Employer Resources
Keeping you informed and up-to-date on 401(k) plans and employee financial wellness

Featured
Most Recent Posts
-
What is a 401(k) Plan Restatement?
What is a 401(k) Plan Restatement? Every six years, the IRS requires that all qualified retirement plans be “restated.” Find out what this means for your plan. Every six years, the IRS requires all qualified retirement plans to update their plan documents to reflect recent legislative and regulatory changes - that’s every six years as counted by the IRS, regardless of how long your plan has been active. Some updates are made during the normal course of business through plan amendments, but others require more substantial rewriting of plan documents through a formal process known as a “plan restatement.” This process began on August 1, 2020 and will close on July 31, 2022. Plan restatements are required by the IRS and not optional. Those who do not comply may be subject to significant IRS penalties. If you work with a third party administrator (TPA), they will be handling the plan restatement, and we will coordinate with them. What is a plan restatement? A restatement is a complete re-writing of the plan document. It includes voluntary amendments that have been adopted since the last time the document was re-written, along with mandatory amendments to reflect additional legislative and regulatory changes. This upcoming mandatory restatement period for defined contribution plans is referred to as “Cycle 3” because it is the third required restatement that follows this six-year cycle. Is the current plan restatement mandatory or voluntary? The upcoming plan restatement is mandatory, even if your plan was amended for various reasons in the recent past. Plans that do not meet the July 31, 2022 restatement deadline will be subject to penalties, up to and including revocation of tax-favored status. This means contributions might not be deductible and would be immediately included as income to employees. Why do plans have to be restated? Retirement plans are governed by ever-changing laws and regulations imposed by Congress, the IRS, and the Department of Labor (DOL). To remain in compliance and current with those laws and regulations, plan documents must be updated from time to time. Some of these changes may be reflected through plan amendments, but it is impractical for plans to amend their documents for every new law or regulation. What has changed since the last restatement? The deadline for the last mandatory restatement was April 30, 2016, but it was based on documents approved by the IRS two years prior and only reflected legislative and regulatory updates through 2010. Since then, there have been a number of regulatory and legislative changes impacting retirement plans such as availability of plan forfeitures to offset certain additional types of company contributions and good faith amendments like the SECURE and CARES Acts. Haven’t we amended our plan to address these changes? Yes. Recognizing that plans would have to continuously update their plans to address changing regulations, the IRS allows for so-called “snap-on” amendments (also known as good faith amendments). However, it is more difficult to interpret a plan document (and therefore operate a plan consistent with the plan document) when there are so many amendments. A restatement cycle requires a full rewrite to incorporate “snap-on” amendments into the body of the document, often in greater detail. How will Betterment help with the plan restatement process? Betterment will draft and deliver the restated plan document to you for review and approval. Once you approve the restated plan document, we will see to it that plan provisions are accurately reflected in our recordkeeping system and provide you with the necessary disclosures for you to deliver to your participants. What does the plan restatement package include? The plan document restatement packages include the following, as applicable, based on your plan’s provisions: Adoption agreement Basic plan document that includes the detailed legal language describing each of the provisions Summary Plan Description (SPD) for distribution to plan participants Administrative policies for participant loans and qualified domestic relations orders (QDROs) Good faith amendments (currently, for the SECURE and CARES Acts) Will this restatement process take a lot of my time? Betterment will ensure that your plan document is properly drafted and delivered to you for execution. However, you have several important roles: Inform Betterment about any organizational changes that may impact your 401(k) plan. Review your restated plan document once you receive it, especially the plan highlight and plan provision (such as eligibility requirements) sections, to be sure they accurately reflect your plan. Distribute the Summary Plan Description (SPD), to be provided to you after you execute the restated plan document, to your plan participants. Is there a fee for this plan restatement? A standard plan restatement will be provided as part of our included compliance services to you. Any additional changes will trigger amendment fees.
-
Is Auto-Enroll Right for Your 401(k) Plan?
Is Auto-Enroll Right for Your 401(k) Plan? Learn the ins and outs of this popular plan feature that streamlines the participant experience. “Maybe when I make more.” “Maybe when I pay off my student loans.” “Maybe when my horoscope tells me it’s time.” When it comes to employees enrolling in their 401(k)s, there’s always a reason why now isn’t the right time. But the fact is the best time to save for retirement is right now, while time and the power of compounding growth are on their side. That’s where 401(k) automatic enrollment—or ‘auto-enroll’ for short—comes in. It gives your employees the gentle nudge they might need to start saving for retirement. Before we dive into all things auto-enroll and whether it makes sense for your company, let’s take a moment to celebrate your journey toward finding the 401(k) plan that’s right for you. If you’re reading this article, you’ve reached one of the final key considerations of plan design. Another key consideration? That’s whether getting a pass on most compliance testing is worth the employer contribution requirements of a Safe Harbor 401(k) plan. If you go the Safe Harbor route, then your specific flavor of auto-enroll may be called a Qualified Automatic Contribution Arrangement (QACA). We’ll cover QACAs and the two other types of auto-enroll below. How 401(k) auto-enroll works As the name implies, automatic enrollment lets employers automatically deduct elective deferrals from employees’ wages. Simply put, it means your employees don’t have to lift a finger to start saving for retirement. Compare that to the typical enrollment process where employees must go online, make a phone call, or submit paperwork to access their retirement plan. All those little steps take real effort, and employees who are on the fence about enrolling might not be bothered to do it. Before they know it, years have passed, and they’ve missed out on valuable time in the market that they will never get back. Or you can do them a solid and make it all automatic. If you decide to add an automatic enrollment feature to your 401(k) plan, you must notify your employees at least 30 days in advance. After you do, they have three options: Opt out. Employees can opt out of 401(k) plan participation in advance. At Betterment at Work, by the way, we make it simple for employees to do this online. Customize their contribution amount or investments. Instead of enrolling with the default automatic enrollment elections, employees can stay enrolled but choose their own contribution rate. Do nothing for now and enjoy the ride. Here we see the beauty of automatic enrollment. Employees don’t have to do anything to start investing. Once the opt-out timeframe has elapsed, they’ll automatically begin deferring a certain percentage of their pay to their 401(k). Employees are typically informed each year that they can opt out from this enrollment. As you can imagine, option C is a popular choice. Among our clients who use auto-enroll, the employee participation rate is nearly 90 percent. The three types of automatic enrollment Before we go into each, a warning: we’re about to throw even more acronyms at you. If you’re allergic to alphabet soup, prepare accordingly! All three types of auto-enroll require that employees be enrolled at preset contribution rates and have the options to opt out or change their contribution rates. That’s effectively where a Basic Automatic Contribution Arrangement (ACA) begins and ends. Two other varieties add a few more wrinkles on top of that. With an Eligible Automatic Contribution Arrangement (EACA), employees can also request a refund of deferrals within the first 90 days. Employers come to a Qualified Automatic Contribution Arrangement (QACA) by way of a Safe Harbor 401(k) plan. That means they’ve already committed to, among other things, a specific threshold of employer contributions. Safe Harbor plans that include auto-enroll must also steadily increase their employees’ contribution rates each year in what’s often referred to as automatic escalation. We offer auto-escalation at no added expense for all new plans. Here’s how all this shakes out in grid form: Basic Automatic Contribution Arrangement (ACA) Eligible Automatic Contribution Arrangement (EACA) Qualified Automatic Contribution Arrangement (QACA) Employees enrolled at preset contribution rates ✓ ✓ ✓ Employees can opt-out or change contribution rates ✓ ✓ ✓ Employees can request a refund of deferrals within first 90 days ✓ Requires employer contributions (i.e. Safe Harbor) ✓ Requires annual increase in employee contribution rate up to at least 6% (i.e. auto-escalation) ✓ Auto-enrolled, but at how much? With auto-enroll plans, you pick your employees’ default contribution rate. This begs the question: how high should you set it? A default contribution rate of 3 percent used to be the most common, but that changed recently. According to The Plan Sponsor Council of America’s 64th Annual Survey, a 6 percent rate became the most popular in 2020. And if it helps any in your decision-making, our own data shows no evidence of higher default contribution rates leading to higher numbers of opt-outs. In addition to the default contribution rate, you’re also responsible for selecting the default investments for employees’ deferrals. This is what’s referred to as a Qualified Default Investment Alternative (QDIA)—and it can help limit your investment liability. Betterment at Work covers this base for all our 401(k) clients by defaulting employee deferrals into our Core portfolio, which meets QDIA criteria for transferability and safety. One potential downside of auto-enroll Making it easier for people to invest and save for retirement is a good thing. It’s sorta our thing. And if you have a Traditional 401(k) plan, an increased participation rate makes it more likely that your plan will pass the required compliance tests. However, there’s one downside to consider, and it’s mostly a matter of perspective. If you set your default contribution rate relatively low—let’s say less than 6 percent—and don’t actively encourage employees to bump that up as much as they can, they may not get on track to retire by their desired age. Is it better than saving nothing for retirement? Absolutely. But because employees didn’t actively choose the rate, they may not be inclined to increase it on their own. Wondering how to combat this retirement saving inertia? Well, it can be partially addressed by the aforementioned auto-escalation, which steadily increases employees’ contribution rates each year. We also help by offering your employees personalized retirement advice that helps keep them on track. How Betterment at Work makes ‘auto’ even easier As a digital 401(k) plan provider, we can help your employees save for their futures with compelling plan design features like auto-enroll. Our intuitive tech and committed service also lightens your administration load in the process. And let’s not forget about auto-escalation, which we offer at no added cost to new plans. Let us handle the work of monitoring who gets escalated. If your payroll provider is one of the many we integrate with, we'll even implement the increase ourselves. Last but certainly not least, we guide your employees through their contribution rates, investment options, and more. Even if your employees were auto-enrolled in the plan, they’ll get the encouragement they need to keep moving closer to retirement.
-
Safe Harbor vs. Traditional 401(k) Plan: Which Is Right for You and Your Employees?
