What the “F” ? – Part 2 – Fees

wtfpt2A four part series that will address important themes of plan management

 

Last installment we tackled the first 4 letter “F”, fund as in mutual funds. This entry will examine the next 4 letter “F” – Fees. Fees and funds go hand and hand as every dollar that you pay in fees lessen the dollars available for retirement. However, I must disclose that I do not believe that cheapest is best and to date, there are not any federal regulations that state your plan has to be the cheapest. What the regulations do state is that as a fiduciary to your company’s retirement plan you have a duty to understand and monitor the fees associated with operating the plan.

The first fee to consider when analyzing the overall cost of your plan is the mutual fund expense ratios. On http://www.morningstar.com an expense ratio is defined as the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1, management fees, operating costs, and all other asset-based costs incurred by the fund. Let’s breakdown each component by first looking at the 12b-1 fee. A 12b-1 fee is earmarked for the financial professional’s compensation and can range from 0.25% up to 1.00%. It should be noted that not all mutual funds have a 12b-1 fee. If you work with a financial professional that is fee-based or fee for service, then that adviser may select funds that do not pay a 12b-1 fee since he or she does not rely on that fee for compensation. The information on how much each fund in your plan pays in 12b-1s should be accessible through the fund prospectus. Next management fees and operating costs are the portion of the expense ratio that is used to compensate the mutual fund manager for his or her expertise in running the fund and for any costs the mutual fund company incurs in managing the fund (producing prospectuses, mailing costs, building costs, etc). This is typically the largest portion of the overall cost of the fund and is usually higher in actively managed funds than in passively managed funds. Finally there is the mysterious “all other” portion. In the retirement space the “all other” can be especially important since many times this is referring to the recordkeeping service fees (RSFs) or subtransfer agents fees (subTA) that are paid to the recordkeeper of your 401(k) plan. In general both the RSF and subTA fees are paid by the mutual fund to the recordkeeper for keeping all the individual records of its investors; in the retirement plan space that means all of your participant’s records on their individual investments. The tricky thing about these fees in particular is that they are negotiated between each recordkeeper and each mutual fund; therefore they are not consistent or readily disclosed. For example, ABC mutual fund may pay DEF recordkeeper 0.15% in an subTA fee, but ABC fund might also pay GHI recordkeeper 0.10% in a subTA. While the RSF or subTA fee may not be the largest portion of the overall expense ratio, it can be very important to understand the next aspect of your overall retirement cost and that is the cost associated with your recordkeeper and third party administrator (TPA).

In February 2012, the Department of Labor issued its final regulations on plan level fee disclosure under section 408(b)(2); now simply known as the 408(b)(2) disclosure. The very simplistic explanation over the 408(b)(2) regulation is that it was designed to disclosed to the plan sponsor the cost of doing business with covered service providers (CSPs) including recordkeepers and TPAs. While it did help to uncover some hard dollar fees and the formulas for calculating compensation, it is still fairly difficult in some cases to truly understand what you are paying to whom. If you work in a bundled arrangement, where the same provider serves as your recordkeeper and TPA, then chances are that the subTAs or RSFs that they are receiving from the mutual funds may cover all costs associated with administering the plan; resulting in a $0 hard dollar billable to you the plan sponsor. These plans are sometimes sold as “free” because there is not a hard dollar cost; however, you know now know that the plan is not in fact “free” but rather that the cost is being subsidized by the money received from the mutual funds. If you are working in an unbundled arrangement where there is a separate firm providing recordkeeping services and another providing TPA services, then you may experience a bill from your TPA and “free” services from the recordkeeper. Again, note that the recordkeeper may be receiving money from the mutual funds to cover their costs. Also, in many cases the recordkeeper may be sharing revenue with the TPA in order to help lessen their billed fees to you. If as a plan you are currently receiving any billable expenses that you pay from the company or pass on to your participants to pay, then chances are the mutual funds in your plan have no or low subTAs or RSFs that do not cover the entire cost to run the plan.

