401(k) basics

Understanding 401(k) Compensation Using an incorrect definition of compensation is on the top ten list of mistakes the IRS sees in voluntary correction filings. Compensation is used to determine various elements of any 401(k) plan including: Participant elective deferrals Employer contributions Whether the plan satisfies certain nondiscrimination requirements Highly compensated employees (HCEs) for testing purposes The IRS permits a plan to use multiple definitions of compensation for different purposes, but there are rules surrounding which definition can be used when. This is why using an incorrect definition of compensation is on the top ten list of mistakes the IRS sees in voluntary correction filings. General Definition of Plan Compensation There are three safe harbor definitions outlined in IRC Section 415(c)(3) that can be used to define “plan compensation” used to allocate participant contributions. W-2 Definition—Wages reported in box 1 of W2  PLUS the taxable portion of certain insurance premiums and taxable fringe benefits. The 3401(a) Definition–Wages subject to federal income tax withholding at the source PLUS  taxable fringe benefits. The 415 Definition–Wages, salaries, and other amounts received for services rendered such as bonuses, and commissions. It also includes items such as taxable medical or disability benefits and other taxable reimbursements. In some contexts, the plan is required to use this definition for purposes of determining HCEs and the maximum permissible contributions. For all of these definitions, pre-tax elective deferrals are included in reported compensation. In addition, it’s important to note the annual cost of living adjustments on compensation as well as contribution limits by the IRS. These will impact the amount of allowable employer and employee contributions. Compensation for Non-Discrimination Testing As defined in IRC Section 414(s), this definition of compensation is primarily used for various nondiscrimination tests. Safe harbor match or safe harbor nonelective plans, for example, must use this definition to bypass the actual deferral percentage (ADP) and the actual contribution percentage (ACP) test. Each of the three 415(c)(3) definitions also satisfy the 414(s) compensation definition of compensation and can be used for non-discrimination testing. However, a 414(s) definition of compensation can include certain modifications that are not permissible where a 415(c)(3) definition is required. It is not uncommon for the 414(s) definition to exclude fringe benefits such as personal use of a company car or moving expenses. Exclusions of certain forms of pay must be clearly stated and identified in the plan document but may trigger additional nondiscrimination testing (known as compensation ratio testing) to make sure non-highly compensated employees are not disproportionately affected. Additional Compensation Definitions Pre-entry or pre-participation Compensation Plans that have a waiting or eligibility period may elect to exclude compensation earned prior to entering the plan from the compensation definition. This may help alleviate some of the financial burden associated with an employer match or profit-sharing contribution. Although such an exclusion would not trigger any compensation discrimination test, a plan that is deemed “top-heavy” (more than 60% of assets belong to key employees) must calculate any required employer contribution using the full year’s worth of compensation. Post-severance Compensation Post severance compensation are amounts that an employee would have been entitled to receive had they remained employed. It usually includes amounts earned but not yet paid at time of termination (bonuses, commissions), payments for unused leave such as vacations or sick days, and any distributions made from a qualified retirement plan. To be considered as post-severance pay eligible and included in the definition of plan compensation, amounts must be paid before the later of the last day of the plan year in which the employee terminated or two and a half months following the date of termination. Taxable Fringe Benefits Non-cash items of value given to the employee, such as the use of a company car for personal use, must be reported as taxable income. A plan can exclude taxable fringe benefits from its compensation definition and therefore not be subject to the compensation ratio test. Bonuses, Commissions, and Overtime These types of payments are considered plan compensation unless specifically excluded in the plan document. Many employers decide to exclude them because they are not regularly recurring, but should be aware that such exclusions will trigger the compensation ratio test. However, such exclusions must be specifically detailed in the plan document. For example, If a company offers a performance bonus, hiring bonus, and holiday bonus but decides to exclude the hiring and holiday bonuses from the definition of plan compensation, then it must be specific, since “bonus” would be too broad and include all types. Reimbursements and Allowances Allowances (amounts received without required documentation) are taxable, while reimbursements for documented and eligible expenses are not taxable. Allowances are therefore included in the definition of plan compensation while reimbursements are not. An allowance is generally considered a taxable fringe benefit so it is reported and follows certain rules above in regards to compensation definitions. International Compensation Tax implications can easily rise when dealing with international workers and compensation. Employers with foreign affiliates that sponsor non-US retirement plans still may be subject to the US withholding and reporting requirements under the Foreign Account Tax Compliance Act (FATCA) to combat tax evasions. Companies with employees who either work outside of the U.S. or who work in the U.S. with certain visas will need to carefully review each employee’s status and 401(k) eligibility. Rules and requirements vary by country. However, when 401(k) eligibility is based on citizenship or visa status, work location and compensation currency is not a factor. Define Plan Compensation Carefully Payroll is often a company’s largest expense, so it’s no surprise that companies devote significant time and energy to develop their compensation strategies. However, companies need to be mindful of the implications of their compensation program. Even simple pay structures do not necessarily translate into simple 401(k) plan definitions of compensation. It’s important to review the plan document carefully to be sure compensation definitions used reflect the desires of the company, that the definitions chosen are accurately applied, and that implications are clearly understood. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

