Employee Benefit Plan Audits – Are You Getting a Quality Audit?

bsmsA great article from Jaime Sweeney, Senior Manager, Barfield, Murphy, Shank & Smith, LLC.

 

 

 

The Department of Labor and the Employee Benefits Security Administration recently completed an assessment of the quality of audit work performed by independent public accountants and the overall findings were disappointing.  In May 2015, the DOL released a report titled “Assessing the Quality of Employee Benefit Plan Audits” that found 30% of the audits (nearly 4 out of 10) contained major deficiencies in regards to GAAS requirements.  Those deficiencies could lead to rejection of a Form 5500 filing.

The report makes recommendations, including DOL outreach and enforcement related to audit standards.  As part of this outreach, in November of 2015, the DOL distributed letters and information to plan administrators of “funded” ERISA employee benefit plans providing tips for selecting and working with a qualified CPA firm auditor who has the expertise.  Plan administrators are held responsible as fiduciaries of the plan, and can be held personally liable if they are not making reasonable choices with regard to their plan.

The letter explains that a quality audit can help protect plan assets and make sure that the plan is compliant with applicable law.  The letter specifically emphasizes that plan administrators should be careful when they select and retain an auditor.

While many accounting firms are choosing not to continue offering employee benefit plan audits, we at Barfield, Murphy, Shank & Smith, LLC assure you that we are distinctly qualified for this work and will continue to offer this service.

According to the DOL, you should consider the following factors when selecting a CPA firm:

  • The number of employee benefit plans the CPA audits each year, including the types of plans
    • Having worked extensively with retirement plans for over two decades, BMSS is known for having one of the premier auditing practices in Alabama. BMSS audited in excess of 30 plans in 2015, including defined contribution and defined benefit plans.  Our staff has a great deal of experience understanding the nuances of these audits.
  • The extent of specific annual training the CPA received in auditing plans
    • Employee benefit plan audits have unique audit and reporting requirements and are different from other financial audits. At BMSS, all of our employee benefit plan professionals receive annual Continuing Professional Education specific to Employee Benefit Audits.
    • Barfield, Murphy, Shank & Smith, LLC is a member of the American Institute of Certified Public Accounts EBPAQC (Employee Benefit Plan Audit Quality Center), a group created to improve quality of benefit plan audits with news alerts, training, webinars, audit quality center and other resources.
  • The status of the CPA’s license with the applicable state board of accountancy
    • Our CPAs are actively licensed by the Alabama State Board of Accountancy.
  • Whether the CPA has been the subject of any prior DOL findings or referrals, or has been referred to a state board of accountancy or the American Institute of CPAs (AICPA) for investigation
    • We are proud to say that BMSS has not been subject to any DOL findings or referrals. We have not been referred to a state board nor the AICPA for investigation.
  • Whether or not your CPA’s employee benefit plan audit work has recently been reviewed by another CPA (this is called a “Peer Review”) and, if so, whether such review resulted in negative findings
    • BMSS participates in the AICPA Peer Review Program and has passed every peer review. Our last peer review was dated November 6, 2014

If you have any questions or concerns regarding your employee benefit plan audit or if you would simply like more information about receiving a quality audit, please contact one of the EBP Audit professionals Barfield, Murphy, Shank & Smith LLC at (205) 982-5500.

Written by Jaime Sweeney, Senior Manager, Barfield, Murphy, Shank & Smith, LLC

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When CYA is Exposing Rather than Covering Your Assets

shutterstock_286288565.jpgI recently had the privilege of attending the National Plan Advisors Association (NAPA) annual conference where some of the best and brightest minds in the retirement plan industry gather to discuss best practices, pending and recent legislation, and industry trends. In one of the sessions it was noted that it is a fiduciary breach to make decisions just to protect yourself as a fiduciary. For me this was one of those “ah-ha” moments that made me sit back and think about the way that we make decisions as a co-fiduciary. Are we keeping the best interests of the participants first or focusing so myopically on fiduciary best practices from a CYA (cover your behind) perspective that we miss out on the big picture? Since I was forced to contemplate our process, I thought I would also share the basics of fiduciary duty with you as well.

 The plan is in place to serve the best interests of the
plan participants and their beneficiaries.
It’s as simple as that!

 One of the most important ERISA fiduciary rules is the exclusive purpose rule, established by ERISA Sections 403 and 404: “A fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries.” In order to fulfill your requirements of sole interest, ERISA established 4 guidelines for fiduciaries to follow.

