie: Well, it's not discretionary. The safe harbor contribution is required, 3% is required.
Doug: But the profit-sharing piece is.
Angie: The profit-sharing place than would be discretionary and then the employee would not have to be contributing anything out of their paycheck to receive that 3% required safe harbor amount. So-
Doug: And again, what's the benefit for the employer in the safe harbor plan?
Angie: In the employer then, a lot of the IRS required testing is kind of automatically passed, so to say. So they can contribute up to the maximum amount that the IRS allows each year.
Doug: Great.
Angie: So that is the benefit.
Doug: And those are fairly cost-effective to put in place for small, mid-market companies, I take it?
Angie: Yes, they are. And we work with different platform providers, Steve and I do, to get them the best cost-effective plan possible based on whether they're a startup plan or whether they're a plan that's been in existence for quite a while.
Doug: Do you see more folks, companies that have gone along just without any type of plan, just they've grown as entrepreneurs or do you see more than maybe they've got something in place but it just doesn't make a lot of sense, or that it's not efficient and they're not taking advantage of what they should? What do you see out there?
Steve: Well, why I laugh because for my clients, no, because they're clients and I service the retirement plan. But when I look at our personal wealth management clients, it's a full range of demographics and jobs that people have, and we do run into somewhere probably more on the minority side, the majority that companies do not offer some type of retirement plan. So it is nice to see that, but I do know, especially on the smaller market, there's a lot of companies that just can't afford to do the type of retirement plan that would be probably most appropriate. As Angie made comment, I think the safe harbor type of programs are probably best for all because it does provide some incentive for the company to allow the owners in, we call them highly compensated employees, to be able to defer as much as they can. But at the lower end of things, it allows people to put monies in and they're known as 100% vested with whatever company contribution.
So it's a win-win for everybody involved, so we like that. But there are administrative costs. There are other expenses that are incorporated with it. So there are other types of retirement plans that are out there. You were asking the question before.
Doug: Yeah, what else do you see.
Steve: For the smaller companies, there's a program called SIMPLE IRAs. There is no administrative expense technically with it, but there is that safe harbor provision where there is an automatic company contribution, a matching type of contribution or non-discretionary, which means that they do have to put a contribution in for them and there's immediate vesting on it. But there's also, the government is in their infinite wisdom, put limitations on some of those that you can't put as much away as a traditional 401k. So it really comes down to what is the objective of the company and sometimes the owner, what are they trying to accomplish? Are they looking for something just for them specifically or are they looking for the wellbeing of the whole organization? So that's where plan design really comes into play.
Doug: So it's sitting down with the owner upfront and determining their goals, in essence, because as you said, they can all be different in that regard, right? So.
Steve: Yes.
Angie: Yes.
Steve: And I see that, going back to the last question is, I see a lot of owners are looking at the wellbeing of their employees. What can we do to help them achieve a retirement down the road? Because the irony to it is the owner has the same objective typically.
Doug: Right. Well, and if they're doing something for them, I would think employee retention and all those things play into it as well. And we certainly, in today's labor environment, that's paramount to try to keep your good folks on board and all of that, so that's great. Now I have kind of a different question. You see some of these hybrid plans, we're seeing certainly more ESOPs done with closely held businesses as well. I've seen a KSOP where the 401k is combined with the ESOP. Any advantages there or should you really stick to having those plans separate in some sense? In other words, if there's an ESOP in place, have that, but also maintain your 401k separately. What are your thoughts there?
Angie: I don't necessarily think there's a benefit for keeping them separate. I think it's a good idea to combine a 401k and an ESOP together as a KSOP, yes.
Doug: Okay. But we're certainly seeing more of that kind of wealth transfer among that generation as they look to exit their businesses or at least have some type of liquidity event with their business. So are there ways that you can help kind of structure things along those lines to help their goals along those lines as well as take care of the employees? What kind of solutions come to mind there other than an ESOP or is that really it there?
Angie: Well, I mean you could come up with like non-qualified plans for certain companies. It depends on those plans, they have risks involved, meaning you do not have the protection against if they would go in a bankruptcy or something. The debtors can come and access a non-qualified plan. But definitely if somebody has extended their options within the qualified plan environment, they can go a non-qualified route and a lot of non-qualified plans, they are set up to keep their higher-paid people, their management type people, where they put in a benefit to them that can be discriminary, discriminatory, thank you.
Doug: I knew what you meant.
Angie: Because it's not a qualified plan, so that's an option for some companies. We also go, if you want to go back to the qualified plan route, we also institute cash balance plans. They are pretty popular for doctor practices or lawyer practices or smaller companies that are very profitable, so cash balance plans are definitely a good option for when an employer has reached their maximum capacity within a 401k plan and still have a need to put more money away.
Doug: See, this is where a business needs somebody like you, right, to sit down and talk about these different choices and say, here are the benefits and cost of each of these and it depends on your goals as an owner and give them some different things to evaluate rather than just, here's the traditional and that's it.