What is Form 5330? If you’ve been told you need to file a Form 5330, you’re probably wondering what it is and why you need to file it. IRS Form 5330 is used when paying excise taxes related to employee benefit plans, including 401(k) plans, even though the error that caused the excise tax has already been corrected. While Betterment can help answer questions, typically your accountant or attorney will help you prepare this filing. When would a 401(k) plan incur excise taxes? Although no plan sponsor wants or expects to incur excise taxes, sometimes a 401(k) plan may trigger an excise tax due to administrative oversight, most often when employee deferrals are deposited late. Although the form covers nearly two dozen situations, some of the most common situations are outlined below. Note that the amount of the excise tax and the filing deadline varies depending on the reason for the excise tax. Note that you must file one Form 5330 to report all excise taxes with the same filing deadline. Reason for Excise Tax Description Amount of Excise Tax Filing Deadline Late deposits of employee deferrals (late payroll) For small businesses, deposits are considered late if they are made more than 7 business days from the date deferrals were withheld from payroll. Large plans must deposit contributions as soon as administratively feasible but no later than 15 business days of the month after the contribution was withheld. However, if the plan has established a precedent for depositing contributions earlier, then that precedent will define what is considered late. 15% of lost earnings Last day of the 7th month after plan year end Failed ADP/ACP test refunds issued after deadline Refunds issued more than 2 ½ months after the close of the plan year are considered late. 10% of the refund excluding investment gains 15 months after the close of the plan year Contributions exceeding the annual tax deduction limit An employer’s deductions for contributions to a 401(k) plan cannot be more than 25% of the compensation paid during the year to eligible employees participating in the plan. 10% of the excess contribution Last day of the 7th month after the plan year-end Penalties for late filing and late payment Failure to file Form 5330 on time results in a 5% penalty each month, up to a maximum of 25% of the unpaid tax. Failure to pay excise taxes on time may result in a penalty of ½ of 1% of the unpaid tax for each month, up to a maximum of 25% of the unpaid tax. Penalties will not be imposed if you can show that the failure to pay on time was due to reasonable cause. Interest and penalties for late filing and late payment will be billed separately after the return is filed. Deadline extension The deadline to file Form 5330 may be extended for up to six months by filling a Form 5558 on or before the date the 5330 is due. The extension applies only to Form 5330, not to the payment of the excise tax, which must be paid on or before the original deadline. Links to forms, instructions and useful information IRS forms are periodically updated, so be sure to download the latest form and other relevant information from the IRS website. IRS Form 5330 Corner from IRS website, with links to latest Form 5330 and instructions. About Form 5558 (Application for Extension of Time to File Certain Employee Plan Returns) from IRS website, including link to latest form. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

True-Ups: What are they and how are they determined? You've been funding 401(K) matching contributions, but you just learned you must make an additional “true-up” contribution. What does this mean and how was it determined? Employer matching contributions are a great benefit and can help attract and retain employees. It’s not unusual for employers to fund matching contributions each pay period, even though the plan document requires that the matching contribution be calculated on an annualized basis. This means that the matching contribution will need to be calculated both ways (pay period versus annualized) and may result in different matching contribution amounts to certain participants, especially those whose contribution amounts varied throughout the year. For many employers (and payroll systems), the per-pay-period matching contribution method can be easier to administer and help with company cash flow. Employer matching contributions are calculated based on each employee’s earnings and contributions per pay period. However, this method can create problems for employees who max out their 401k contributions early, as we will see below. Per-pay-period match: Consistent 401(k) contributions throughout the year Suppose a company matches dollar-for dollar-on the first 4% of pay and pays employees twice a month for a total of 24 pay periods in a year. The per period gross pay of an employee with an annual salary of $120,000, then, is $5,000. If the employee makes a 4% contribution to their 401(k) plan, their $200 per pay period contribution will be matched with $200 from the company. Per-pay-period matching contribution methodology for $120K employee contributing 4% for full year  Employee contribution Employer matching contribution Total Contributions per pay period $200 $200 $400 Full year contributions $4,800 $4,800 $9,600 For the full year, assuming the 401(k) contribution rate remains constant, this employee would contribute a total of $4,800 and receive $4,800 from their employer, for a total of $9,600. Per-pay-period match: Maxing out 401(k) contributions early Employees are often encouraged to optimize their 401(k) benefit by contributing the maximum allowable amount to their plan. Suppose instead that this same employee is enthusiastic about this suggestion and, determined to maximize their 401(k) contribution, elects to contribute 20% of their paycheck to the company’s 401(k) plan. Sounds great, right? At this rate, however, assuming the employee is younger than age 50, the employee would reach the $19,500 annual 401(k) contribution limit during the 20th pay period. Their contributions to the plan would stop, but so too would the employer matching contributions, even though the company had only deposited $3,800 into this employee’s account, — $1,000 less than the amount that would have been received if the employee had spread their contributions throughout the year and received the full matching contribution for every pay period. Per-pay-period matching contribution methodology for $120K employee contributing 20% from beginning of year Employee contribution Employer matching contribution Total Contributions per pay period $1,000 $200 $1,200 Full year contributions $19,500 $3,800 $23,300 Employees who max out too soon on their own contributions are at risk of missing out on the full employer matching contribution amount. This can happen if the contribution rate or compensation (due to bonuses, for instance) varies throughout the year. True-up contributions using annualized matching calculation When the plan document stipulates that the matching contribution calculation will be made on an annualized basis, plans who match each pay period will be required to make an extra calculation after the end of the plan year. The annualized contribution amount is based on each employee’s contributions and compensation throughout the entire plan year. The difference between these annualized calculations and those made on a per-pay-period basis will be the “true-up contributions” required for any employees who maxed out their 401(k) contributions early and therefore missed out on the full company matching contribution. In the example above, the employee would receive a true-up contribution of $1,000 in the following year. Plans with the annualized employer matching contribution requirement (per their plan document) may still make matching contributions each pay period, but during compliance testing, which is based on annual compensation, matching amounts are reviewed and true-ups calculated as needed. The true-up contribution is normally completed within the first two months following the plan year end and before the company’s tax filing deadline. Making true-up contributions means employees won’t have to worry about adjusting their contribution percentages to make sure they don’t max out too early. Employees can front-load their 401k contributions and still receive the full matching contribution amount. Often true-up contributions affect senior managers or business owners; hence companies are reluctant to amend their plan to a per-pay-period matching contribution calculation. That said, employers should be prepared to make true-up contributions and not be surprised when they are required.