Safe Harbor vs. Traditional 401(k) Plan: Which Is Right for You and Your Employees? Weigh the pros and cons of each carefully before making a decision for your company. 401(k) lingo can seem funny at first glance. There's "MEPs" and "PEPs," “QDIAs” and "Safe Harbors." And don't even get us started on "QACAs." But for now, let's linger on Safe Harbor 401(k) plans. If you’ve concluded that a 401(k) is right for your company, the next decision you face is what kind of 401(k) plan. They come in two primary flavors, with the Safe Harbor variety providing an alternative to the Traditional 401(k) plan. Does the “Safe Harbor” name mean the traditional route is riskier? Not necessarily. There's a host of pros and cons to each plan type. The best fit for your company depends ultimately on your unique situation. Keep reading to try on a Safe Harbor for size. Editor’s note: If you’re reading this during the first half of the year, with eyes on possibly implementing a Safe Harbor plan the following year, time is of the essence! Learn more about Safe Harbor setup deadlines below. Table of contents Safe Harbor 401(k) plans in a nutshell How nondiscrimination testing can trip up small businesses Safe Harbor may make sense for you if … Safe Harbor setup deadlines What Betterment at Work brings to your Safe Harbor 401(k) setup Safe Harbor 401(k) plans in a nutshell Safe Harbor plans offer companies an enticing deal. Contribute to your employees’ 401(k)s, the federal government says, and we’ll give you a free pass on most compliance testing. There's plenty more nuance to them of course (keep reading for that), but this is the key distinction. In Traditional 401(k) plans, employer contributions are allowed but not required—and you face the added burden of annual testing. As with all things in life, Safe Harbor plans come with tradeoffs. Matching your employees’ contributions—or contributing regardless of whether they do through what’s called a nonelective contribution—is great for your employees' financial wellbeing, but it could also increase your overall employee budget by 3% or more depending on the size of your contribution. How nondiscrimination testing can trip up small businesses Federal law requires annual nondiscrimination tests, which help ensure 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the federal government provides significant tax perks through 401(k) plans, it wants to make sure these benefits don’t more heavily favor high earners. The three main nondiscrimination tests are: Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs). Actual contribution percentage (ACP) test—Compares the average employer matching contributions received by HCEs and NHCEs. Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. The IRS defines a key employee as an officer making more than $185,000 (indexed), an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year. In practice, it’s easier for large companies to pass the tests because they have a lot of employees at many different income levels contributing to the plan. If, on the other hand, even just a few HCEs at a small-to-midsize business contribute a lot to the plan, but the lower earners don’t, there’s a chance the 401(k) plan will not pass nondiscrimination testing. You may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by either returning a portion of the contributions made by your highly compensated employees or by increasing the contributions of your non-highly compensated employees. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious consequences. Failing these tests, in other words, can be a real pain in the pocketbook. Safe Harbor may make sense for you if … Every company is different, but here’s a list of employer characteristics that tend to align best with the plan type. Your staff count is in the dozens, not hundreds. Not all small businesses are created equal. In general, however, the smaller your staff count, the more likely it is that the 401(k) contributions of high earners could outweigh those of their lower-compensated peers. If that happens under a Traditional 401(k) plan, you’re at a higher risk of failing nondiscrimination testing. Your staff includes a high percentage of part-time and/or seasonal employees. For companies with more fluid staff makeups, the same elevated risk of failing nondiscrimination testing applies. These types of workers are typically allowed to participate in plans yet often don’t contribute, thus negatively impacting testing. Your company has previously failed ADP or ACP compliance tests. This one’s a no-brainer. If Traditional 401(k) plans have given you testing fits in recent years, switching to a Safe Harbor plan could help avoid these costly tripups. Your company’s previous plans have been deemed “top-heavy.” Similar to the above, if you haven’t recently failed an ADP or ACP test as part of a Traditional 401(k) plan, but your plan was deemed “top-heavy,” you may have a higher risk of failing in the future. Your company has consistent and adequate cash flow. Safe Harbor 401(k) plans offer employees a pretty sweet deal. The company kicks in a minimum of 3-4% of their salaries, either contingent on a matching contribution or not (see: nonelective). That money vests immediately, too, which means employees can quit tomorrow and keep it. This commitment to your workforce’s retirement savings is the key cost consideration of Safe Harbor plans. It’s why we typically don’t recommend them for companies with less predictable cash flow year-over-year. You’d rather avoid administrative burdens. Take it from us: even successful compliance testing can be a hassle. And failures? They can lead not only to the aforementioned penalties but to uncomfortable conversations with impacted employees. They’ll need explanations for why their contributions are being returned, and they ultimately may not be able to maximize their 401(k). If you prefer peace-of-mind over these compliance worries, consider the Safe Harbor option. Safe Harbor setup deadlines If you’re strongly considering setting up a Safe Harbor plan or adding a Safe Harbor contribution to your existing plan, here are a few key deadlines you need to know: Starting a new plan For calendar year plans, October 1 is the final deadline for starting a new Safe Harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts—and you’ll likely need to talk to your plan provider before that. If we’re fortunate enough to serve in that role for you, that means we’ll need to sign a service agreement by August 1. Adding Safe Harbor to an existing plan If you want to add a Safe Harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1 so long as employees receive notice at least 30 days prior. At Betterment, the deadline for you to request this amendment is October 31. Thanks to the SECURE Act, plans that want to become a nonelective Safe Harbor plan—meaning the employer contributes regardless of whether the employee does—have newfound flexibility. An existing plan can implement a 3% nonelective Safe Harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective Safe Harbor contribution of 4% or more have until the end of the following year in which the plan will become a Safe Harbor. Communicating with employees Every year, eligible employees need to be notified about their rights and obligations under your Safe Harbor plan (except for those with nonelective contributions, as noted above). The IRS requires notice be given between 30-90 days before the beginning of the plan year. What Betterment at Work brings to your Safe Harbor 401(k) setup An experienced plan provider like Betterment at Work can bring a lot to the table: Smooth onboarding | We guide you through each step of the onboarding process so you can start your plan quickly and easily. Simple administration | Our intuitive tech and helpful team keep you informed of what you need to do, when you need to do it. Affordability | We’re fully transparent about our pricing so no surprises await you or your employees. Investing choice | Give your employees access to a variety of low-cost, expert-built portfolios. Ready to get started – or simply get more of your questions answered? Reach out today. Or keep reading to learn more about whether a Qualified Automatic Contribution Arrangement (QACA) – i.e. auto-enrollment – is right for your Safe Harbor plan.
Our library built for employers
401(k) basics
-
What is a 401(k) Plan Restatement?
What is a 401(k) Plan Restatement? Every six years, the IRS requires that all qualified retirement plans be “restated.” Find out what this means for your plan. Every six years, the IRS requires all qualified retirement plans to update their plan documents to reflect recent legislative and regulatory changes - that’s every six years as counted by the IRS, regardless of how long your plan has been active. Some updates are made during the normal course of business through plan amendments, but others require more substantial rewriting of plan documents through a formal process known as a “plan restatement.” This process began on August 1, 2020 and will close on July 31, 2022. Plan restatements are required by the IRS and not optional. Those who do not comply may be subject to significant IRS penalties. If you work with a third party administrator (TPA), they will be handling the plan restatement, and we will coordinate with them. What is a plan restatement? A restatement is a complete re-writing of the plan document. It includes voluntary amendments that have been adopted since the last time the document was re-written, along with mandatory amendments to reflect additional legislative and regulatory changes. This upcoming mandatory restatement period for defined contribution plans is referred to as “Cycle 3” because it is the third required restatement that follows this six-year cycle. Is the current plan restatement mandatory or voluntary? The upcoming plan restatement is mandatory, even if your plan was amended for various reasons in the recent past. Plans that do not meet the July 31, 2022 restatement deadline will be subject to penalties, up to and including revocation of tax-favored status. This means contributions might not be deductible and would be immediately included as income to employees. Why do plans have to be restated? Retirement plans are governed by ever-changing laws and regulations imposed by Congress, the IRS, and the Department of Labor (DOL). To remain in compliance and current with those laws and regulations, plan documents must be updated from time to time. Some of these changes may be reflected through plan amendments, but it is impractical for plans to amend their documents for every new law or regulation. What has changed since the last restatement? The deadline for the last mandatory restatement was April 30, 2016, but it was based on documents approved by the IRS two years prior and only reflected legislative and regulatory updates through 2010. Since then, there have been a number of regulatory and legislative changes impacting retirement plans such as availability of plan forfeitures to offset certain additional types of company contributions and good faith amendments like the SECURE and CARES Acts. Haven’t we amended our plan to address these changes? Yes. Recognizing that plans would have to continuously update their plans to address changing regulations, the IRS allows for so-called “snap-on” amendments (also known as good faith amendments). However, it is more difficult to interpret a plan document (and therefore operate a plan consistent with the plan document) when there are so many amendments. A restatement cycle requires a full rewrite to incorporate “snap-on” amendments into the body of the document, often in greater detail. How will Betterment help with the plan restatement process? Betterment will draft and deliver the restated plan document to you for review and approval. Once you approve the restated plan document, we will see to it that plan provisions are accurately reflected in our recordkeeping system and provide you with the necessary disclosures for you to deliver to your participants. What does the plan restatement package include? The plan document restatement packages include the following, as applicable, based on your plan’s provisions: Adoption agreement Basic plan document that includes the detailed legal language describing each of the provisions Summary Plan Description (SPD) for distribution to plan participants Administrative policies for participant loans and qualified domestic relations orders (QDROs) Good faith amendments (currently, for the SECURE and CARES Acts) Will this restatement process take a lot of my time? Betterment will ensure that your plan document is properly drafted and delivered to you for execution. However, you have several important roles: Inform Betterment about any organizational changes that may impact your 401(k) plan. Review your restated plan document once you receive it, especially the plan highlight and plan provision (such as eligibility requirements) sections, to be sure they accurately reflect your plan. Distribute the Summary Plan Description (SPD), to be provided to you after you execute the restated plan document, to your plan participants. Is there a fee for this plan restatement? A standard plan restatement will be provided as part of our included compliance services to you. Any additional changes will trigger amendment fees. -
Is Auto-Enroll Right for Your 401(k) Plan?