  • The first is loyalty. To demonstrate this quality the fiduciary must act for the exclusive purpose of providing benefits to participants and their beneficiaries; and defraying reasonable expenses of administering the plan. In essence this guideline sums up that you work for your plan participants when running the 401(k) plan and it is your responsibility to make sure they get appropriate services for a reasonable fee.
  • The next is prudence. Fiduciaries must act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like goals. This is where the advice of an investment professional can be the most valuable as it is expected for you- the fiduciary – to not just act with good intentions, but also with knowledge and care.
  • The third guideline is diversification of investments. Fiduciaries must diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so. In my opinion, this is one of the most difficult demands to balance since most investors expect to have positive returns in their account every quarter despite market conditions or investment mix. However as the plan fiduciary, you have the responsibility to protect the participants from themselves.
  • The final guideline is to follow the plan’s governing documents. Fiduciaries must operate the plan in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with [ERISA] provisions. While this may seem like a “no-brainer”, it is in this guideline where I have seen the most common problems arise. We have seen everything from not having a signed plan document to incorrectly following the plan’s definition of compensation to mismatched vesting schedules.

In nearly all cases, plan fiduciaries act in the best interest of their participants through their actions without even thinking twice about it. However, there are very strict and expensive rules around making sure that you do so consistently and that you don’t inadvertently shift focus from them to you and your assets.

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

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What the “F” ? – Part 4 – Future

wtf4What the “F” ?
A four part series that will address important themes of plan management

 If you’ve stayed with me through this four part series on the critical “F”s in 401(k) plan management (and thank you if you have), then hopefully you will agree that I have saved the best and most crucial “F” for last – Future. When you think about the last three “F”s , funds, fees and fiduciary, they all center around producing the best outcomes for the retirement future of your plan participants. Moreover, the main purpose of the Employee Retirement Income Security Act of 1974 (ERISA) is to protect the assets of millions of Americans so that funds placed in their retirement plans during their working lives will be there when they retire. So much focus is placed on protecting, growing and maintaining the assets during work that it leaves us asking what happens when your participant is ready to retire with those assets that he or she has worked so hard to amass or worse yet, what happens when your employee starts to plan his or her retirement and realizes there is not enough there to allow them to retire.

First let’s focus on how to best assist your employee during their working career to earn, grow and protect their retirement assets. As we have discussed, making sure that the funds in your plan are appropriate to help asset growth, monitoring the fees in your plan to protect against plan asset erosion, and acting in the proper fiduciary manner in order to maintain a compliant plan are all steps that you can take to help your employees while they are participants in your company’s 401(k) plan. Additionally, many retirement plan recordkeepers offer tools and calculators that your participants can utilize to model the potential shortfall or overage that they will have in monthly income during retirement. To clarify, most tools will calculate 75% – 80% of the participant’s preretirement income and turn that into a monthly amount. From there, the tool will analyze how much the participant can expect to generate on a monthly basis from the balance of their retirement account considering both current and future contributions and average market performance. The more dynamic tools will also let the participant enter outside sources of income, model for social security, account for medical expenses, and more. The participant will then be able to fairly quickly determine if they will have an overage or a shortfall in monthly income in retirement. This tool is commonly referred to as “Gap Analysis” and if the plan that you work with does not currently offer something like it, it may be time to consider adding it.

Providing tools like Gap Analysis to your participants is a great first step; however, we believe that it is essential that you take another critical step in assisting your plan participants by offering a dynamic education plan that encompasses both informative group meetings and impactful one-on-one meetings. We believe that our industry as a whole has done a poor job of reaching out to the average participant in a way that makes very difficult and often intimidating financial concepts surrounding a 401(k) understandable. Therefore, we believe in some basic concepts when it comes to educating your participants. The first is a concept in education called “Chunking” whereby a person attempts to make sense of something complex by breaking it down into smaller, more manageable units. We attempt to take daunting items like asset allocation, asset classes, match structures and vesting schedules and explain them in a way that is relatable to most participants. Furthermore, we believe that it is imperative to not only engage the left brain, analytic side of the brain when describing investment concepts, but also to involve the right brain, emotional side to truly appeal to the participant. I’d be willing to bet that you have seen the look before in your employee’s eyes when you start into a dry or, dare I say boring, concept in an employee meeting and immediately the stares glaze over and the head nodding begins. By engaging the creative and emotional side of the brain, we have found that we get a much better engagement and communication in our employee education events which can lead to more action when it comes to making a decision to participate in the plan. Caleb Bagwell, our employee education specialist says, “Participants have been told their entire working life that they need to save.  It’s not a foreign concept to them.  The problem is that no one has taken the time to show them why! Why should they be using the 401(k)? Why can’t they depend on social security? We need to bridge the gap between the discomfort of delaying gratification now, and the payoff they will receive in retirement, and that bridge is built through education.”   I would encourage all of my readers to visit Caleb Bagwell’s blog, Motivated Monday, to learn more about how he is taking a fresh approach to engaging and inspiring employees to take a new look at their retirement futures.