The final cost to understand is what you are paying your financial representative. He or she may receive the 12b1 from the mutual fund if you are not in a fee based arrangement. Please note that if compensated by a 12b-1 fee, then his/her compensation is determined by the share class of mutual fund in your plan. In general an A Share fund pays 0.25% and an R share pays 0.50% (there are other share classes, but these are the most common in retirement plans). If you are in a fee based arrangement with your representative, than he/she may charge a flat hard dollar fee or an asset based charge (0.25% of plan assets). There is not a right or wrong way to compensator your financial professional for their time, but like all of the other fees that we have discussed it is just important that you understand how they get paid.

One of my favorite business quotes is “Cost is only an issue in the absence of value.” and this is especially true as it pertains to your company’s 401(k) plan. As I said in the outset, you don’t necessarily have to have the cheapest plan, but you do have to be able to demonstrate that you understand what you are paying and what you are getting for those dollars. If you are unsure of what you are paying any of your vendors or if those costs are reasonable, then please contact me. We are happy to help you answer this “What the “F”?”!

 

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

 

Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the mutual fund, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

jamie kertis headshotJamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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Calling All COIs

coi

Poll most business owners, presidents of companies, or C-level executives about who are there most trusted advisors are and chances are you will get the same answers: their spouse, their attorney, and their CPA.

As a CPA, who are your most trusted advisors?  Do you have an attorney or other professional who you can turn to for ideas or advice to help you expand your knowledge base and bring new ideas to your clients?

Argument for an Attorney

When determining which attorney to work with as a center of influence, first take a look at your own practice and where your clients may have a specific need.  If you work with a large number of business owners, there may be a need for an attorney that has a strong working knowledge of buy-sell agreements, estate planning, or liability.  Additionally, if you are a CPA who deals with business clients and their qualified retirement plans, there is a good chance that you will come across a situation that will require an outside opinion, sometimes even a legal opinion, on the operation of the qualified plan.  I would argue that it makes more sense to have already vetted and established an relationship with a legal professional before the situation arises that you need to recommend one.  Attorneys also can provide you with insights and opinions that can help you guide your clients away from trouble to begin with.

Argument for a Financial Advisor

Similarly when deciding which advisor to partner with as a center of influence, first take a look at your practice to determine if it would make more sense to partner with a professional that specializes in personal wealth management or qualified plan management.  If you find that most of your practice is focused on personal returns and individual tax preparation, then it would make more sense for you to team up with an advisor that also focuses on that form of client service.  On the other hand, if your practice is focused on qualified plan audits and business tax preparation, then working with an advisor who also works on qualified plans is the best way to go.  The pool of advisors that focuses on qualified plans, such as 401k plans, is much smaller, but our knowledge base of the challenges that our 401(k) clients face can be very valuable.  For instance, a qualified plan advisor is integral in changing plan service providers.  Although a service provider change may not seemingly have an impact on your ability to conduct an audit, it certainly can when you consider the reports that you need to complete your audit and the vast differences when it comes to the availability of reports on a provider website.  If you have a relationship with that advisor prior to the conversion taking place, you will have a better chance to give your opinion on the new provider that is chosen.

Cultivate the Relationship

In both cases, attorney and advisor, these professionals are more than likely looking to add value to their clients and you as a CPA have an excellent opportunity to do just that.  Perhaps you could consider hosting joint lunch and learns, seminars, or webinars that offer content to clients from your unique perspective as a CPA.  For example, I recently learned there is a significant difference between a limited scope and full scope audit offered to plans with over 100 employees; I would not have gained this useful information had it not been for my relationship with a trusted CPA partner.  Vice versa, I was able to inform this CPA group about the short-comings that we have seen in plan audits and what are clients felt were the most overlooked items in their audits.  In both cases, we were able to add value to our own practices while gaining information that we can pass along to our respective clients.

jamie kertis headshotJamie Kertis, AIF®, QKA
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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What the “F” ? – Part 1 – Funds

wtf1.jpg

No this entry is not about all of the things that your participants and employees might do to make you go “What the “F”?” (although I am you all have some great stories). Instead over the next four weeks, I will be covering the four topics that should be top of mind for plan administrators, investment committees, and human resource professionals concerning plan management. Today’s “F” is Funds. 