Is Auto-Enroll Right for Your 401(k) Plan? Learn the ins and outs of this popular plan feature that streamlines the participant experience. “Maybe when I make more.” “Maybe when I pay off my student loans.” “Maybe when my horoscope tells me it’s time.” When it comes to employees enrolling in their 401(k)s, there’s always a reason why now isn’t the right time. But the fact is the best time to save for retirement is right now, while time and the power of compounding growth are on their side. That’s where 401(k) automatic enrollment—or ‘auto-enroll’ for short—comes in. It gives your employees the gentle nudge they might need to start saving for retirement. Before we dive into all things auto-enroll and whether it makes sense for your company, let’s take a moment to celebrate your journey toward finding the 401(k) plan that’s right for you. If you’re reading this article, you’ve reached one of the final key considerations of plan design. Another key consideration? That’s whether getting a pass on most compliance testing is worth the employer contribution requirements of a Safe Harbor 401(k) plan. If you go the Safe Harbor route, then your specific flavor of auto-enroll may be called a Qualified Automatic Contribution Arrangement (QACA). We’ll cover QACAs and the two other types of auto-enroll below. How 401(k) auto-enroll works As the name implies, automatic enrollment lets employers automatically deduct elective deferrals from employees’ wages. Simply put, it means your employees don’t have to lift a finger to start saving for retirement. Compare that to the typical enrollment process where employees must go online, make a phone call, or submit paperwork to access their retirement plan. All those little steps take real effort, and employees who are on the fence about enrolling might not be bothered to do it. Before they know it, years have passed, and they’ve missed out on valuable time in the market that they will never get back. Or you can do them a solid and make it all automatic. If you decide to add an automatic enrollment feature to your 401(k) plan, you must notify your employees at least 30 days in advance. After you do, they have three options: Opt out. Employees can opt out of 401(k) plan participation in advance. At Betterment at Work, by the way, we make it simple for employees to do this online. Customize their contribution amount or investments. Instead of enrolling with the default automatic enrollment elections, employees can stay enrolled but choose their own contribution rate. Do nothing for now and enjoy the ride. Here we see the beauty of automatic enrollment. Employees don’t have to do anything to start investing. Once the opt-out timeframe has elapsed, they’ll automatically begin deferring a certain percentage of their pay to their 401(k). Employees are typically informed each year that they can opt out from this enrollment. As you can imagine, option C is a popular choice. Among our clients who use auto-enroll, the employee participation rate is nearly 90 percent. The three types of automatic enrollment Before we go into each, a warning: we’re about to throw even more acronyms at you. If you’re allergic to alphabet soup, prepare accordingly! All three types of auto-enroll require that employees be enrolled at preset contribution rates and have the options to opt out or change their contribution rates. That’s effectively where a Basic Automatic Contribution Arrangement (ACA) begins and ends. Two other varieties add a few more wrinkles on top of that. With an Eligible Automatic Contribution Arrangement (EACA), employees can also request a refund of deferrals within the first 90 days. Employers come to a Qualified Automatic Contribution Arrangement (QACA) by way of a Safe Harbor 401(k) plan. That means they’ve already committed to, among other things, a specific threshold of employer contributions. Safe Harbor plans that include auto-enroll must also steadily increase their employees’ contribution rates each year in what’s often referred to as automatic escalation. We offer auto-escalation at no added expense for all new plans. Here’s how all this shakes out in grid form: Basic Automatic Contribution Arrangement (ACA) Eligible Automatic Contribution Arrangement (EACA) Qualified Automatic Contribution Arrangement (QACA) Employees enrolled at preset contribution rates ✓ ✓ ✓ Employees can opt-out or change contribution rates ✓ ✓ ✓ Employees can request a refund of deferrals within first 90 days ✓ Requires employer contributions (i.e. Safe Harbor) ✓ Requires annual increase in employee contribution rate up to at least 6% (i.e. auto-escalation) ✓ Auto-enrolled, but at how much? With auto-enroll plans, you pick your employees’ default contribution rate. This begs the question: how high should you set it? A default contribution rate of 3 percent used to be the most common, but that changed recently. According to The Plan Sponsor Council of America’s 64th Annual Survey, a 6 percent rate became the most popular in 2020. And if it helps any in your decision-making, our own data shows no evidence of higher default contribution rates leading to higher numbers of opt-outs. In addition to the default contribution rate, you’re also responsible for selecting the default investments for employees’ deferrals. This is what’s referred to as a Qualified Default Investment Alternative (QDIA)—and it can help limit your investment liability. Betterment at Work covers this base for all our 401(k) clients by defaulting employee deferrals into our Core portfolio, which meets QDIA criteria for transferability and safety. One potential downside of auto-enroll Making it easier for people to invest and save for retirement is a good thing. It’s sorta our thing. And if you have a Traditional 401(k) plan, an increased participation rate makes it more likely that your plan will pass the required compliance tests. However, there’s one downside to consider, and it’s mostly a matter of perspective. If you set your default contribution rate relatively low—let’s say less than 6 percent—and don’t actively encourage employees to bump that up as much as they can, they may not get on track to retire by their desired age. Is it better than saving nothing for retirement? Absolutely. But because employees didn’t actively choose the rate, they may not be inclined to increase it on their own. Wondering how to combat this retirement saving inertia? Well, it can be partially addressed by the aforementioned auto-escalation, which steadily increases employees’ contribution rates each year. We also help by offering your employees personalized retirement advice that helps keep them on track. How Betterment at Work makes ‘auto’ even easier As a digital 401(k) plan provider, we can help your employees save for their futures with compelling plan design features like auto-enroll. Our intuitive tech and committed service also lightens your administration load in the process. And let’s not forget about auto-escalation, which we offer at no added cost to new plans. Let us handle the work of monitoring who gets escalated. If your payroll provider is one of the many we integrate with, we'll even implement the increase ourselves. Last but certainly not least, we guide your employees through their contribution rates, investment options, and more. Even if your employees were auto-enrolled in the plan, they’ll get the encouragement they need to keep moving closer to retirement. -
Safe Harbor vs. Traditional 401(k) Plan: Which Is Right for You and Your Employees?
Safe Harbor vs. Traditional 401(k) Plan: Which Is Right for You and Your Employees? Weigh the pros and cons of each carefully before making a decision for your company. 401(k) lingo can seem funny at first glance. There's "MEPs" and "PEPs," “QDIAs” and "Safe Harbors." And don't even get us started on "QACAs." But for now, let's linger on Safe Harbor 401(k) plans. If you’ve concluded that a 401(k) is right for your company, the next decision you face is what kind of 401(k) plan. They come in two primary flavors, with the Safe Harbor variety providing an alternative to the Traditional 401(k) plan. Does the “Safe Harbor” name mean the traditional route is riskier? Not necessarily. There's a host of pros and cons to each plan type. The best fit for your company depends ultimately on your unique situation. Keep reading to try on a Safe Harbor for size. Editor’s note: If you’re reading this during the first half of the year, with eyes on possibly implementing a Safe Harbor plan the following year, time is of the essence! Learn more about Safe Harbor setup deadlines below. Table of contents Safe Harbor 401(k) plans in a nutshell How nondiscrimination testing can trip up small businesses Safe Harbor may make sense for you if … Safe Harbor setup deadlines What Betterment at Work brings to your Safe Harbor 401(k) setup Safe Harbor 401(k) plans in a nutshell Safe Harbor plans offer companies an enticing deal. Contribute to your employees’ 401(k)s, the federal government says, and we’ll give you a free pass on most compliance testing. There's plenty more nuance to them of course (keep reading for that), but this is the key distinction. In Traditional 401(k) plans, employer contributions are allowed but not required—and you face the added burden of annual testing. As with all things in life, Safe Harbor plans come with tradeoffs. Matching your employees’ contributions—or contributing regardless of whether they do through what’s called a nonelective contribution—is great for your employees' financial wellbeing, but it could also increase your overall employee budget by 3% or more depending on the size of your contribution. How nondiscrimination testing can trip up small businesses Federal law requires annual nondiscrimination tests, which help ensure 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the federal government provides significant tax perks through 401(k) plans, it wants to make sure these benefits don’t more heavily favor high earners. The three main nondiscrimination tests are: Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs). Actual contribution percentage (ACP) test—Compares the average employer matching contributions received by HCEs and NHCEs. Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. The IRS defines a key employee as an officer making more than $185,000 (indexed), an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year. In practice, it’s easier for large companies to pass the tests because they have a lot of employees at many different income levels contributing to the plan. If, on the other hand, even just a few HCEs at a small-to-midsize business contribute a lot to the plan, but the lower earners don’t, there’s a chance the 401(k) plan will not pass nondiscrimination testing. You may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by either returning a portion of the contributions made by your highly compensated employees or by increasing the contributions of your non-highly compensated employees. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious consequences. Failing these tests, in other words, can be a real pain in the pocketbook. Safe Harbor may make sense for you if … Every company is different, but here’s a list of employer characteristics that tend to align best with the plan type. Your staff count is in the dozens, not hundreds. Not all small businesses are created equal. In general, however, the smaller your staff count, the more likely it is that the 401(k) contributions of high earners could outweigh those of their lower-compensated peers. If that happens under a Traditional 401(k) plan, you’re at a higher risk of failing nondiscrimination testing. Your staff includes a high percentage of part-time and/or seasonal employees. For companies with more fluid staff makeups, the same elevated risk of failing nondiscrimination testing applies. These types of workers are typically allowed to participate in plans yet often don’t contribute, thus negatively impacting testing. Your company has previously failed ADP or ACP compliance tests. This one’s a no-brainer. If Traditional 401(k) plans have given you testing fits in recent years, switching to a Safe Harbor plan could help avoid these costly tripups. Your company’s previous plans have been deemed “top-heavy.” Similar to the above, if you haven’t recently failed an ADP or ACP test as part of a Traditional 401(k) plan, but your plan was deemed “top-heavy,” you may have a higher risk of failing in the future. Your company has consistent and adequate cash flow. Safe Harbor 401(k) plans offer employees a pretty sweet deal. The company kicks in a minimum of 3-4% of their salaries, either contingent on a matching contribution or not (see: nonelective). That money vests immediately, too, which means employees can quit tomorrow and keep it. This commitment to your workforce’s retirement savings is the key cost consideration of Safe Harbor plans. It’s why we typically don’t recommend them for companies with less predictable cash flow year-over-year. You’d rather avoid administrative burdens. Take it from us: even successful compliance testing can be a hassle. And failures? They can lead not only to the aforementioned penalties but to uncomfortable conversations with impacted employees. They’ll need explanations for why their contributions are being returned, and they ultimately may not be able to maximize their 401(k). If you prefer peace-of-mind over these compliance worries, consider the Safe Harbor option. Safe Harbor setup deadlines If you’re strongly considering setting up a Safe Harbor plan or adding a Safe Harbor contribution to your existing plan, here are a few key deadlines you need to know: Starting a new plan For calendar year plans, October 1 is the final deadline for starting a new Safe Harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts—and you’ll likely need to talk to your plan provider before that. If we’re fortunate enough to serve in that role for you, that means we’ll need to sign a service agreement by August 1. Adding Safe Harbor to an existing plan If you want to add a Safe Harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1 so long as employees receive notice at least 30 days prior. At Betterment, the deadline for you to request this amendment is October 31. Thanks to the SECURE Act, plans that want to become a nonelective Safe Harbor plan—meaning the employer contributes regardless of whether the employee does—have newfound flexibility. An existing plan can implement a 3% nonelective Safe Harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective Safe Harbor contribution of 4% or more have until the end of the following year in which the plan will become a Safe Harbor. Communicating with employees Every year, eligible employees need to be notified about their rights and obligations under your Safe Harbor plan (except for those with nonelective contributions, as noted above). The IRS requires notice be given between 30-90 days before the beginning of the plan year. What Betterment at Work brings to your Safe Harbor 401(k) setup An experienced plan provider like Betterment at Work can bring a lot to the table: Smooth onboarding | We guide you through each step of the onboarding process so you can start your plan quickly and easily. Simple administration | Our intuitive tech and helpful team keep you informed of what you need to do, when you need to do it. Affordability | We’re fully transparent about our pricing so no surprises await you or your employees. Investing choice | Give your employees access to a variety of low-cost, expert-built portfolios. Ready to get started – or simply get more of your questions answered? Reach out today. Or keep reading to learn more about whether a Qualified Automatic Contribution Arrangement (QACA) – i.e. auto-enrollment – is right for your Safe Harbor plan.