Finally, when it comes to weighing the importance of your participant’s future against the immediate needs that are constantly pressing, we urge you to consider the potential cost that employees who cannot afford to retire may have on your business’s bottom line. We know and fully appreciate that there are situations where the experience, knowledge and wisdom that comes with long time employees cannot be replaced, but we are also fully aware, as should you be, that the more senior the employee the greater the potential for higher costs associated with that employee. These costs can include anything from greater absenteeism to higher salaries to increased medical costs. Case in point, we have a business contact who hired a practice manager over 6 years ago to streamline their operations in anticipation that many of the staff members that currently served in administrative roles would soon be retiring. Flash forward to today and that company now has the highly paid practice administrator that they hired 6 years ago along with all of the other 9 employees that were planning on retiring who cannot because they cannot afford to. This is an all too real situation that many companies find themselves facing, but we believe with proper education it can possibly be avoided.

John Adams, our second President, said “There are two educations. One should teach us how to make a living and the other how to live.” We could not agree with this statement more whole-heartedly when it comes to educating employees about their retirement futures. It is absolutely a balance between making your living and living the life you want now and in the future. If you feel like there may be a better way to help your employees achieve the future that they want, we’d love to hear from you.

Jamie Kertis, AIF®, QKA jamie 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

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CPA Value to Their Clients

value.jpgWhile you are in the midst of finishing personal tax returns, filing extensions, viewing recordkeeper’s reports, sorting through transaction ledgers amongst countless other tasks associated with the normal course of your business, it may be tough to fathom stopping to ask yourself “What other value could I be adding to my clients?” So I have done that for you! Here are a few ideas that you can immediately add to your practice that could add additional value to your client relationships.

  1. Nonqualified Deferred Compensation Plan – If you are a CPA who works with high net worth individuals or business owners, simply mentioning the idea of a Nonqualified Deferred Compensation (NQDC) plan may be enough to spark your client’s interest. A NQDC plan is a type of savings plan that a business sets up that allows a select group of individuals to put away sums of money over and above what a traditional retirement plan allows. There are several forms of investments that a NQDC can utilize, including mutual funds and corporate owner life insurance, and you must have a plan document in place. However, as the name states because the plan is nonqualified there are not the same restrictions to contributions or participation and there is no annual compliance testing associated with this type of plan. It should be noted that NQDC plans are suitable only for regular (C) corporations. In S corporations or unincorporated entities (partnerships or proprietorships), business owners generally can’t defer taxes on their shares of business income. However, S corporations and unincorporated businesses can adopt NQDC plans for regular employees who have no ownership in the business. There are many more nuisances to a NQDC which we would be happy to help you explore if you have a client who is interested in learning more.
  2. Safe Harbor Features – If you audit a plan that consistently fails testing resulting in the highly compensated employees receiving refunds, it may be time for that plan to explore the options of adding a Safe Harbor feature to their plan design. A Safe Harbor 401(k) plan generally satisfies annual compliance testing. By satisfying annual compliance testing through either an approved matching formula or non-elective formula, the highly compensated employees are no longer at risk of receiving a refund of their deferral dollars.   The stated Safe Harbor match formula is 100% match on the first 3% of elective deferrals and 50% match of the next 2% deferred and the stated non-elective contribution formula is equal to a contribution of 3% of eligible compensation for all eligible employees regardless of participation. In both cases, the participants must be formally notified of the Safe Harbor provision through a notice and the contributions are immediately 100% vested.

  3.  Automatic Enrollment – Another idea that can help that plan who consistently fails compliance testing would be to suggest adding an automatic enrollment feature. In a our best case scenario of automatic enrollment, all eligible employees would be enrolled at 6% with an auto-increase feature up to 10%; but, even adding automatic enrollment at the more widely accepted 3%, the plan is taking steps to not only increase their chances of passing annual compliance testing, but also to help their employees become better prepared for retirement.

As a CPA working side-by-side on a business owner’s personal return or auditing a corporation’s benefit plans, you are in a unique position to provide guidance on areas slightly outside your scope of services that may have a meaningful impact on the retirement success of your client and further cement your already valuable relationship. The information provided on our 3 value-add ideas was brief and there are of course individual circumstances that could affect the appropriateness of the recommendations; therefore, please reach out to me if I can be of any further assistance in explaining.