401(k) QNECs & QMACs: what are they and does my plan need them? QNECs and QMACs are special 401(k) contributions employers can make to correct certain compliance errors without incurring IRS penalties. Even the best laid plans can go awry, especially when some elements are out of your control. Managing a 401(k) plan is no different. For example, your plan could fail certain required nondiscrimination tests depending solely on how much each of your employees chooses to defer into the plan for that year (unless you have a safe harbor 401(k) plan that is deemed to pass this testing.) QNECs and QMACs are designed to help employers fix specific 401(k) plan problems by making additional contributions to the plan accounts of employees who have been negatively affected. What is a QNEC? A Qualified Nonelective Contribution (QNEC) is a contribution employers can make to the 401(k) plan on behalf of some or all employees to correct certain types of operational mistakes and failed nondiscrimination tests. They are typically calculated based on a percentage of an employee’s compensation. QNECs must be immediately 100% vested when allocated to participants’ accounts. This means they are not forfeitable and cannot be subject to a vesting schedule. QNECs also must be subject to the same distribution restrictions that apply to elective deferrals in a 401(k) plan. In other words, QNECs cannot be distributed until the participant has met one of the following triggering events: severed employment, attained age 59½, died, become disabled, or met the requirements for a qualified reservist distribution or a financial hardship (plan permitting). These assets may also be distributed upon termination of the plan. What is a QMAC? A Qualified Matching Contribution (QMAC) is also an employer contribution that may be used to assist employers in correcting problems in their  401(k) plan. The QMAC made for a participant is a matching contribution, based on how much the participant is contributing to the plan  (as pre-tax deferrals, designated Roth contributions, or after-tax employee contributions), or it may be based on the amount needed to bring the plan into compliance, depending on the problem being corrected. QMACs also must be nonforfeitable and subject to the distribution limitations listed above when they are allocated to participant’s accounts. QNECs vs. QMACs Based on % of employee’s compensation based on amount of employee’s contribution QNECs (Qualified Nonelective Contribution) QMACs (Qualified Matching Contribution) Commonly used to pass either the Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) test Most commonly used to pass the Actual Contribution Percentage (ACP) test Frequently Asked Questions about QNECs and QMACs How are QNECs and QMACs used to correct nondiscrimination testing failures? One of the most common situations in which an employer might choose to make a QNEC or QMAC is when their 401(k) plan has failed the Actual Deferral Percentage (ADP) test or the Actual Contribution Percentage (ACP) test for a plan year. These tests ensure the plan does not disproportionately benefit highly compensated employees (HCEs). The ADP test limits the percentage of compensation the HCE group can defer into the 401(k) plan based on the deferral rate of the non-HCE group. The ACP test ensures that the employer matching contributions and after-tax employee contributions for HCEs are not disproportionately higher than those for non-HCEs. When the plan fails one of these tests at year-end, the employer may have a few correction options available, depending on their plan document. Many plans choose to distribute excess deferrals to HCEs to bring the HCE group’s deferral rate down to a level that will pass the test. Your HCEs, however, may not appreciate a taxable refund at the end of the year or a cap on how much they can save for retirement. Making QNECs and QMACs are another option for correcting failed nondiscrimination tests. This option allows HCEs to keep their savings in the plan because the employer is making additional contributions to raise the deferral or contribution rate of the lower paid employees (non-HCEs) to a level that passes the test. How much would I have to contribute to correct a testing failure? For QNECs, the plan usually allows the employer to contribute the minimum QNEC amount needed to boost the non-HCE group’s deferral rate enough to pass the ADP test. The contribution formula may require that an allocation be a specific percentage of compensation that will be given equally to all non-HCEs, or it may allow the allocation to be used in a more targeted fashion that gives the amount needed to pass the test to just certain non-HCEs. QMACs are most commonly made to pass the ACP test. As with QNECs, there are allocation options available to the plan sponsor when making QMACs. A plan sponsor can make targeted QMACs, which are an amount needed to satisfy a nondiscrimination testing failure, or they can allocate QMACs based on the percentage of compensation deferred by a participant. QNECs and QMACs can both be made to help pass the ADP and ACP tests, but a contribution cannot be double counted. For example, if a QNEC was used to help the plan pass the ADP test, that QNEC cannot also be used to help pass the ACP test. How long do I have to make a QNEC or QMAC to correct a testing failure? QNECs/QMACs used to correct ADP/ACP tests generally must be made within 12 months after the end of the plan year being tested. Beware, however, if you use the prior-year testing method for your ADP/ACP tests. If you use this testing method, the QNEC/QMAC must be made by the end of the plan year being tested. For example, if you’re using the prior-year testing method for the 2020 plan year ADP test, the non-HCE group’s deferral rate for 2019 is used to determine the passing rate for HCE deferrals for 2020 testing. Using this prior-year method can help plans proactively determine the maximum amount HCEs may defer each year. But, if the plan still fails testing for some reason, a QNEC or QMAC would have to be made by the end of 2020, which is before the ADP/ACP test would be completed for 2020. QNECs and QMACs deposited by the employer’s tax-filing deadline (plus extensions) for a tax year will be deductible for that tax year. What