Expert Insights
-
Understanding 401(k) Nondiscrimination Testing
Understanding 401(k) Nondiscrimination Testing Discover what nondiscrimination testing is (and how to pass) If your company has a 401(k) plan—or if you’re considering starting one in the future—you’ve probably heard about nondiscrimination testing. But what is it really? And how do you help ensure your plan passes these important compliance tests? Read on for answers to the most frequently asked questions about nondiscrimination testing. What is nondiscrimination testing? Mandated by ERISA, annual nondiscrimination tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. We’ll dive deeper into nondiscrimination testing, but let’s first discuss an important component of 401(k) compliance: contribution limits. What contribution limits do I need to know about? Because of the tax advantages afforded 401(k) plan contributions, the IRS puts a limit on the amount that employers and employees can contribute. Here’s a quick overview of the important limits: Limit What is it? Notes for 2022 plan year Employee contribution limits (“402g”) Limits the amount a participant may contribute to the 401(k) plan. The personal limit is based on the calendar year.1 Note that traditional (pre-tax) and Roth (post-tax) contributions are added together (there aren’t separate limits for each). $20,500 is the maximum amount participants may contribute to their 401(k) plan for 2022. Participants age 50 or older during the year may defer an additional $6,500 in “catch-up” contributions if permitted by the plan. Total contribution limit (“415”) Limits the total contributions allocated to an eligible participant for the year. This includes employee contributions, all employer contributions and forfeiture allocations. Total employee and employer contributions cannot exceed total employee compensation for the year. $61,0002 plus up to $6,500 in catch-up contributions (if permitted by the plan) for 2022. Cannot exceed total compensation. Employer contribution limit Employers’ total contributions (excluding employee deferrals) may not exceed 25% of eligible compensation for the plan year. N/A This limit is an IRS imposed limit based on the calendar year. Plans that use a ‘plan year’ not ending December 31st base their allocation limit on the year in which the plan year ends. This is different from the compensation limits, which are based on the start of the plan year. Adjusted annually; see most recent Cost of Living Adjustments table here. What is nondiscrimination testing designed to achieve? Essentially, nondiscrimination testing has three main goals: To measure employee retirement plan participation levels to ensure that the plan isn’t “discriminating” against lower-income employees (NHCEs) or favoring HCEs. To ensure that people of all income levels have equal access to—and awareness of—the company’s retirement plan. To encourage employers to be good stewards of their employees’ futures by making any necessary adjustments to level the playing field (such as matching employees’ contributions) How do I classify my employees by income level? And what do all these acronyms really mean? Before you embark on nondiscrimination testing, you’ll need to categorize your employees by income level and employee status. Here are the main categories (and acronyms): Highly compensated employee (HCE)—According to the IRS, an employee who meets one or more of the following criteria: Prior (lookback) year compensation—Earned over $130,000 in 2021; some plans may limit this to the top 20% of earners in 2021 (known as the top-paid group election); or Ownership in current or prior year—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation Non-highly compensated employee (NHCE)—Someone who does not meet the above criteria. Key employee—According to the IRS, an employee who meets one or more of the following criteria during the plan year: Ownership over 5%—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. Ownership over 1%—Owns more than 1% of the stock, voting power, capital, or profits, and earned more than $150,000. Officer—An officer of the employer who earned more than $185,000 for 2022; this may be limited to the lesser of 50 officers or the greater of 3 or 10% of the employee count. Non-key employee—Someone who does not meet the above criteria. What are the nondiscrimination tests that need to be performed? Below are the tests typically performed for 401(k) plans. Betterment will perform each of these tests on behalf of your plan and inform you of the results. 1. 410(b) Coverage Tests—These tests determine the ratios of employees eligible for and benefitting from the plan to show that the plan fairly covers your employee base. Specifically, these tests review the ratio of HCEs benefitting from the plan against the ratio of NHCEs benefitting from the plan. Typically, the NHCE percentage benefitting must be at least 70% or 0.7 times the percentage of HCEs considered benefitting for the year, or further testing is required. These annual tests are performed across different contribution types: employee contributions, employer matching contributions, after-tax contributions, and non-elective (employer, non-matching) contributions. 2. Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of non-highly compensated employees (NHCEs). This test includes pre-tax and Roth deferrals, but not catch-up contributions. Essentially, it measures the level of engagement of HCEs vs. NHCEs to make sure that high income earners aren’t saving at a significantly higher rate than the rest of the employee base. Specifically, two percentages are calculated: HCE ADP—The average deferral rate (ADR) for each HCE is calculated by dividing the employee’s elective deferrals by their salary. The HCE ADP is calculated by averaging the ADR for all eligible HCEs (even those who chose not to defer). NHCE ADP—The average deferral rate (ADR) for each NHCE is calculated by dividing the employee’s elective deferrals by their salary. The NHCE ADP is calculated by averaging the ADR for all eligible NHCEs (even those who chose not to defer). The following table shows how the IRS limits the disparity between HCE and NHCE average contribution rates. For example, if the NHCEs contributed 3%, the HCEs can only defer 5% (or less) on average. NHCE ADP HCE ADP 2% or less → NHCE% x 2 2-8% → NHCE% + 2 more than 8% → NHCE% x 1.25 3. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (So this test is only required if you make employer contributions.) Conveniently, the calculations and breakdowns are the same as with the ADP test, but the average contribution rate calculation includes both employer matching contributions and after-tax contributions. 4. Top-heavy determination—Evaluates whether or not the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. Simply put, it analyzes the accrued benefits between two groups: Key employees and non-Key employees. A plan is considered top-heavy when the total value (account balance with adjustments related to rollovers, terminated accounts, and a five-year lookback of distributions) of the Key employees’ plan accounts is greater than 60% of the total value (also adjusted as noted above) of the plan assets, as of the end of the prior plan year. (Exception: The first plan year is determined based on the last day of that year). If the plan is considered top-heavy for the year, employers must make a contribution to non-key employees. The top-heavy minimum contribution is the lesser of 3% of compensation or the highest percentage contributed for key employees. However, this can be reduced or avoided if no key employee makes or receives contributions for the year (including forfeiture allocations). What happens if my plan fails? If your plan fails the ADP and ACP tests, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by making additional employer contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. Why is it hard for 401(k) plans to pass nondiscrimination testing? It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-sizes businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but non-highly compensated employees (NHCEs) don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. How can I help my plan pass the tests? It pays to prepare for nondiscrimination testing. Here are a few tips that can make a difference: Make it easy to enroll in your plan—Is your 401(k) plan enrollment process confusing and cumbersome? If so, it might be stopping employees from enrolling. Consider partnering with a tech-savvy provider like Betterment that can help your employees enroll quickly and easily—and support them on every step of their retirement saving journey. Learn more now. Encourage your employees to save—Whether you send emails or host employee meetings, it’s important to get the word out about saving for retirement through the plan. That’s because the more NHCEs that participate, the better chance you have of passing the nondiscrimination tests. (Plus, you’re helping your staff prioritize their future.) Add automatic enrollment —By adding an auto-enrollment feature to your 401(k) plan, you can automatically deduct elective deferrals from your employees’ wages unless they elect not to contribute. It’s a simple way to boost participation rates and help your employees start saving. Add automatic escalation - By adding automatic escalation, you can ensure that participants who are automatically enrolled in the plan continue to increase their deferral rate by 1% annually until a cap is reached (generally 15%). It’s a great way to increase your employees retirement savings and to engage them in the plan. Add a safe harbor provision to your 401(k) plan—Avoid these time-consuming, headache-inducing compliance tests all together by electing a safe harbor 401(k) plan. What’s a safe harbor 401(k) plan? A safe harbor 401(k) plan is a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on behalf of your employees, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company. To fulfill safe harbor plan requirements, you can elect one of the following contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3-4% of each employee’s compensation, regardless of whether they make their own contributions. These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement. Interested in adding a safe harbor provision to your 401(k) plan? Find out more now. Did You Know? As a result of the SECURE Act, any 401(k) plan not utilizing a safe harbor match can be amended as late as 30 days before a plan year-end to provide the 3% safe harbor nonelective contribution for the plan year. How can Betterment help? We know that nondiscrimination testing and many other aspects of 401(k) plan administration can be complicated. That’s why we do everything in our power to help make it easier for you as a plan sponsor. In fact, we help with year-end compliance testing, including ADP/ACP testing, top-heavy testing, annual additions testing, deferral limit testing, and coverage testing. With our intuitive online platform, you can better manage your plan and get the support you need along the way. Plus, you can have it all for a fraction of the cost of other 401(k) providers. Ready to learn more? Let's talk. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The information contained in this article is meant to be informational only and does not constitute investment or tax advice. -
SECURE Act 2.0: Getting Closer to Reality
SECURE Act 2.0: Getting Closer to Reality SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer retirement plan benefits. The Securing a Strong Retirement Act, or ‘SECURE Act 2.0’ as it is commonly called, came much closer to being realized with the House passing the bill by a wide margin, 414-5, on March 29, 2022. This coming almost a full year after the House Ways and Means Committee unanimously approved the bill. It is now off to the Senate for approval. The bill builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans. Key provisions of SECURE Act 2.0 related to 401(k) plans include: Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt. Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee. Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5). The new bill increases the RMD age even further: to 73 in 2023; 74 in 2030 and ultimately 75 in 2033. Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2022. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64. Catch-up contributions must be made in Roth. Currently, participants can choose whether to contribute pre-tax or Roth as their catch-up contributions. The new bill requires that all catch-up contributions be made in Roth moving forward. This will provide less tax diversification for participants but will generate more tax revenue to help offset the cost of some of the other provisions in the bill. Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes. Ability to contribute matching contributions in Roth dollars. Currently, all employer matching contributions must be made on a pre-tax basis. The bill proposes that employers would be allowed to offer matching contributions to participants on a Roth basis. Roth matching contributions would not be deductible for employers as pre-tax contributions are, but may provide beneficial tax benefits to employees. Additional incentives for employees to contribute. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. The bill proposes that employers could now offer additional incentives, such as a small gift card benefit, to employees who contribute to their 401(k). One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to 2 years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan. Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act, employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2023 to allocate profit sharing and elective deferrals for the 2022 plan year. Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years. Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification. Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing. Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements. Retirement savings lost and found - SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs. -
Pros and Cons of the New York State Secure Choice Savings Program
Pros and Cons of the New York State Secure Choice Savings Program Answers to small businesses' frequently asked questions The New York State Secure Choice Savings Program was established to help the more than 3.5 million private-sector workers in the state who have no access to a workplace retirement savings plan. Originally enacted as a voluntary program in 2018, Gov. Kathy Hochul signed a law on Oct. 22, 2021, that requires all employees of qualified businesses be automatically enrolled in the state's Secure Choice Savings Program. If you’re an employer in New York, state laws require you to offer the Secure Choice Savings Program if you: Had 10 or more employees during the entire prior calendar year Have been in business for at least two years Have not offered a qualified retirement plan during prior two years If you’re wondering whether the Secure Choice Savings Program is the best choice for your employees, read on for answers to frequently asked questions. Do I have to offer my employees the Secure Choice Savings Program? No. State laws require businesses with 10 or more employees to offer retirement benefits, but you don’t have to elect the Secure Choice Savings Program if you provide a 401(k) plan (or another type of employer-sponsored retirement program). What is the Secure Choice Savings Program? The Secure Choice Savings Program is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the New York plan requires employers to automatically enroll employees at a 3% deferral rate. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice Savings Program provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. Why should I consider the Secure Choice Savings Program? The Secure Choice Savings Program is a simple, straightforward way to help your employees save for retirement. According to SHRM, it is managed by the program’s board, which is responsible for selecting the investment options. The state pays the administrative costs associated with the program until it has enough assets to cover those costs itself. When that happens, any costs will be paid out of the money in the program’s fund. Are there any downsides to the Secure Choice Savings Program? Yes, there are factors that may make the Secure Choice Savings Program less appealing than other retirement plans. Here are some important considerations: The Secure Choice Savings Program is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to the Secure Choice Savings Program—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. New York Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2022 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $20,500 in 2022 ($27,000 if they’re age 50 or older). So even if employees max out their contribution to the Secure Choice Savings Program, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, the Secure Choice Savings Program does not. Limited investment options—Secure Choice Savings Program offers a relatively limited selection of investments. Why should I consider a 401(k) plan instead of the Secure Choice Savings Program? For many employers—even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. What action should I take now? After the Secure Choice Savings Program opens for enrollment, you’ll have nine months to set up a payroll deposit retirement savings arrangement. No rollout date has been set yet, and the board can delay the program rollout as needed. We’ll keep you posted of any deadline updates. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now.