Jamie Kertis, AIF®, QKA jamie 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

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What the “F” ? – Part 3 – Fiduciary

wtf3
What the “F” ?
A four part series that will address important themes of plan management  

Thus far we have looked at some complicated “F”s in funds and fees, in today’s blog we are going to address one of the most overused and misunderstood “F”s in our industry: fiduciary. The basic definition of fiduciary is any individual or entity that has, or exercises discretionary control over the management of the plan or the plan’s assets. A plan may have one than one fiduciary and/or one individual serving in more than one fiduciary capacity. From there, the functional definition of fiduciary goes in several different directions.

When assessing whether or not you fall into a fiduciary role using the functional test you must consider the following: even with no expressed appointment or delegation of fiduciary authority if you are considered in control or procession of authority over the plan’s asset, management, or administration than you are considered a functional fiduciary. Many times this will include members of the Employer’s Board of Directors or Trustees, voting and non-voting, with power to exercise discretion and control. One important distinction to make is that the person who performs administrative ministerial functions, such as processing payroll, approving distributions or loans, or submitting data for testing, is not considered a fiduciary. In other words, the president of the company is usually a fiduciary because he or she has the discretion to implement plan decisions and to hire parties to assist in the administration of the plan; while a payroll clerk is not a fiduciary if he or she is processing the payroll in the 401(k) vendor’s website.

As a plan fiduciary, you may also be presented with opportunities to hire or appoint additional co-fiduciaries. There are different varieties of co-fiduciaries including 3(16), 3(21) , and 3(38) fiduciaries. A 3(16) co-fiduciary acts as the plan administrator and is responsible for managing the day-to-day operations of the plan. Some functions may include determining the eligibility of employees, maintaining all plan documents and records, providing annual notices, rendering decisions regarding participant claims, and fixing plan operational errors. This may be confusing since we have already determined that the individual within your company that provides many of these administrative functions like sending out notices and approving distributions is not a fiduciary; the difference is in that a named 3(16) fiduciary is an individual outside of your company that provides these administrative duties without consulting you, the plan sponsor. A 3(21) fiduciary is a paid professional who provides investment recommendations to the plan sponsor, but the plan sponsor retains ultimate decision-making authority and approves or rejects the advice of the 3(21) fiduciary. There is no discretion given to the 3(21) fiduciary. A 3(21) provides investment advice on a regular basis to the plan that the plan sponsor relies on to make a decisions pursuant to a mutual agreement or understanding (written or not) that is specialized to the plan for a fee. Finally, a 3(38) fiduciary is an investment manager in that the investment manager has discretion to make changes in the plan investment line-up or allocation without consent of the plan sponsor. A 3(38) must be appointed in writing by contract. The main difference between a 3(21) and a 3(38) is discretion. It is also important to note that even if you as a plan fiduciary hire a 3(16), a 3(21), and a 3(38), you still cannot absolve yourself of your personal fiduciary responsibility.

If you’ve made it this far in the blog, I’m sure it is clear to you why the definition of a fiduciary is anything but clear and you may be asking yourself why you should take the time to even bother with trying to understand your role and whether or not you are or are not a fiduciary. The reason understanding your role and acting properly as a fiduciary can be so important is that fiduciaries who do not follow the basic standards of conduct may be personally liable to restore any plan losses to the plan, or to restore any profits made through improper use of the plan’s assets resulting from their actions. While this is very true and taken directly from the Department of Labor’s commentary on fiduciary responsibility, it can be hard for many plan fiduciaries to conceptualize because chances are you have not, do not, and will not ever know anyone who loses their home or personal assets over a fiduciary breach. Nonetheless, there are very real examples of plan fiduciaries who have cost their companies a significant amount of many and/or lost their job due to improper fiduciary management. Look no further than Caterpillar, Fidelity, Lockheed Martin, Intel, Boeing and State Farm for companies that have faced or are currently facing case action lawsuits involving the management of their respective 401(k) plans (not all cases have been settled, nor have all companies been found guilty).

Moreover, as a plan fiduciary you have the unique and important role of providing the greatest opportunity for retirement savings that most of your employees will have. By properly managing the plan, you are playing a vital part in helping your valued employees get to their retirement goals. Check out my next installment when we will look closer at this role you play in the ultimate “F”.

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

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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

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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

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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

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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

Follow Jamie on LinkedIn

Follow Jamie’s Blog