other types of compliance issues may be corrected with a QNEC or QMAC? Through administrative mix-ups or miscommunications with payroll, a plan administrator might fail to recognize that an employee has met the eligibility requirements to enter the plan or fail to notify the employee of their eligibility. These types of errors tend to happen especially in plans that have an automatic enrollment feature. And sometimes, even when the employee has made an election to begin deferring into the plan, the election can be missed. These types of errors are considered a “missed deferral opportunity.” The employer may correct its mistake by contributing to the plan on behalf of the employee. How is a QNEC or QMAC calculated for a “missed deferral opportunity”? When a missed deferral opportunity is discovered, the employer can correct this operational error by making a QNEC contribution up to 50% of what the employee would have deferred based on their compensation for the year and the average deferral rate for the group the employee belongs to (HCE or non-HCE) for the year the mistake occurred. The QNEC must also include the amount of investment earnings that would be attributable to the deferral had it been contributed timely. If a missed deferral opportunity is being corrected and the plan is a 401(k) safe harbor plan, the employer must make a matching contribution in the form of a QMAC to go with the QNEC to make up for the missed deferrals, plus earnings. Is there a way to reduce the cost of QNECs/QMACs? Employers who catch and fix their mistakes early can reduce the cost of correcting a compliance error. For example, no QNEC is required if the correct deferral amount begins for an affected employee by the first payroll after the earlier of 3 months after the failure occurred, or The end of the month following the month in which the employee notified the employer of the failure. Plans that have an automatic enrollment feature have an even longer time to correct errors. No QNEC is required if the correct deferral amount begins for an affected employee by the first payroll after the earlier of 9½ months after the end of the plan year in which the failure occurred, or The end of the month after the month in which the employee notified the employer of the failure. If it has been more than three months but not past the end of the second plan year following the year in which deferrals were missed, a 25% QNEC (reduced from 50%) is sufficient to correct the plan error. The QNEC must include earnings and any missed matching contributions and the correct deferrals must begin by the first payroll after the earlier of: The end of the second plan year following the year the failure occurred, or The end of the month after the month in which the employee notified the employer of the failure. For all these reduced QNEC scenarios, employees must be given a special notice about the correction within 45 days of the start of the correct deferrals. For More Information These rules are complex, and the calculation of the corrective contribution, as well as the deadline to contribute, varies based on the type of mistake being corrected. You can find more information about correcting plan mistakes using QNECs or QMACs on the IRS’s Employee Plans Compliance Resolution System (EPCRS) webpage. And you can contact your Betterment for Business representative to discuss the correction options for your plan. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.

All About Vesting of Employer Contributions Employers have flexibility in defining their plan’s vesting schedule, which can be an important employee retention tool. Regardless of age, employees, as well as job seekers, are thinking more than ever about saving for their future. 401(k) plans, therefore, are a very attractive benefit and can be an important competitive tool in helping employers attract and retain talent. And when a company sweetens the 401(k) plan with a matching or profit sharing contribution, that’s like “free money” that can be hard for prospective or current employees to pass up. But with employer contributions comes the concept of “vesting,” which both employees and employers should understand. What is Vesting? With respect to retirement plans, “vesting” simply means ownership. In other words, each employee will vest, or own, a portion or all of their account in the plan based on the plan’s vesting schedule. All 401(k) contributions that an employee makes to the plan, including pre-tax and/or Roth contributions made through payroll deduction, are immediately 100% vested. Those contributions were money earned by the employee as compensation, and so they are owned by the employee immediately and completely. Employer contributions made to the plan, however, usually vest according to a plan-specific schedule (called a vesting schedule) which may require the employee to work a certain period of time to be fully vested or “own” those funds. Often ownership in employer contributions is made gradually over a number of years, which can be an effective retention tool by encouraging employees to stay long enough to vest in 100% of their employer contributions. What is a 401(k) Vesting Schedule? The 401(k) vesting schedule is the set of rules outlining how much and when employees are entitled to (some or all of)  the employer contributions made to their accounts. Typically, the more years of service, the higher the vesting percentage. Different Types of 401(k) Vesting Schedules Employers have flexibility in determining the type and length of vesting schedule. The three types of vesting are: Immediate Vesting - This is very straight-forward in that the employee is immediately vested (or owns) 100% of employer contributions from the point of receipt. In this case, employees are not required to work a certain number of years to claim ownership of the employer contribution. An employee who was hired in the beginning of the month and received an employer matching contribution in his 401(k) account at the end of the month could leave the company the next day, along with the total amount in his account (employee plus employer contributions). Graded Vesting Schedule - Probably the most common schedule, vesting takes place in a gradual manner. At least 20% of the employer contributions must