Money 101
Product Guides
-
Tax Coordination for Betterment 401(k)
Tax Coordination for Betterment 401(k) Learn how 401(k) participants can benefit from Betterment's automated tax-coordinated strategy which can help employees reach their savings goal faster. For Betterment for Business 401(k) plan participants who also have a personal account with Betterment, using Tax Coordination for their Retirement goal can help increase their after-tax returns. At Betterment, we’re continually improving our investment advice, always with the goal of maximizing our customers’ take-home returns. Key to that pursuit is minimizing the amount lost to taxes. We’ve taken a huge step forward with a powerful service that could increase your employees’ after-tax returns, so they can have more money for retirement. Betterment’s Tax Coordination service is our very own, fully automated version of an investment strategy known as asset location. Automated asset location is the latest advancement in tax-smart investing. Introducing Betterment’s Tax Coordination feature for 401(k) plans Asset location is widely regarded as the closest thing there is to a “free lunch” in the wealth management industry. If your employees are saving in more than one type of account, it is a way to increase their after-tax returns without taking on additional risk. Millions of Americans wind up saving for retirement in some combination of three account types: 1. Taxable, 2. Tax-deferred (Traditional 401(k) or IRA), and 3. Tax-exempt (Roth 401(k) or IRA). Each type of account has different tax treatment, and these rules make certain investments a better fit for one account type over another. Choosing wisely can significantly improve the after-tax value of their savings when more than one account is in the mix. However, intelligently applying this strategy to a globally diversified portfolio is complex. A team of Betterment quantitative analysts, tax experts, software engineers, designers, and product managers worked for over a year building this powerful service. We are proud to offer Tax Coordination, the first automated asset location service, available to all investors. Next, let’s look at how asset location, the strategy behind TCP, adds value. How Does Tax Coordination Work? What is the idea behind asset location? To simplify somewhat: Some assets in a portfolio (bonds) grow by paying dividends. These are taxed annually, and at a high rate, which hurts the take-home return. Other assets (stocks) mostly grow by increasing in value. This growth is called capital gains and is taxed at a lower rate. Plus, it only gets taxed when you need to make a withdrawal—possibly decades later—and deferring tax is good for the return. Returns in 401(k)s and Individual Retirement Accounts (IRAs) don’t get taxed annually, so they shelter growth from tax better than a taxable account. We would rather have the assets that lose more to tax in these retirement accounts. In the taxable account, we prefer to have the assets that don’t get taxed as much.2 When investing in more than one account, many people select the same portfolio in each one. This is easy to do, and when you add everything up, you get the same portfolio, only bigger. Here’s what an asset allocation with 70% stocks and 30% bonds looks like, held separately in three accounts. The circles represent various asset classes, and the bar represents the allocation for all the accounts combined. Portfolio Managed Separately in Each Account But as long as all the accounts add up to the portfolio we want, each individual account on its own does not have to have that portfolio. Asset location takes advantage of this. Each asset can go in the account where it makes the most sense, from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase after-tax return, without taking on more risk. The concept of asset location is not new. Advisors and sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for maximum benefit is very mathematically complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts. For an optimal asset location strategy, an automated approach works best. Our software handles all of the complexity in a way that a manual approach just can’t match. We are the first automated investment service to offer this service to all of our customers. Who Can Benefit? To benefit from from Tax Coordination, the participant must have a balance in at least two of the following three types of Betterment accounts: Taxable account: If you can save more money for the long-term after making your 401(k) contributions, that money can be invested in a standard taxable account. Tax-deferred account: Betterment for Business traditional 401(k) or a traditional IRA. Investments grow with all taxes deferred until liquidation and then taxed at the ordinary income tax rate. Tax-exempt account: Betterment for Business Roth 401(k) or a Roth IRA. Investment income is never taxed—withdrawals are tax-free. Higher After-Tax Returns Betterment’s research and rigorous testing demonstrate that accounts managed by Tax Coordination are expected to yield meaningfully higher after-tax returns than uncoordinated accounts. Our white paper presents results for various account combinations. Here, we excerpt the additional “tax alpha” for one generalized case—an identical starting balance of $50,000 in each of three account types, a 30-year horizon, a federal tax rate of 28%, and a state tax rate of 9.3% (CA) both during the period and during liquidation. Equal Starting Balance in Three Accounts: Taxable, Traditional IRA, and Roth IRA Asset Allocation Additional Tax Alpha with TCP (Annualized) 50% Stocks 0.82% 70% Stocks 0.48% 90% Stocks 0.27% Source: TCP White Paper. Help Your Employees Get Started with Tax Coordination Ready to help your employees take advantage of the benefits of Tax Coordination? Direct them to this introductory article on Tax Coordination to get started. Learn more about how Betterment’s Tax Coordination feature can help your employees have more spending money in retirement. All return examples and return figures mentioned above are for illustrative purposes only. For much more on our TCP research, including additional considerations on the suitability of TCP to your circumstances, please see our white paper. For more information on our estimates and Tax Coordination generally, see full disclosure. -
Betterment’s 401(k) Investment Approach
Betterment’s 401(k) Investment Approach Helping employees make better decisions and providing choice to those who want it. Dan Egan, Betterment’s VP of Behavioral Finance and Investing, explains why Betterment’s investment approach is effective for all 401(k) participants Investment Approach Q&A Betterment’s 401(k) investment approach differs from that of traditional providers, but can you give us a little history about the 401(k) environment pre-Betterment? If I go back to the first job where I had a 401k, probably about 20 years ago, there was a lineup of funds, and it was up to me as a 401(k) participant to figure out which funds to pick and in what ratios, how much to save and so on. The research coming from that period showed that people often ended up in an analysis paralysis state, where there was so much choice and so many things to consider. It was very difficult for people to know whether they were investing at the appropriate risk level, how much they were paying and so on. Many people were so overloaded that they decided to forego saving for retirement than risk making a “bad” decision. But as the industry matured, and everyone realized that more choice does not necessarily lead to better decision-making, the Pension Protection Act (PPA) was passed in 2006. The idea here was not to eliminate choice, but to encourage good defaults that would encourage 401k plan participation. How exactly did the PPA encourage more 401(k) participation? Well for one thing, it allowed for safe harbor investments in the form of QDIAs, or qualified default investment alternatives. The most popular QDIAs were target date funds, which are linked to an individual’s age so if you're 40, it’s assumed that you will be investing for the next 25 years and retiring at 65. Target dates have a glidepath so that the stock allocation becomes more conservative over time, so the employee doesn't have to do anything like managing a portfolio or rebalancing. After the PPA, it became much more common for employees to be auto-enrolled using a target date fund or something like it, and all of sudden, they no longer had to make choices. People were no longer worried about picking and choosing from a whole bunch of individual funds or even individual stocks. And the plan designs promoted by the PPA really worked: plan participation rates that had been languishing saw rates increase to 80 or 90% after implementing auto-enrollment. By the time Betterment started its 401(k) platform, the changes brought about by the PPA were already well established. So talk a little bit now about how Betterment's 401k investment approach differs from that of traditional 401(k) providers. Betterment takes and builds upon a lot of the ideas in a target date fund and goes further. Number one, we are not a fund manufacturer. We are independent from fund companies. So part of our job is to be a real investment advisor and financial advisor, and do the due diligence on all of the funds that are available out there. If you're picking from amongst eight large-cap US stock funds, there's not a lot of variation in what their returns are going to look like and you can generally predict performance versus a benchmark knowing the fund costs. So part of our job is to actually do the work on the behalf of participants, to narrow down the field of funds towards just the ones that stand out within a given asset class and that are cost-effective. We then ask more specific questions including not just how old someone is, but also more personalized questions like when someone plans on retiring. Some people want to retire as early as possible. That might be 55, 57, 62, which is when you can start taking social security. Other people want to keep working as late as possible, which is 70 or 72. Those are extremely different retirement plans that should have different portfolios based upon those hugely different time horizons. So unlike a target date fund, which says, this is your age and you're done, Betterment is going to ask about your age, but also things like, when do you want to retire? Putting together a holistic retirement plan, it might involve your spouse or significant others, retirement assets, and even doing tax optimization across the account types that you have available to you. And how does that help the employee? A lot of it is about making it easy for consumers to make better decisions, not imposing a bunch of choices on them. You have to remember, the vast majority of people are not commonly and frequently thinking about stocks and investing. They don't want to have to look up prospectuses and put together a risk managed portfolio. So Betterment does the work for them to make it very easy for them to understand how to get to where they want to be. I want to be clear that that's not necessarily about removing choice, it's about making it easy to get to a solution quickly. It’s also about minimizing the number of unnecessary choices for most people while maintaining choice for people who want it. At Betterment, 401(k) investors can still modify your risk level. You can say, "Yeah, maybe it makes sense for me to be at 90% stocks, but I'm not comfortable with it. I want to be at 30% stocks." Or they can modify their allocations using our flexible portfolio strategy, so that they can come in and say, "Actually I don't like international as much." So it's not about removing choice. And we let them see the consequences of that in terms of risk and return. So employees in Betterment 401(k)s have choice, but how do you respond to people who might already have a 401k or are already invested in funds outside of their 401k, and have a favorite fund that they feel is an absolute must have? I’m not necessarily against people who have put time and effort into researching something and wanting to invest in it. But I think it is focusing on the wrong thing. When you look at long-run research statistics on funds, the predictability of fund success within a category is very low. A fund that outperformed last quarter is very unlikely to continue to outperform this quarter. So I would say that the fund is very rarely the most important aspect of the 401(k) plan or decision. And I’d guess most participants don't have a favorite fund. Again, going back to research we've looked at across a wide array of companies, most people are looking to minimize how much burden is imposed upon them in making decisions about what they should do for their retirement. There is generally a very small minority who have very strong views about what the right investments are. And that trade-off shows up in that we will generally look at low-cost funds, well-diversified funds. We do offer a range of choice in terms of portfolio strategy: do you want a factor-tilted portfolio or a socially-responsible portfolio or an income portfolio? Without necessarily saying that you're responsible for doing the fund due diligence yourself. It is true that we offer a trade-off: we're not the wild west where you can go out and get anything you want. And that is because that level of discretion is just very, very rarely used by plan participants. There's a lot of potential to do the wrong thing when somebody has a completely open access plan. Not to mention, all plan fiduciaries have an obligation to act in the best interests of their plan participants as a whole. So they have to evaluate what makes the most sense for the majority of plan participants, not a small, vocal minority. Somewhat related, what is your response to people who argue that Betterment’s all-ETF fund line-up is too limited? A 401(k) plan made up exclusively of ETFs is no less limiting than a 401(k) plan made up exclusively of mutual funds. Because mutual funds have been around much longer, it’s true that their universe is larger, but I think anyone would be hard pressed to argue that 8,000+ ETFs is not enough to choose from. ETFs represent an advancement over mutual funds because they are cost-effective, highly flexible, and technologically sophisticated. They are critical to Betterment’s investment approach and a better alternative for 401(k) plans, in large part because mutual funds have complex fee structures and are typically more expensive than ETFs which have transparent and low costs. So why do so many plans still use mutual funds? We believe it’s not despite these issues but because of them, since fees embedded in mutual fund expense ratios are often used to offset the costs of 401(k) vendors servicing the plan. In addition, many legacy recordkeeping systems do not have the technology to handle ETF intraday trading and must restrict their clients to using funds that are only valued at the end of the day. Betterment’s 401(k) plan comes with a 0.25% investment advisory fee. What do employers and employees get for that? I think there's actually two levels to this. The first is “does this actually cost me more?” It’s definitely more transparent in its cost, but most 401k plans charge more via higher fund fees. The fund fees may even include embedded fees that go to pay for other plan services. In these more traditional models, the fees are hidden from you, the consumer. But trust me: everybody is getting paid. It's just a matter of whether or not you're aware how much and who you're paying. That also sets up the very important second aspect which is: what is this investment manager responsible for and what are they incentivized to do well? What does Betterment do for 25 basis points? Well, number one, that's how we make sure that we're independent from the fund companies; we don’t get paid by them. Every quarter, we go out and we look at all of the funds that are available in the market. We sort through them, independent of who provides them, looking at cost, liquidity, tax burdens etc. And if we find a better fund, because we take no money from fund companies, we're going to move to that better fund. So one thing that you're paying for is, in effect, not only ongoing due diligence and checking, but you're paying for independence, which means that you get the best raw materials inside of your portfolio. The other thing you get is that we want to earn that 25 basis points by serving clients better. So we want to invest in things like personalized retirement portfolios (available to every 401(k) participant) where we are actually able to give better retirement advice that takes into account you, your partner, all the various kinds of retirement accounts you have: Roth, IRA, taxable, trust, maybe even pensions or other income sources. Or asset location, for example, which works across tax-advantaged retirement accounts so that employees can keep more of their money and enjoy higher levels of spending in retirement. So what you get from paying somebody to do a good job, is you get them really incentivized to take care of their customers. Betterment takes care of its customers. We are motivated to do a good job and to retain all of our customers. -
Welcome to Betterment 401(k)!