Angie: Correct. Right. Yeah. There are options out there. It just depends. A lot of times, especially a lot of times we'd have to start small and get them to a simple IRA and then do a 401k plan, and then grow up into a cash balance plan, and then you have to start small and grow.
Doug: It's a process
Steve: It's a process in their progression. And again, it goes back to some of the things we've talked about, it's really sitting down and what is the overall objective and goals of the company, the owner, and how do you try to structure it to be, as I'd like to say, an effective and efficient plan for everybody involved.
Doug: So Steve, from a fiduciary responsibility perspective, where are some of the shortcomings that you see out there with businesses typically? Again, not your clients.
Steve: And great point. The definition of a fiduciary is having the best interest in mind, and that's where a lot of times it does come into play as who is truly helping the plan design the best possible plan for the employees, the company and everybody involved. And some of the issues that are there are, just some people don't have a skillset or knowledge, as we're talking about, the different types of plans and different structures, some of the uniquenesses to the highly compensated, the non-highly compensated. And some people, they're just not educated enough to be able to do so. So they could act as a fiduciary in some capacities of investment management or something, but when you really look at it, it's how do you look at the full picture of the plant itself. And in today's environment, it is nothing but a fee driven discussion majority of the time.
So, you're trying to get the most cost-efficient plan, but you also want to have some flexibility in the plan. And what I mean by flexibility, and I'll focus a little bit on the investment side, is everybody thinks just go to the index funds or go to Vanguard because they're the cheapest ones out there. Well the irony to it is, there's another investment firm out there that has a lower S and P 500 index fund than Vanguard.
Doug: Wow.
Steve: So if you're not finding that and keeping on top of it, it could be not doing the best. But it's also one, you got to look at the size of plan, as Angie mad reference, there's a lot of things different that you could do for a startup plan then you can do for an established mature plan that has a certain amount of assets than a new startup plan. Some companies and institutions don't cater to that marketplace, so you got to be very conscientious of that. So, it's truly just acting in the best interest of your clients in every capacity you can from the plan design structure, process procedures as well as fees and expenses.
Doug: And I mean, as you just talk about those issues, I can't imagine a company wanting to take all that on, on their own.
Steve: Good luck.
Angie: Mm-hmm (affirmative).
Doug: I mean, there's just no way. How could you possibly keep up with that and be an expert? It's like we say in our business, whether it comes to tax or financial reporting issues, I mean that's where I'd want to bring in an expert like you and say, help me, this is your world.
Steve: That's one of the reasons I got out of the employee benefits side, I did not want to keep up with the health insurance environment. That's its own animal in itself. I like the corporate retirement plan side of the equation, it's a nice match.
Doug: So what changes do you see coming, if at all, I mean if you're a sage outlook here going forward? Anything that we should be aware of or that business owners should be aware of with regard to their plans?
Steve: I think Angie could speak a little bit more on it as well, but I think one of the biggest things out there is what's been going in Congress. There's a new law coming down called SECURE, that is talking about the greater potential of what's known as a multiple employer plan, an MEP type of program, which could have some great effects for those smaller companies that can't or don't, and can't do it or don't afford it, to set up a plan of trying to get a group of companies together. So I think that's one of the bigger things that is out there that could be really a game-changer in our industry in some capacity.
Angie: Right. That's what I was going to pipe in and say, that's the biggest thing out there in the industry right now is the MEPs, the multiple employer plans.
Doug: What would that look like, at least in the initial proposal stage, what's being talked about there?
Steve: You don't have enough time.
Angie: Yeah.
Doug: Too soon to tell.
Angie: It is too soon to tell, but-
Steve: I've learned with the government, I mean anything that until it's passed, you can make all the speculation you want. It's nice that that's being discussed and the House definitely approved a measure. It just depends on what does get finalized. I think there are some great features and benefits, but there are also some detriments to the legislation that is out there too that could impact some individuals too.
Doug: Sure.
Steve: So again, until it's finalized, I read it to keep on top of it, but I don't want to be an expert on it until it's definitive.
Doug: Yeah, a lot to think about for sure. Well, if I'm a business owner, I want to know enough to be dangerous, but this scares me. This is why I pick up the phone and call you guys and say, please come out and help me, because this is way beyond my sweet spots, so to speak.
Angie: Yeah. We've definitely had to unwind some issues where owners have just gone the easy route or the route where they didn't know-
Doug: Or they had a friend that-
Angie: ... enough.
Doug: Hey, I got an investment guy. He said he could do this, kind of thing.
Angie: Mm-hmm (affirmative). And we realize that they're paying a lot more than they really ought to be for something, or they're not in compliance with things that they should be in compliance with, so.
Doug: Yeah. Well, that's great stuff. Well, Steve and Angie, thank you very much. We could go on for a number of episodes here and really get into the details, but from a high level that's fantastic stuff.
So, if you want more business tips and insight or to hear previous episodes of unsuitable, visit our podcast page at www.raecpa.com/podcast. Thanks for listening to this week's show. You can subscribe to unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. And while you're there, leave us a review. I'm Doug Houser, join us next week for another unsuitable interview from an industry professional.
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