vest after two years of service and 100% vesting can be achieved after anywhere from two to six years to achieve 100% vesting. Popular graded vesting schedules include: 3-Year Graded 4-Year Graded 5-Year Graded 6-Year Graded Yrs of Service % Vested % Vested % Vested % Vested 0 - 1 33% 25% 20% 0% 1 - 2 66% 50% 40% 20% 2 - 3 100% 75% 60% 40% 3 - 4 100% 80% 60% 4 - 5 100% 80% 5 - 6 100% Cliff Vesting Schedule - With a cliff vesting schedule, the entire employer contribution becomes 100% vested all at once, after a specific period of time. For example, if the company has a 3 year cliff vesting schedule and an employee leaves for a new job after two years, the employee would only be able to take the contributions they made to their 401(k) account; they wouldn’t have any ownership rights to any employer contributions that had been made on their behalf. The maximum number of years for a cliff schedule is 3 years. Popular cliff vesting schedules include: 2-Year Cliff 3-Year Cliff Yrs of Service % Vested % Vested 0 - 1 0% 0% 1 - 2 100% 0% 2 - 3 100% Frequently Asked Questions about Vesting What is a typical vesting schedule? Vesting schedules can vary for every plan. However, the most common type of vesting schedule is the graded schedule, where the employee will gradually vest over time depending on the years of service required. Can we change our plan’s vesting schedule in the future? Yes, with a word of caution. In order to apply to all employees, the vesting schedule can change only to one that is equally or more generous than the existing vesting schedule. Known as the anti-cutback rule, this prevents plan sponsors from taking away benefits that have already accrued to employees. For example, if a plan has a 4-year graded vesting schedule, it could not be amended to a 5- or 6-year graded vesting schedule (unless the plan is willing to maintain separate vesting schedules for new hires versus existing employees). The same plan could, however, amend its vesting schedule to a 3-year graded one, since the new benefit would be more generous than the previous one. Since my plan doesn't currently offer employer contributions, I don't need to worry about defining a vesting schedule, right? Whether or not your organization plans on making 401(k) employer contributions, for maximum flexibility, we recommend that all plans include provisions for discretionary employer contributions and a more restrictive vesting formula. The discretionary provision in no way obligates the employer to make contributions (the employer could decide each year whether to contribute or not, and how much). In addition, having a restrictive vesting schedule means that the vesting schedule could be amended easily in the future. When does a vesting period begin? Usually, a vesting period begins when an employee is hired so that even if the 401(k) plan is established years after an employee has started working at the company, all of the year(s) of service prior to the plan’s establishment will be counted towards their vesting. However, this is not always the case. The plan document may have been written such that the vesting period starts only after the plan has been in effect. This means that if an employee was hired prior to a 401(k) plan being established, the year(s) of service prior to the plan’s effective date will not be counted. What are the methods of counting service for vesting? Service for vesting can be calculated in two ways: hours of service or elapsed time. With the hours of service method, an employer can define 1,000 hours of service as a year of service so that an employee can earn a year of vesting service in as little as five or six months (assuming 190 hours worked per month). The employer must be diligent in tracking the hours worked to make sure vesting is calculated correctly for each employee and to avoid over-forfeiting or over-distributing employer contributions. The challenges of tracking hours of service often lead employers to favor the elapsed time method. With this method, a year of vesting is calculated based on years from the employee’s date of hire. If an employee is still active 12 months from their date of hire, then they will be credited with one year of service toward vesting, regardless of the hours or days worked at the company. If there is an eligibility requirement to be a part of the plan, does vesting start after an employee becomes an eligible participant in the plan? Typically, no, but it is dependent on what has been written into the plan document. As stated previously, the vesting clock usually starts ticking when the employee is hired. An employee may not be able to join the plan because there’s a separate eligibility requirement that must be met (for example, 6 months of service), but the eligibility computation period is completely separate from the vesting period. The only instance where an ineligible participant may not start vesting from their date of hire is if the plan document excludes years of service of an employee who has not reached the age of 18. How long does an employer have to deposit employer contributions to the 401(k) plan? This is dependent on how the plan document is written. If the plan document is written for employer contributions to be made every pay period, then the plan sponsor must follow their fiduciary duty to make sure that the employer contribution is made on time. If the plan document is written so that the contribution can be made on an annual basis, then the employer can wait until the end of the year ( or even until the plan goes through their annual compliance testing) to wait for the contribution calculations to be received from their provider. What happens to an employer contribution that is not vested? If an employee leaves the company before they are fully vested, then the unvested portion (including associated earnings) will be “forfeited” and returned to the employer’s plan cash account, which can be used to fund future employer contributions or pay for plan expenses. For example, if a 401(k) plan has a 6-year graded vesting schedule and an employee terminates service after only 5 years,  80% of the employer contribution will belong to the employee, and the remaining 20% will be sent back to the employer when the employee initiates a distribution of their account.