Welcome to Betterment 401(k)! Find out how to make the most of your plan and get your employees to start saving for their future. We’re excited that you have chosen to help your employees prioritize your financial wellness with us, starting with your 401(k) plan. Betterment’s easy-to-use platform is designed to help you feel confident in administering your plan. Let’s get started. TABLE OF CONTENTS Overview Administration and compliance Investments Employee experience Overseeing your plan (including our 401(k) glossary) Betterment contact information Plan Sponsor dashboard overview Special note for first-time plans Adding new participants (individually and in bulk) Adding multiple employees at once Updating employee information Remitting contributions to Betterment Updating employee contribution (deferral) rate changes Distribution and loan requests Approving distributions Approving loans Reports Important documents Overview By sponsoring a 401(k) plan, you take on important fiduciary responsibilities for the plan, including acting in the best interests of plan participants at all times, following the plan document as written, paying only reasonable fees, depositing contributions in a timely manner and meeting all reporting and disclosure requirements. While you can never fully transfer or eliminate all fiduciary responsibility, Betterment will help with many of these duties. In fact, at no extra cost to you or your employees, Betterment assumes certain fiduciary functions to reduce your liability, serving as both a 3(16) administrative fiduciary and a 3(38) investment fiduciary. Let’s review key areas of your plan and the support that Betterment provides. As always, we provide support via phone and email to both you and your employees. Administration and compliance Our innovative technology and dedicated support make it easy for you to keep your plan running smoothly and remain fully compliant at all times. As your 3(16) fiduciary, we perform a wide range of administrative duties including preparing and filing your Form 5500 As your 3(38) investment manager with full discretion, we will select and monitor plan investments We provide on-going consultative support with respect to plan design, compliance testing and annual audits Investments Betterment uses low-cost ETFs to create globally diversified portfolios across 12 asset classes that are designed to help maximize returns for each level of risk. Employees will be defaulted into a portfolio that corresponds to their years to retirement, but they choose alternative investment strategies if they wish: Flexible Portfolio -- using funds in Betterment Core Portfolio Strategy, employees can customize their portfolio by adjusting fund weights Socially Responsible Portfolio -- for socially-conscious employees who want their investments to reflect their personal values Goldman Sachs Smart Beta Portfolio -- for employees who are willing to take on additional risks in the pursuit of higher returns BlackRock Target Income Portfolio -- for retirees (or employees with non-retirement goals), this approach seeks to provide a steady stream of cash income In addition, our investment approach incorporates sophisticated strategies such as automatic rebalancing, tax coordination, and automatic allocation adjustments as someone gets older. And with personalized advice and an integrated platform, employees can earn better returns at various levels of risk. Employee experience Betterment’s clean design and straightforward tools help your employees get more out of their retirement plan. Our goals-based approach helps employees see all of their financial goals in one place. We help employees establish a Personal Retirement Plan based on their unique situation and preferences. Every time they log in, they can easily see whether they are off-track and take immediate corrective action. We make it easy for employees to sync other accounts so that our advice will propose a total solution that takes everything into consideration. Employees have access to numerous educational resources including: Comprehensive guide to your Betterment 401(k) Webinars and videos Website resources Articles FAQs Tools and calculators In addition, feel free to share the following to promote plan engagement and in response to specific employee questions: One-pagers Why save with a 401(k)? Small increases can make a big difference Employee guides 401(k) Rollovers What to do with your 401(k) account when you leave the company Overseeing your plan In addition to the fiduciary responsibilities mentioned above, plan oversight includes making sure you and those responsible for the plan’s operations are familiar with the plan document. Depending on the size of your organization, it may be appropriate to establish a 401(k) committee that meets periodically to review the plan. Decisions should be fully vetted and documented. On an on-going basis, you and members of your team will also be responsible for: Adding newly eligible employees to the plan Ensuring that Betterment has current and accurate employee information Review and approval of distributions (and loans, if offered by the plan) Sending contributions and contribution rate changes to Betterment (non-integrated plans only Monitoring any vendors you hire You will find more details in the day-to-day operations section below, including the differences between integrated and non-integrated plans. 401(k) glossary of terms Betterment contact information: For employers For employees Monday - Friday 9:00am - 6:00pm EST 1-855-906-5280 plansupport@bettermentforbusiness.com Monday - Friday 9:00am - 6:00pm EST 1-855-906-5281 support@betterment.com Plan sponsor dashboard overview The plan sponsor dashboard is the home for your 401(k) plan, where you can perform all administrative functions and find all plan information. To get started, visit the plan sponsor login page, which is not to be confused with the login page to your personal Betterment account. (Although you may have the same login credentials for both pages, they are two different websites with different login specifications.) The plan sponsor dashboard allows for three levels of access: Administrator access provides full access to the dashboard and allows all actions to be performed. Staff access provides the same access as an administrator but does not allow plan managers to be added or deleted. View only access does not allow items on the dashboard to be edited. In order to gain access to the plan sponsor dashboard, you must either be invited by a member of your Betterment Plan Support Team or a current plan manager who has Administrator access (via Settings>Manage access). The plan sponsor dashboard contains several tabs that you should familiarize yourself with. We will be referencing these tabs throughout this document. Home -- shows you high-level statistics and summary information about your plan, along with notifications that may require your attention and and recent plan activity Employees -- lists all active and inactive employees in your plan, along with information that requires your review Payroll -- location to upload payroll. Also includes notifications and past payroll activity Plan -- in addition to plan statistics, this is where you will go to approve loan and distribution requests. You will also be able to view recent activity as well as upcoming compliance deadlines Resources - source for reports, documents and education information to support you in your role as plan administrator. Under the Documents tab, you will find templates you may need for various uploads; and under the Support tab, you will find FAQs. Special note for first-time plans As a new plan, there are two small but important items to set up your 401(k) plan correctly and avoid complications down the road: Ensure payroll system and Betterment match Before your payroll launch date, make sure that your payroll system is set up to correctly withhold employee contributions. Your Betterment 401(k) offers Traditional and Roth contributions. Typically, these are two separate deduction codes within payroll systems. Make sure that your employee contribution elections from Betterment match your payroll system. You will receive notifications in your plan sponsor dashboard of changes and you can also run a custom report. Definition of compensation Our plan documents usually define compensation as all earned income (think Box 5 of the W2). That means all income reported on the W2 must be included in the calculation of deductions within the payroll system. You want to ensure that your payroll system includes commission and bonus checks as compensation for purposes of 401(k) deductions. Loan Code If your plan offers loans, you will need to set up a loan deduction code in your payroll system so that the loan repayment amount will be deducted from the participant’s paycheck on the first repayment date. Adding new participants (individually and in bulk) If your plan is integrated with one of our preferred payroll providers, new participants are added automatically when created in the payroll system, so this operation does not apply to you. When an employee becomes eligible for the plan, they must be added to the Betterment system. You can add each employee individually through the plan sponsor dashboard using these steps (our bulk upload process is outlined further down): To add a new participant, login to the plan sponsor dashboard. Once in the dashboard, click on the Employees tab, then click on the blue Add Employee button Follow the prompts on each page to successfully add a new employee. You will receive an error message if any data is incomplete or appears incorrect. Uploading multiple employees at once To make it easier and save time, you may want to take advantage of our bulk employee upload process which is detailed in this in-depth tutorial. We have built in a 15-minute buffer between the time you submit employee information to us and the time an employee sees a Betterment 401(k) welcome email. This allows you to correct any mistakes that you might realize right after you hit submit! Clients often ask: What are some common errors when adding a new employee? Answer: Two common errors we see during the “add a new employee” process include: Mismatched information to existing Betterment customer record If someone has previously had a Betterment account before joining your organization, all of the personal information must match the information we have on file. Differences may occur if, for example, the employee may have had a different last name when they signed up for Betterment years ago or their current profile includes a typo. The error “Last name matches existing user” indicates that the employee’s Betterment profile has a different last name. Failed ID check As part of SEC regulations and the US Patriot Act, Betterment must attempt to verify the identity of all our clients. Our system automatically checks new employee information you enter against a database of publicly-available information. Participants who fail the ID check will be alerted via email and should follow the prompts in the email to resolve the issue. It is not uncommon for newly married, recently-relocated or younger participants to fail the ID checks, which is not a cause for concern. Updating employee information It is important that all employee information be kept current on the Betterment system. If your plan is integrated with one of our preferred payroll providers, please make sure all demographic data is correct in your payroll system, as that is the main source of truth and all demographic data on the Betterment system will be overwritten when the next sync with your plan occurs. For plans that do not have payroll integration: Participants can update every piece of personal information themselves within their profile under Settings. Plan administrators can update most employee information, with the exception of the email address linked to a participant account which serves as a login ID. If an email address was changed without an employee’s knowledge, they will be locked out of their account. Please contact the Betterment Plan Support Team for help in changing an email address or direct the employee to make the change themselves. Remitting contributions to Betterment If your plan is integrated with one of our preferred payroll partners, the process to remit contributions to your 401(k) plan couldn’t be easier. All you have to do is ensure the contribution data is accurate and run your payroll as you normally would! Once you run your payroll in your system: the contribution data will be automatically sent to Betterment for processing Betterment will send an ACH request to your bank account on file Upon receipt, Betterment will allocate the funds to the proper accounts and execute any necessary trades. For plans without integrated payroll, data must be uploaded via the Payroll Upload template accessible via the Payroll Upload page of the Plan Sponsor Dashboard. The pre-formatted template includes all of your employees who have an account in your 401(k) plan and can be populated with a report available on most payroll systems. Information required: compensation for the pay period hours worked for the pay period contribution amounts any applicable employer match amounts any applicable loan repayment amounts Once you have the file ready for upload: Login to the Plan Sponsor Dashboard and navigate to the Payroll Upload Page Click Upload Payroll NOTE: You will always get an email confirmation for the payroll upload. If you do not receive that email, your payroll submission was not completed. Upon receipt, Betterment will check for any issues and will send you an email with a summary of the contribution file, along with the amount to be withdrawn from your organization’s bank account. Once you approve the submission, we will send an ACH request to your bank account on file and upon receipt, allocate the funds to the proper accounts and execute any necessary trades. Updating employee contribution (deferral) rate changes If your plan is integrated with one of our preferred payroll providers, Betterment pushes all contribution rate changes directly to your payroll provider, meaning there is nothing for you to do! For plans that do not have payroll integration, some work is needed to make sure contribution rates are correctly passed to Betterment as recordkeeper and to ensure a clean audit trail. There are three ways for you to see contribution rate changes made by employees: View all recent changes by logging into the plan sponsor dashboard and clicking on Payroll>Notifications. View the Weekly Deferral Rate Change email sent by Betterment, which links directly to the reports found on the dashboard. Run a Current Deferral Rate report by logging into the plan sponsor dashboard and navigating to Documents>Reports>Run a Report>Current Deferral Rates. Regardless of which method you use, if any employees have made contribution rate changes, you will need to reflect those changes in your payroll system before you run your next payroll. Clients often ask: Are there regulatory requirements around how quickly I need to make contribution rate changes once I am alerted? Answer: The requirement is “as soon as administratively feasible,” which usually means within 1 to 2 pay periods. It’s very possible for you to miss a contribution rate change that an employee makes shortly before you run payroll. As long as you update your payroll system next time, you are fine. Distribution and loan requests As plan administrator, you are responsible for approving all loans and distributions since assets are leaving the plan. Approving distributions When a participant seeks a distribution online, our system will dynamically present them with available options at that moment in time (based on plan rules and the individual eligibility), with brief explanations regarding the pros and cons of taking a distribution. Once the participant submits a request, you will be alerted via email that a distribution request is pending. You can view any pending distribution request in the dashboard under Plan>Distribution Requests. We suggest you check the distribution request for: Common or obvious spelling mistakes Accuracy of vesting Accuracy of matching contribution amounts if your plan provides a match Please note: Mistakes are easier to fix before the request is approved. Approving loans For the participant, the online loan request flow works similarly as for distributions. Once you receive an email that a loan request is pending, you will need to do the following: Approve the loan Add the loan repayment to your payroll system (regardless of whether your payroll is integrated). Reports You can find a variety of reports within the Plan Sponsor Dashboard to help you analyze, manage, monitor, and evaluate your plan. To run a report, simply go to Resources>Reports> Run a Report. Important documents Many of the important documents related to your plan can be found within Resources>Documents, including participant notices and disclosures (participants may also find this information within their account via disclosures. These disclosures can be found in the plan sponsor dashboard via Documents>401(k) Documents.
