Mastering Your Company’s Match

percentage money hands.jpg

If I offered to give you $15 back if you gave me $10, would you do it? Of course, you would! That is pretty much the way a 401(k) company match works. If your company offers a matching contribution as part of its 401(k) and a participant contributes to that plan, then the company is giving that employee additional money just for participating. This makes a company match one of the most powerful tools in a participant’s retirement arsenal – if it is used correctly. Here are some ways that a company match can be so powerful.

Give Your Participants a Raise
The general rule of thumb for retirement savings is that on average an individual should save between 10% – 15%. That number can seem daunting to most people. However, add in a company match and that number becomes much more attainable. For instance, if the company match is 50% of the first 6% deferred, then a participant who contributes the full 6% is getting 3% from the company and is now at 9% – much closer to the 10% goal. Also keep in mind that the participant got to that 9% number with only 6% of their own money being contributed. That’s pretty powerful stuff!

Match Wisely
How the company chooses to design the match can have significant impacts on participant behavior. If the company front-loads a match, such as offering a 100% match on the first 3% deferred, it may be inadvertently dissuading participants from contributing more than 3% of their own money. Also, if too little match is offered, then the company may miss out on the incentive feature that a match can offer. Therefore, it is important to assess how much money your company can afford to allot to match money and then design your match to encourage your participants to defer as much as possible into the plan.

Give the Plan Some Relief
If your company is already offering a match and plans to continue doing so in the future and/or if the plan regularly fails annual compliance testing, then you may want to consider a Safe Harbor Match plan design. A traditional Safe Harbor Match is as follows: 100% of the first 3% deferred and 50% of the next 2% deferred. Therefore, if a participant contributes 5% of their own money, the company would match 4%. The other caveat with a Safe Harbor Match is that the money that the company contributes to the Safe Harbor Match is immediately 100% vested, which means it is the participants to take if she ever leaves the company. What makes a Safe Harbor Match so powerful is that by offering it, the plan is deemed to pass annual compliance testing, which means no more refunds to highly compensated employees if the plan would have otherwise failed testing. It also is an amazing benefit to your participants since a 5% deferral plus a 4% match gets them pretty close to that 10% goal.

A company match is a tremendous incentive that can help your employees meet their retirement goals. If you would like an analysis of your company’s current match structure or if you would like to discuss implementing a company match, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.

Advertisements

Three Significant Ways Recordkeeping Arrangements May Vary

Magnifying Glass.jpg

Recordkeeping for an employer-sponsored qualified retirement plan is pretty much just as it sounds; an outside provider is hired to literally keep a record of participant accounts. This includes everything from accounting for how much money each participant has in her account, to the number of investment shares held, to the source of money deposited. On the surface, recordkeepers seem fairly similar, but get into the fine print and there are significant differences in contracts and services offered. Here is a list of some of those differences I have seen in my history of working with various recordkeepers.

  1. Termination Clauses – When things are good, they’re good, but should your company need to terminate your relationship with your recordkeeper, there is a good chance that some fee will apply to end the relationship. Fees may vary. Also, recordkeepers have different arrangements when it comes to the services they will complete once they have been handed their pink slip. I recently came across a situation where the recordkeeper refused to complete the annual testing or Form 5500 if the plan transferred assets prior to the calendar year end.
  2. Available Investments – The universe of investment options is slowly but surely become more available thanks in part to the Department of Labor’s Fiduciary Rule, but there remains some noteworthy discrepancies in the accessibility of investments across various recordkeepers. In some cases, recordkeepers offer sub-advised or sub-managed investments which includes the investment arm of the recordkeeper offering additional oversight on traditional investments, usually for an additional fee. There are also differences in the share classes offered. Share class matters because it often dictates the overall cost of investing in an investment option along with the amount that various parties, such as the financial adviser and recordkeeper, receive in compensation from the investment. (See my blog Share Class Warfare for additional information).
  3. Third-Party Administration Services – Often recordkeepers will also offer third-party administration (TPA) services in what the industry calls a “bundled” service arrangement. In many cases, this arrangement makes sense because much of the data that a recordkeeper collects is also used by a TPA and therefore, having them work together is a win-win for the client and the provider. However, TPA services are another area with vastly different capabilities, costs, and proficiencies. Before you enter into a bundled agreement it is important to assess what the compliance and administrative needs of your plan are and whether or not the bundled TPA can meet those needs.

Although all recordkeepers may seem the same on the surface, there are several differences that can be found in the details and operation. If you would like assistance reviewing your recordkeeping arrangement, please contact me at 205-970-9088 or email jamie@grinkmeyerleonard.com.

One Item to Immediately Address With Your Participants

happy family.jpg

Often when we are engrossed in the day-to-day operation of 401(k) plan management, we can overlook the reason why we are all doing this – for the benefit of our people. We also focus on the here and now; making sure that employee deferrals are contributed on time, that investments are top notch, and that participants are retirement ready. The one item that often get overlooked is what will happen when your hard-working people pass way. The simplest way to answer that question is to make certain all of your participants have an accurate beneficiary form on file with you, the plan sponsor, and if possible, the plan’s recordkeeper. Here are 5 items that can help you and your participants get back on track with their beneficiary forms.

1. Don’t leave a beneficiary form blank, and don’t name your estate as beneficiary.
Failing to name an individual, or individuals, as your beneficiary could deprive your heirs or loved ones of inheriting your retirement assets. Another downside of not naming a beneficiary – your retirement assets would need to go through the lengthy probate process and could be subject to creditors.

2. Make a beneficiary designation for each retirement account that you own.
People often make the mistake of assuming that the beneficiary they name on one account will dictate who the beneficiary is on their other retirement accounts, but that is not the case. You need to have a valid beneficiary on file for each account.

3. Remember that beneficiary designations take precedence over wills.
Retirement assets are distributed according to the named beneficiary, regardless of any other agreements, such as wills.

4. Keep your beneficiary designations current.
Many people fail to update their beneficiary designations after major life events, such as a marriage, divorce, or new addition to the family.

5. Consider consulting a professional.
You may wish to seek the guidance of an experienced attorney, CPA, or financial advisor to help you make the best choices for you and your heirs.

Don’t let your hard work or that of your participants go to waste by having their retirement account balances go to the wrong person or worse, the state. If you need assistance with making sure that your beneficiary forms are on file and in good order, please give me a call at 205-970-9088 or email me at jamie@grinkmeyerleonard.com.