401(k) Glossary of Terms Whether you're offering a 401(k) for the first time or need a refresh on important terms, these definitions can help you make sense of industry jargon. 3(16) fiduciary: A fiduciary partner hired by an employer to handle a plan’s day-to-day administrative responsibilities and ensure that the plan remains in compliance with Department of Labor regulations. 3(21) fiduciary: An investment advisor who acts as co-fiduciary to review and make recommendations regarding a plan’s investment lineup. This fiduciary provides guidance but does not have the authority to make investment decisions. 3(38) fiduciary: A codified retirement plan fiduciary that’s responsible for choosing, managing, and overseeing the plan’s investment options. 401(k) administration costs: The expenses involved with the various aspects of running a 401(k) plan. Plan administration includes managing eligibility and enrollment, coordinating contributions, processing distributions and loans, preparing and delivering legally required notices and forms, and more. 401(k) committee charter: A document that describes the 401(k) committee’s responsibilities and authority. 401(k) compensation limit: The maximum amount of compensation that’s eligible to draw on for plan contributions, as determined by the IRS. In 2020, this limit is $285,000. Keep in mind that contributions are also limited by the 401(k) contribution limit, which is $19,500 in 2020 for those under age 50. 401(k) contribution limits: The maximum amount that a participant may contribute to an employer-sponsored 401(k) plan, as determined by the IRS. For 2020, the limits are $19,500 for individuals under age 50, and $26,000 for individuals age 50 and older (including $6,500 in catch-up contributions). 401(k) force-out rule: Refers to a plan sponsor’s option to remove a former employee’s assets from the retirement plan. The sponsor has the option to “force out” these assets (into an IRA in the former employee’s name) if the assets are less than $5,000. 401(k) plan: An employer-sponsored retirement savings plan that allows participants to save money on a tax-advantaged basis. 401(k) plan fees: The various fees associated with a plan. These can include fees for investment management, plan administration, fiduciary services, and consulting fees. While some fees are applied at the plan level — that is, deducted from plan assets — others are charged directly to participant accounts. 401(k) plan fee benchmarking: The process of comparing a plan’s fees to those of other plans in similar industries with roughly equal assets and participation rates. This practice can help to determine if a plan’s fees are reasonable. 401(k) set-up costs: The expenses involved in establishing a 401(k) plan. These costs cover plan documents, recordkeeping, investment management, participant communication, and other essential aspects of the plan. 401(k) withdrawal: A distribution from a plan account. Because a 401(k) plan is designed to provide income during retirement, a participant generally may not make a withdrawal until age 59 ½ unless he or she terminates or retires; becomes disabled; or qualifies for a hardship withdrawal. Any other withdrawals before age 59 ½ are subject to a 10% penalty as well as regular income tax. 404(a)(5) fee disclosure: A notice issued by a plan sponsor that details information about investment fees. This notice, which is required of all plan sponsors by the Department of Labor, covers initial disclosure for new participants, new fees, and fee changes. 404(c) compliance: Refers to a participant’s (or beneficiary’s) right to choose the specific investments for 401(k) plan assets. Because the participant controls investment decisions, the plan fiduciary is not liable for investment losses. 408(b)(2) fee disclosure: A notice issued by a plan service provider that details the fees charged by the provider (and its affiliates or subcontractors) and reports any possible conflicts of interest. The Department of Labor requires all plan fiduciaries to issue this disclosure. Actual contribution percentage (ACP) test: A required compliance test that compares company matching contributions among highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). Actual deferral percentage (ADP) test: A required compliance test that compares employee deferrals among highly compensated employees (HCEs) and non-highly compensated employees (NHCEs). Annual fee disclosure: A notice issued by a plan sponsor that details the plan’s fees and investments. This disclosure includes plan and individual fees that may be deducted from participant accounts, as well as information about the plan’s investments (performance, expenses, fees, and any applicable trade restrictions). Automated Clearing House (ACH): A banking network used to transfer funds between banks quickly and cost-efficiently. Automatic enrollment (ACA): An option that allows employers to automatically deduct elective deferrals into the plan from an employee’s wages unless the employee actively elects not to contribute or to contribute a different amount. Beneficiary: The person or persons who a participant chooses to receive the assets in a plan account if he or she dies. If the participant is married, the spouse is automatically the beneficiary unless the participant designates a different beneficiary (and signs a written waiver). If the participant is not married, the account will be paid to his or her estate if no beneficiary is on file. Blackout notice: An advance notice of an upcoming blackout period. ERISA rules require plan sponsors to notify participants of a blackout period at least 30 days in advance. Blackout period: A temporary period (three or more business days) during which a 401(k) plan is suspended, usually to accommodate a change in plan administrators. During this period, participants may not change investment options, make contributions or withdrawals, or request loans. Catch-up contributions: Contributions beyond the ordinary contribution limit, which are permitted to help people age 50 and older save more as they approach retirement. In 2020, contribution limits (set by the IRS) are $19,500 on ordinary contributions and $6,500 on catch-up contributions, for a combined limit of $26,000. Compensation: The amount of pay a participant receives from an employer. For purposes of 401(k) contribution calculations, only compensation, which is reported on a W-2 is considered to be eligible. Constructive receipt: A payroll term that refers to the impending receipt of a paycheck. The paycheck has not yet been fully cleared for deposit in the employee’s bank account, but the employee has access to the funds. Deferrals: Another term for contributions made to a 401(k) account. Defined contribution plan: A tax-deferred retirement plan in which an employee or employer (or both) invest a fixed amount or percentage (of pay) in an account in the employee’s name. Participation in this type of plan is voluntary for the employee. A 401(k) plan is one type of tax-deferred defined contribution plan. Department of Labor (DOL): The federal government department that oversees employer-sponsored retirement plans as well as