Dive deep on financial wellness in the workplace
401(k) Plan Essentials
-
What Does It Mean to be a 401(k) Plan Sponsor?
If you’re new to the world of 401(k)s and wondering what it means to be a plan sponsor, we have you ...
What Does It Mean to be a 401(k) Plan Sponsor? If you’re new to the world of 401(k)s and wondering what it means to be a plan sponsor, we have you covered. We applaud you for considering a 401(k) plan. Not only can an effective plan make a difference in helping employees save for their future, but it can enhance your organization’s recruiting efforts. If you’re new to the world of 401(k)s and wondering what it means to be a plan sponsor, we have you covered. Betterment will partner with you every step of the way and is always available to answer your questions. Getting Your Plan Set Up Betterment will need to know more about your organization to prepare a plan document for your review and approval, outlining key plan provisions such as eligibility requirements, company matching provisions, enrollment type (automatic or voluntary) and vesting schedules. We will guide you through these decisions (much of it through our online Onboarding Hub) and share best practices so that your plan meets the needs of your organization and your employees. Since you are required to administer the plan in accordance with the plan document, it's important that you and those responsible for the plan’s operations are familiar with it. Periodic amendments prepared by Betterment will ensure the plan remains in compliance with changing regulatory requirements and evolving decisions by the company. Before any funds can flow into the plan, you are also required by law to purchase a fidelity bond that protects the plan against fraudulent or dishonest acts made by anyone at your organization that may help administer the plan. Understanding Your Fiduciary Responsibilities 401(k) plan sponsors have important fiduciary responsibilities and must adhere to specific standards of conduct as defined by Employee Retirement Income Security Act (ERISA): Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them Carrying out their duties prudently Following the plan documents Diversifying plan investments Paying only reasonable plan expenses Betterment acts as your 3(16) fiduciary for certain administrative functions and acts as a 3(38) investment manager, which provides you with a higher level of investment fiduciary protection. However, you still have an obligation to monitor us and anyone to whom you delegate your fiduciary obligations; you can never fully eliminate these. Ongoing and Annual Responsibilities Betterment will handle much of your plan administration, but as plan sponsor, there are certain responsibilities that fall to you, including: Ensuring eligible employees are appropriately identified (if payroll is integrated, Betterment enforces your plan’s eligibility requirements) Making sure that employee decisions are accurately captured and reflected in your payroll system Making sure that employee changes are reflected in the Betterment system Approving participant loans (if offered) distribution requests Reviewing results of compliance tests performed by Betterment (annually) Signing Form 5500 prepared by Betterment (annually) Staying Informed The 401(k) industry is constantly changing, and Betterment keeps its finger on the pulse of what’s going on. We regularly add relevant articles to our website and will keep you informed of any changes that may impact your plan. We look forward to working with you and are here to answer any questions you may have. -
Guide to Meeting Your 401(k) Fiduciary Responsibilities
To help your business avoid any pitfalls, this guide outlines how you can fulfill your 401(k) ...
Guide to Meeting Your 401(k) Fiduciary Responsibilities To help your business avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities and manage them properly. If your company has or is considering, a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does it mean to you as a 401(k) plan sponsor? Simply put, being a fiduciary means that you’re obligated to act in the best interests of your 401(k) plan participants. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face serious legal and financial ramifications. To help you avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act in the best interests of employees who save in the plan and avoid conflicts of interest. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties and even shoulder some of the responsibility for you. Key fiduciary responsibilities Even if you’re a business owner with a small 401(k) plan, you still have fiduciary duties. By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. 401(k) fiduciary responsibility checklist As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when making decisions about plan operations. As a 401(k) fiduciary, you must follow five cornerstone rules: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, including collecting fee disclosures for investments and service providers, and comparing (or benchmarking) fees to ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Betterment’s fees are well below industry average, and we always tell you what they are so there are no surprises for you—and more money working harder for your employees. Plus, since we serve as both a 3(16) administrative fiduciary and 3(38) investment fiduciary, we can help limit your risk exposure so you can focus on running your business--not managing your plan. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. How to be the best 401(k) fiduciary you can be Now that you understand what a 401(k) fiduciary is, you may be wondering how to best fulfill your fiduciary responsibilities. Here are some tips: Pay reasonable fees—As you know, fees can really chip away at your participants’ account balances—and have a detrimental impact on their futures. So take care to ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. Your 401(k) provider should be able to assist you with the benchmarking process. Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days.For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to guide you through the process.It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as safe harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Follow the plan document—It’s important to know your plan document. In fact, the IRS mandates that 401(k) plans operate in accordance with the terms of its written document to maintain its tax-favored status and prevent a breach of fiduciary duty.Make a mistake? The IRS considers the issue an “operational defect,” and your 401(k) plan can be disqualified for not fixing the problem in a timely manner. However, the IRS offers a handy 401(k) Plan Fix-It Guide to help you resolve any issues that crop up. Select prudent investments—Unfortunately, there can be many hidden fees buried in plan investments, so it’s critical to be vigilant about those you select. In addition to fee considerations, you must also think about whether they meet your plan’s investment objectives. Wondering which investments you should choose? Betterment can help.In fact, most companies hire one or more outside experts (such as an investment advisor, investment manager, or third party administrator) to help them manage their fiduciary responsibilities. Get help shouldering your fiduciary responsibilities When it comes to managing your fiduciary responsibilities, you don’t have to go it alone. However, the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring your plan’s investment professionals and administrators. How much support is right for you? For most employers, day-to-day business responsibilities leave little time for extensive investment research, analysis, and fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties or even plan administration responsibilities. Take a look at the chart below to see the different fiduciary roles—and the implications they have for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibility Betterment can help When you appoint an ERISA 3(38) investment manager like Betterment, you fully delegate responsibility for selecting and monitoring plan investments to the investment manager. That means less work for you and your staff, so you can focus on your business. In addition to assuming fiduciary responsibility for your investment options, Betterment offers: Consultative plan sponsor support—As a total 401(k) solution, we are your full-service partner providing everything from fiduciary services to plan design consulting to ensure your 401(k) is fully optimized. Personalized employee guidance—Our action-oriented approach to financial wellness enables your employees to make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. Plus, we link employees’ outside investments, savings accounts, IRAs—even spousal/partner assets—to help them see the big picture. And we do it all for fees that are well below industry average. -
What is a 401(k) QDIA?
A QDIA (Qualified Default Investment Alternative) is the plan’s default investment. When money is ...