A fund or mutual fund is defined by the Securities and Exchange Commission (SEC) as a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds, or other assets the fund owns are known as its portfolio. Each investor in the fund owns share, which represent a part of these holdings. As someone who works on your company’s 401(k) plan it is important to have a good understanding of how mutual funds work since mutual funds are the most common investment vehicles offered in 401(k) plans. According to FINRA’s website (www.finra.org) the majority of 401(k) plans offer 8 – 12 investment options, but I have seen plans out there that offer 40 + mutual fund options. There are certainly different schools of thought as it pertains to the number of investment options that you should make available to your plan participants. Some committees believe the more the merrier; that by offering a large number of options, their participants will be able to design a portfolio that works best for them. Others believe, limit the plan options to a handful of funds that represent the main asset classes (equity, fixed income, and cash).   We tend to believe that the plan should offer the fund option in each of the 404(c) style boxes: large, mid and small cap in the growth, value and blend categories with a additional options in international and fixed income.

Another important aspect of your plan’s investment menu is the Qualified Default Investment Alternative (QDIA). Your plan’s QDIA is the fund or funds that a participant defaults into if he or she falls to make an investment election. Under the Department of Labor’s guidelines, a QDIA may be a life-cycle or targeted-retirement-date fund, a balanced fund or a professionally managed account. The committee should take the task of selecting a QDIA very seriously because if used correctly, it can offer the plan and its fiduciaries valuable safe harbor protections.

Regardless of the number of funds in your plan or what option you have designated as the QDIA, one thing is constant: the fiduciaries of the plan have an ongoing responsibility to monitor the investment options. In the Tibble v. Edison case, the Supreme Court sent a clear message that the fiduciaries of a qualified retirement plan have an ongoing duty to monitor fund investment choices. A quote taken from the ruling reads “The trustee must systematically consider all investment of the trust at regular intervals to ensure that they are appropriate.” Please note this case did not center around fund performance or if one asset class is better than another, but rather underscored the importance of having a prudent process for review and decisions to keep or remove a fund option.

In this blog edition, I mentioned several industry terms like 404(c), QDIA and the prudent process required for monitoring funds. If you or the your investment committee are unsure if you have one or all of these in place, please contact me and we can further discuss the importance of this “F” to successfully running your 401(k) plan.

-Jamie

 

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.

Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the mutual fund, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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March 15th – A Scary Day to Open the Mailbox

March 15th – A Scary Day to Open the Mailbox

Highly Compensated Employees Receiving Taxable Refunds
and Why This Type of Refund is NOT a Good Thing for Employees or Employers

mailboxToday, some of you may go to your mailbox and find a check waiting for you. This check may be anywhere from a couple of hundred dollars to a couple of thousand dollars. And on any other day, but today, you would probably be thrilled to find such a surprise awaiting you in a mass of otherwise junk mail. However today, March 15th, is the deadline to make 401(k) compliance testing refunds to avoid a 10% excise tax (to your employer); therefore, if you receive a check today (or in the next few days) from the company that recordkeeps your company’s 401(k) plan , then you have just received a 401(k) refund.