work-related issues including wages, hours worked, workplace safety, and unemployment and reemployment services. Distributions: A blanket term for any withdrawal from a 401(k) account. A distribution can include a required minimum distribution (RMD), a loan, a hardship withdrawal, a residential loan, or a qualified domestic relations order (QDRO). Docusign: A third-party platform used for exchanging signatures on documents, especially during plan onboarding. EIN: An employer’s identification number, which is listed on Form 5500. Eligible automatic enrollment arrangement (EACA): An automatic enrollment (ACA) plan that applies a default and uniform deferral percentage to all employees who do not opt out of the plan or provide any specific instructions about deferrals to the plan. Under this arrangement, the employer is required to provide employees with adequate notice about the plan and their rights regarding contributions and withdrawals. ERISA: Refers to the Employee Retirement Income Security Act of 1974, a federal law that requires individuals and entities that manage a retirement plan (fiduciaries) to follow strict standards of conduct. ERISA rules are designed to protect retirement plan participants and secure their access to benefits in the plan. Excess contributions: The amount of contributions to a plan that exceed the IRS contribution limit. Excess contributions made in any year (and their earnings) may be withdrawn without penalty by the tax filing deadline for that year, and the participant is then required to pay regular taxes on the amount withdrawn. Any excess contributions not withdrawn by the tax deadline are subject to a 6% excise tax every year they remain in the account. Exchange-traded fund (ETF): Passively managed index funds that feature low costs and high liquidity. ETFs make it easy to manage portfolios efficiently and effectively. All of Betterment’s investment options are ETFs. Fee disclosure: Information about the various fees related to a 401(k) plan, including plan administration, fiduciary services, and investment management. Fee disclosure deadline: The date by which a plan sponsor must provide plan and investment-related fee disclosure information to participants. For calendar-year plans, the deadline is August 31. Fidelity bond: Also known as a fiduciary bond, this bond protects the plan from losses due to fraud or dishonesty. Every fiduciary who handles 401(k) plan funds is required to hold a fidelity bond. Fiduciary: An individual or entity that manages a retirement plan and is required to always act in the best interests of employees who save in the plan. In exchange for helping employees build retirement savings, employers and employees receive special tax benefits, as outlined in the Internal Revenue Code. When a company adopts a 401(k) plan for employees, it becomes an ERISA fiduciary and takes on two sets of fiduciary responsibilities:     “Named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments     “Plan administrator” with fiduciary authority and discretion over how the plan is operated Most companies hire one or more outside experts (such as an investment advisor, investment manager, or third-party administrator) to help manage their fiduciary responsibilities. Form 5500: An informational document that a plan sponsor must prepare to disclose the identity of the plan sponsor (including EIN and plan number), characteristics of the plan (including auto-enrollment, matching contributions, profit-sharing, and other information), the numbers of eligible and active employees, plan assets, and fees. The plan sponsor must submit this form annually to the IRS and the Department of Labor, and must provide a summary to plan participants. Smaller plans (less than 100 employees) may instead file Form 5500-SF. Hardship withdrawal: A withdrawal before age 59 ½ intended to address a severe and immediate need ( as defined by the IRS). To qualify for a hardship withdrawal, a participant must provide the employer with documentation (such as a medical bill, a rent invoice, funeral expenses) that shows the purpose and amount needed. If the hardship withdrawal is authorized, it must be limited to the amount needed (adjusted for taxes and penalties), may still be subject to early withdrawal penalties, is not eligible for rollover, and may not be repaid to the plan. Highly compensated employee (HCE): An employee who earned at least $125,000 in compensation from the plan sponsor during the previous year (if 2019), or at least $130,000 if the previous year is 2020, or owned more than 5% interest in the plan sponsor’s business at any time during the current or previous year (regardless of compensation). Inception to date (ITD): Refers to contribution amounts since the inception of a participant’s account. Internal Revenue Service (IRS): The U.S. federal agency that’s responsible for the collection of taxes and enforcement of tax laws. Most of the work of the IRS involves income taxes, both corporate and individual. Investment advice (ERISA ruling): The Department of Labor’s final ruling (revised in 2016) on what constitutes investment advice and what activities define the role of a fiduciary. Investment policy statement (IPS): A plan’s unique governing document, which details the characteristics of the plan and assists the plan sponsor in complying with ERISA requirements. The IPS should be written carefully, reviewed regularly, updated as needed, and adhered to closely. Key employee: An employee classification used in top-heavy testing. This is an employee who meets one of the following criteria:     Ownership stake greater than 5%     Ownership stake greater than 1% and annual compensation greater than $150,000     Officer with annual compensation greater than $185,000 (for 2020) Non-discrimination testing: Tests required by the IRS to ensure that a plan does not favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).  There are three tests: Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of NHCEs. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (This test is only required if plan makes employer contributions.) Top-heavy determination—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. Non-elective contribution: An employer contribution to an employee’s plan account that’s made regardless of whether the employee makes a contribution. This type of contribution is not deducted from the employee’s paycheck. Non-highly compensated employee (NHCE): An employee who does not meet any of the criteria of a highly compensated employee (HCE). Plan sponsor: An organization that establishes and offers a 401(k) plan for its employees or members. Qualified default investment alternative (QDIA): The default investment for plan participants who don’t make an active investment selection. All 401(k) plans are required to have a QDIA. For Betterment’s 401(k), the QDIA is one of 101 portfolios (based on age) that make up the Core Portfolio Strategy. Qualified domestic relations order (QDRO): A document that recognizes a spouse’s, former spouse’s, child’s, or dependent’s right to receive benefits from a participant’s retirement plan. Typically approved by a court judge, this