What is a 401(k) QDIA? A QDIA (Qualified Default Investment Alternative) is the plan’s default investment. When money is contributed to the plan, it’s automatically invested in the QDIA. What is a QDIA? A 401(k) QDIA (Qualified Default Investment Alternative) is the investment used when an employee contributes to the plan without having specified how the money should be invested. As a "safe harbor," a QDIA relieves the employer from liability should the QDIA suffer investment losses. Here’s how it works: When money is contributed to the plan, it’s automatically invested in the QDIA that was selected by the plan fiduciary (typically, the business owner or the plan sponsor). The employee can leave the money in the QDIA or transfer it to another plan investment. When (and why) was the QDIA introduced? The concept of a QDIA was first introduced when the Pension Protection Act of 2006 (PPA) was signed into law. Designed to boost employee retirement savings, the PPA removed barriers that prevented employers from adopting automatic enrollment. At the time, fears about legal liability for market fluctuations and the applicability of state wage withholding laws had prevented many employers from adopting automatic enrollment—or had led them to select low-risk, low-return options as default investments. The PPA eliminated those fears by amending the Employee Retirement Income Security Act (ERISA) to provide a safe harbor for plan fiduciaries who invest participant assets in certain types of default investment alternatives when participants do not give investment direction. To assist employers in selecting QDIAs that met employees’ long-term retirement needs, the Department of Labor (DOL) issued a final regulation detailing the characteristics of these investments (see What kinds of investments qualify as QDIAs? below). Why does having a QDIA matter? When a 401(k) plan has a QDIA that meets the DOL’s rules, then the plan fiduciary is not liable for the QDIA’s investment performance. Without a QDIA, the plan fiduciary is potentially liable for investment losses when participants don’t actively direct their plan investments. Plus, having a QDIA in place means that employee accounts are well positioned—even if an active investment decision is never taken. If you select an appropriate default investment for your plan, you can feel confident knowing that your employees’ retirement dollars are invested in a vehicle that offers the potential for growth. Does my retirement plan need a QDIA? Yes, it’s a smart idea for all plans to have a QDIA. That’s because, at some point, money may be contributed to the plan, and participants may not have an investment election on file. This could happen in a number of situations, including when money is contributed to an account but no active investment elections have been established, such as when an employer makes a contribution but an employee isn’t contributing to the plan; or when an employee rolls money into the 401(k) plan prior to making investment elections. It makes sense then, that plans with automatic enrollment must have a QDIA. Are there any other important QDIA regulations that I need to know about? Yes, the DOL details several conditions plan sponsors must follow in order to obtain safe harbor relief from fiduciary liability for investment outcomes, including: A notice generally must be provided to participants and beneficiaries in advance of their first QDIA investment, and then on an annual basis after that Information about the QDIA must be provided to participants and beneficiaries which must include the following: An explanation of the employee’s rights under the plan to designate how the contributions will be invested; An explanation of how assets will be invested if no action taken regarding investment election; Description of the actual QDIA, which includes the investment objectives, characteristics of risk and return, and any fees and expenses involved Participants and beneficiaries must have the opportunity to direct investments out of a QDIA as frequently as other plan investments, but at least quarterly For more information, consult the DOL fact sheet. What kinds of investments qualify as QDIAs? The DOL regulations don’t identify specific investment products. Instead, they describe mechanisms for investing participant contributions in a way that meets long-term retirement saving needs. Specifically, there are four types of QDIAs: An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date (for example, a professionally managed account like the one offered by Betterment) A product with a mix of investments that takes into account the individual’s age or retirement date (for example, a life-cycle or target-date fund) A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund) The fourth type of QDIA is a capital preservation product, such as a stable value fund, that can only be used for the first 120 days of participation. This may be an option for Eligible Automatic Contribution Arrangement (EACA) plans that allow withdrawals of unintended deferrals within the first 90 days without penalty. We’re excluding further discussion of this option here since plans must still have one of the other QDIAs in cases where the participant takes no action within the first 120 days. What are the pros and cons of each type of QDIA? Let’s breakdown each of the first three QDIAs: 1. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual’s age or retirement date Such an investment service, or managed account, is often preferred as a QDIA over the other options because they can be much more personalized. This is the QDIA provided as part of Betterment 401(k)s. And Betterment factors in more than just age (or years to retirement) when assigning participants to one of our 101 core portfolios. We utilize specific data including salary, balance, state of residence, plan rules, and more. And while managed accounts can be pricey, they don’t have to be. Betterment’s solution, which is just a fraction of the cost of most providers, offers personalized advice and an easy-to-use platform that can also take external and spousal/partner accounts into consideration. 2. A product with a mix of investments that takes into account the individual’s age or retirement date When QDIAs were introduced in 2006, target date funds were the preferred default investment. The concept is simple: pick the target date fund with the year that most closely matches the year the investor plans to retire. For example, in 2020 if the investor is 45 and retirement is 20 years away, the 2040 Target Date Fund would be selected. As the investor moves closer to their retirement date, the fund adjusts its asset mix to become more conservative. One common criticism of target date funds today is that the personalization ends there. Target date funds are too simple and their one-size-fits-all portfolio allocations do not serve any individual investor very well. Plus, target date funds are often far more expensive compared to other alternatives. Finally, most target date funds are composed of investments from the same company—and very few fund companies excel at investing across every sector and asset class. Many experts view target date funds as outdated QDIAs and less desirable than managed accounts. Morningstar, a global investment research company, discusses the pros and cons of managed accounts versus target date funds, and predicts that they may become obsolete over time. 3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole This kind of product—for example, a balanced fund—offers a mix of equity and fixed-income investments. However, it’s based on group demographics and not on the retirement needs of individual participants. Therefore, using a balanced fund as a QDIA is a blunt instrument that by definition will have an investment mix that is either too heavily weighted to one asset class or another for most participants in your plan. Better QDIAs—and better 401(k) plans Betterment provides tailored allocation advice based on what each individual investor needs. That means greater personalization—and potentially greater investment results—for your employees. At Betterment, we monitor plan participants’ investing progress to make sure they’re on track to reach their goals. When they’re not on target, we provide actionable advice to get them back on the road to investment success. As a 3(38) investment manager, we assume full responsibility for selecting and monitoring plan investments—including your QDIA. That means fiduciary relief for you and better results for your employees. All of this for a fraction of the cost of most providers. The exchange-traded fund (ETF) difference Another key component that sets Betterment apart from the competition is our exclusive use of ETFs. Cost-effective, highly flexible, and technologically sophisticated, ETFs are rapidly gaining in popularity among retirement investors. Here’s why: Low cost—ETFs generally cost far less than mutual funds, which means more money stays invested Diversified—All of the ETFs used by Betterment are well-diversified so that investors are not overly exposed to individual stocks, bonds, sectors, or countries—which may mean better returns in the long run Sophisticated—ETFs take advantage of decades of technological advances in buying, selling, and pricing securities. Learn more about these five attributes now. Helping your employees live better Our mission is simple: to empower people to do what’s best for their money so they can live better. Every aspect of our solution from our QDIAs to our user-friendly investment platform is designed to give your employees a more personalized, holistic experience. We invite you to learn more about what we can do for you. -
What to Consider When Choosing a 401(k) Plan Recordkeeper
Selecting the right recordkeeper is important to the success of your 401(k) plan.
What to Consider When Choosing a 401(k) Plan Recordkeeper Selecting the right recordkeeper is important to the success of your 401(k) plan. A service provider who understands 401(k) plan administrative requirements and operational compliance can save you time, worry, and money. When you combine quality service with thoughtful plan design, appropriate investment options, and effective employee communications, you can drive strong savings behavior and increase the chances for a financially secure retirement for you and your employees. Prudently selecting a provider to help administer your plan and safeguard your employees’ retirement savings is also part of your fiduciary responsibility as the plan sponsor. Under ERISA, every plan must have at least one “named fiduciary.” The employer is typically the named fiduciary with overall responsibility for the plan. The plan must also designate an ERISA 3(16) plan administrator. This fiduciary has discretion over how the plan is operated and is often responsible for hiring service providers to help administer the plan and ensure that plan notices and disclosures are properly delivered. Most plan documents also name the employer as the ERISA plan administrator. As a fiduciary, you must adhere to high fiduciary standards in carrying out your responsibilities. This includes acting in the best interests of your participants and making sure only reasonable and necessary fees are paid from plan assets. Fortunately, there are skilled recordkeepers and other service providers to help you administer your 401(k) plan and meet your fiduciary responsibilities. 401(k) Plan Services and Who Provides Them So how do you find the 401(k) plan recordkeeper that’s right for you? One of the first steps is to understand what type of services you need and who provides them. A successful 401(k) plan typically requires four types of services: Plan recordkeeping and administrative support Participant services (account access and education) Operational compliance support (plan documents and nondiscrimination testing) Investment selection and monitoring Traditionally, different types of providers offered different types of services for 401(k) plans. Here are general definitions of 401(k) plan service providers: Recordkeeper – A recordkeeper is the bookkeeper for the day-to-day activities of the plan. This includes tracking participant activity such as deferral elections and investment allocations. A recordkeeper also tracks employer contributions and investment gains and losses. Most recordkeepers provide access to a platform of investments that can be selected by the plan fiduciary and made available to plan participants. Providing an easy-to-use and engaging website for participants and employers to access information and transact plan business is a critical element of recordkeeping services. A recordkeeper generally does not assume fiduciary responsibility for the plan but takes direction from the employer sponsoring the plan. Third Party Administrator (TPA) – A TPA provides compliance support to the employer and helps ensure the plan operates in accordance with the rules. This can include drafting and amending plan documents, conducting nondiscrimination testing, and filing an annual Form 5500 on behalf of the plan. In some cases, the role of the TPA and the recordkeeper may be filled by the same entity. Some TPAs also offer investment support services and may derive a portion of their revenue from the sale of investments. Most TPAs perform their administrative services at the direction of the employer and are not considered fiduciaries. However, some TPAs take on the role of the ERISA 3(16) plan fiduciary relieving employers from the fiduciary responsibility for certain plan operations. Trustee – 401(k) plan assets must be held in a trust for the benefit of each participant (unless the assets consist only of insurance contracts). A trustee is typically named in the plan document or a trust agreement. Some employers choose to serve as the plan’s trustee, referred to as a self-trusteed plan. In other cases, a separate entity such as a trust company will be appointed to assume legal title to the plan assets and to provide annual trust or account statements. All trustees are considered to be plan fiduciaries and are subject to strict standards when handling the assets of 401(k) plan participants. Financial Advisor – A financial advisor typically serves as an employer’s investment expert. The financial advisor may also help employers identify their objectives for sponsoring a retirement plan and then help determine the types of services and service model that will meet those objectives. Financial advisors are also typically involved in employee enrollment meetings and providing additional employee education. Those who advise on investments may take on a fiduciary role, serving as either an ERISA 3(21) investment advisor (makes recommendations) or an ERISA 3(38) investment manager (has discretion to select investments for the plan). To Bundle or Unbundle? In today’s market, one entity may fill more than one service provider role for a retirement plan. There are multiple combinations of services possible, depending on the provider and their affiliates. For example, a recordkeeper may also serve as the TPA, or an investment provider may provide recordkeeping services. Some service providers coordinate their services to present a comprehensive solution, known as a bundled service model. For example, a single entity may design a product that includes all facets of retirement plan services – fiduciary investment support, plan documents, recordkeeping, and compliance support. Or a service provider may choose to bundle just a few services such as the recordkeeping and TPA functions. Other providers specialize in just one area of 401(k) plan servicing and don’t affiliate with any other providers. With these types of unbundled providers, the employer is responsible for selecting and engaging independently with each provider and monitoring their performance. A Prudent Process Looking for a 401(k) plan recordkeeper or considering whether you want to change recordkeepers is a fiduciary function, so it’s important to follow a careful process and document your decisions. Consider whether you can manage a group of independent service providers or would benefit from a bundled service model. You may want to start by reviewing a provider’s service agreement to identify the specific services that will be provided, including whether the provider is assuming a fiduciary role as part of those services. Compare multiple providers’ services and fees, so you understand what fees are reasonable in the industry for your plan size and the types of services and features that are most important to you and your participants. Here is a list of elements you may want to consider when evaluating service providers: Types of Services Offered Scope of recordkeeping and administration support Compliance support such as plan documents and nondiscrimination testing Investment advise or support – at the plan level and the participant level Fiduciary services (ERISA 3(16) plan administration, ERISA 3(21) investment advice, or ERISA 3(38) investment management) Employee education programs or employee communication support Online account access and phone/email support services Fees Costs for plan services and investments Transparency of fees Payment structure (e.g., can fees be paid by the business or debited from participant accounts? Are fees paid through a revenue sharing arrangement?) Qualifications of Provider The depth of technical expertise within the organization Experience with plans having similar characteristics Service levels promised, such as turnaround times for common transactions The investment approach or philosophy The sophistication of technology and online tools Referrals or recommendations from other clients Ready for a Better 401(k)? Betterment for Business offers a bundled approach to servicing 401(k) plans, so you don’t need to navigate through multiple providers’ service models and fee structures or worry about gaps in services. We specialize in servicing small businesses for low cost to save you money. And our digital platform makes it easy for you to set up and maintain a 401(k) plan and for your employees to access their account balances and investments. We’re committed to being here for you every step of the way with expert investment and administrative support, including fiduciary 3(16) and 3(38) services.