A 401(k) refund occurs when your company’s 401(k) plan fails its annual discrimination testing; the amount that is refunded is the amount that was needed to be taken out of the 401(k) account of each affected highly compensated employee in order to bring the test into a passing range. If you are an HCE that receives a refund, then you will also receive a 1099-R and you must report the amount as taxable income in the year in which the refund was received.

hce 1.pngThere are several annoying implications of receiving money out of your retirement plan. The first is that money that you intended to be set aside as tax deferred is now taxable at a time that is more than likely earlier than you would have liked. The second is the potential impact to your overall retirement plan in that any money that comes out of the plan early is lessening that which you had saved for retirement. Finally, we have found that there is a compounding negative impact on your desire to want to continue to participate in your company’s retirement plan when refunds are received in multiple years.

hce2.pngReady for the silver lining in this article? There are options that are available to retirement plans to correct the issue of refunds. Most of them involve examining the plan design to determine if there could be any modifications that would improve the likelihood of the plan passing testing. A Safe Harbor plan design would allow the plan to receive an automatic pass of the compliance tests that cause refunds. Adding an automatic enrollment option could give an immediate boost to participation numbers which could give added support to the testing calculations. Implementing a comprehensive education plan could bolster both participation and deferral percentages. These are just a few of the designs and your plan would have to be reviewed in detail to determine if one of these or potentially another solution would be right.

Need a better way to keep retirement contributions in your 401(k) plan? Want to improve your company’s plan for the HCE’s so you can attract and retain them? Contact me to discuss.   jamie@grinkmeyerleonard.com or 205-970-9088.

jamie kertis headshot2

Jamie Kertis, AIF®, QKA / Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 / Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162 / Fax: 866.774.9029
Jamie@grinkmeyerleonard.com / www.grinkmeyerleonard.com /  Find us on Facebook  / Follow my blog

 

PPA Document Restatement Deadline Looming

ppa.jpgEvery six years, the IRS requires that employers using a pre-approved prototype or volume-submitter 401(k) document restate their plan document to incorporate any and all changes made to the regulations and tax laws that impact retirement plans. This go-around is labeled the Pension Protection Act of 2006 (PPA) restatement process and will pick up the changes made by the Pension Protection Act of 2006, the final 415 regulations, the Heroes Earnings Assistance and Relief Act (HEART) of 2008 and the Worker, Retiree and Employer Recovery Act (WRERA) of 2008. The window for restating your plan document opened on May 1, 2014 and will close April 30, 2016 which means if this is the first time that you are hearing about this restatement phase it is of the utmost importance that you contact your third party administrator (TPA) as soon as possible to get your restatement started.

Do I Have To?

The long and the short of it is “Yes”! Your retirement plan must follow the written plan document and the written plan document must follow the rule, regulations, and guidelines set forth by the IRS and the Department of Labor (DOL). Therefore, when one of these governing bodies makes changes to the rules, your plan must adopt to follow these rules. Most of the time, these changes can be handled through an interim or “snap-on” amendment to the plan, but when the number or the complexity of the changes gets to be too great, a restatement is required.

Who Should be Helping Me?

Your plan’s third party administrator (TPA) is more than likely the party that will be assisting you with the restatement of your document. Keep in mind that it is common for your TPA and your record keeper to be the same company, but that is not always the case. It is also important to determine if your plan is using a prototype or volume submitter document or if your plan is an individually drafted or designed plan. In most cases, your plan will be either a prototype or volume submitter, but it is definitely important to make sure you are clear on what type of plan you have as that will impact when and how your plan has to be restated.

Anything Else I Should Know?

Now could be a good time to review your plan to determine if any changes should be made to the plan provisions that are not specifically covered by the required restatement. For example, your plan could review the definition of compensation, Roth options, and/or automatic enrollment procedures and make updates to these or other provisions during the mandatory restatement. Just be ware not to change any “protected benefits” such as the timing or forms of distributions during the process.

By this time, hopefully your provider has already completed the restatement process or at least you plan’s TPA has reached out to you to discuss the restatement process; however, if not, it is time to make a call to your plan provider to get the process started! If you have any questions about the restatement process, what it means to your plan, or where to go for assistance, please let me know by calling 205-970-9088 or emailing me at jamie@grinkmeyerleonard.com.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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Follow Jamie’s Blog