document states how an account must be split or reassigned. Plan administrator: An individual or company responsible for the day-to-day responsibilities of 401(k) plan administration. Among the responsibilities of a plan administrator are compliance testing, maintenance of the plan document, and preparation of the Form 5500. Many of these responsibilities may be handled by the plan provider or a third-party administrator (TPA). Plan document: A document that describes a plan’s features and procedures. Specifically, this document identifies the type of plan, how it operates, and how it addresses the company’s unique needs and goals. Professional employer organization (PEO): A firm that provides small to medium-sized businesses with benefits-related and compliance-related services. Profit sharing: A type of defined contribution plan in which a plan sponsor contributes a portion of the company’s quarterly or annual profit to employee retirement accounts. This type of plan is often combined with an employer-sponsored retirement plan. Promissory note: A legal document that lays out the terms of a 401(k) loan or other financial obligation. Qualified non-elective contribution (QNEC): A contribution that a plan is required to make if it’s found to be top-heavy. Required minimum distribution (RMD): Refers to the requirement that an owner of a tax-deferred account begin making plan withdrawals each year starting at age 72. The first withdrawal must be made by April 1 of the year after the participant reaches age 72, and all subsequent annual withdrawals must be made by December 31. Rollover: A retirement account balance that is transferred directly from a previous employer’s qualified plan to the participant’s current plan. Consolidating accounts in this way makes it easier for a participant to manage and track retirement investments, and may also reduce retirement account fees. Roth 401(k) contributions: After-tax plan contributions that do not reduce taxable income. Contributions and their earnings are not taxed upon withdrawal as long as the participant is at least age 59½ and has owned the Roth 401(k) account for at least five years. For 2020, the limits on plan contributions (Traditional, Roth, or a combination of both) are $19,500 for individuals under age 50, and $26,000 for individuals age 50 and older (including $6,500 in catch-up contributions). Roth IRA contributions: After-tax IRA contributions that do not reduce current taxable income. Contributions and their earnings are not taxed upon withdrawal. In 2020, the Roth IRA contribution limit is $6,000 for those under age 50 and $7,000 for ages 50 or older. A single tax filer may make a full contribution as long as the modified adjusted gross income is less than $124,000. Roth vs. pre-tax contributions: Pre-tax contributions reduce a participant’s current income, with taxes due when funds are withdrawn (typically in retirement). Alternatively, Roth contributions are deposited into the plan after taxes are deducted, so withdrawals are tax-free. Safe Harbor: One of three plan designs that provides annual testing exemptions. In exchange, employer contributions on behalf of all employees are required. Saver’s credit: A credit designed to help low- and moderate-income taxpayers further reduce their taxes by saving for retirement. The amount of this credit — 10%, 20%, or 50% of contributions, based on filing status and adjusted gross income — directly reduces the amount of tax owed. Stock option: The opportunity for an employee to purchase shares of an employer’s stock at a specific (often discounted) price for a limited time period. Some companies may offer a stock option as an alternative or a complement to a 401(k) plan. Summary Annual Report (SAR): A summary version of Form 5500, which a plan sponsor is required to provide to participants every year within two months after filing Form 5500. Summary Plan Description (SPD): A comprehensive document that describes in detail how a 401(k) plan works and the benefits it provides. Employers are required to provide an SPD to employees free of charge. Third-party administrator (TPA): An individual or company that may be hired by a 401(k) plan sponsor to help run many day-to-day aspects of a retirement plan. Among the responsibilities of a TPA are compliance testing, generation and maintenance of the plan document, and preparation of Form 5500. Top-heavy test: An annual compliance test that examines the plan assets of key employees relative to total plan assets. If key employee assets make up more than 60% of total assets, then the plan must make a top-heavy minimum contribution, usually in the form of a nonelective contribution. Traditional contributions: Pre-tax plan contributions that reduce taxable income. These contributions and their earnings are taxable upon withdrawal, which is typically during retirement. For 2020, the limits on plan contributions (Traditional, Roth, or a combination of both) are $19,500 for individuals under age 50, and $26,000 for individuals age 50 and older (including $6,500 in catch-up contributions). Vesting: Another word for ownership. Participants are always fully vested in the contributions they make. Employer contributions, however, may be subject to a vesting schedule in which participant ownership builds gradually over several years.

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. 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.” The IRS recently announced that the current two-year restatement window will begin on August 1, 2020 and 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 have a Betterment 401(k) plan, there is nothing you need to do now.  We will be in touch with you in early August and will do the heavy lifting to restate your plan document within the IRS window. Your restated plan document will be sent to you upon completion, and all you need to do is review it and execute it. It’s that simple! Plans with standard restatements will not incur any additional fees. Refer to FAQs specific to Betterment 401(k) plans. NOTE: If you work with a TPA, they will be handling the plan restatement, and we will coordinate with them. Read on for frequently asked questions about plan restatements. 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. But we just restated our plan! Surely we don’t need to do it again? Unfortunately, all plans are subject to the restatement, regardless of how recently amendments may have been made. But we just started our plan! Surely we don’t need to go through this process? Unfortunately, the restatement cycle is dictated by the IRS without regard to a plan’s inception date. This process is required for all 401(k) plans and the document should be executed in a timely manner to remain compliant and qualified. Betterment specific FAQs How will Betterment help with the plan restatement process? Betterment works to keep your plan in compliance at all times, and this restatement process is no exception. We'll ensure that your plan document is properly drafted and delivered to you for execution. Once you execute the restated plan document, we will ensure that all 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? Not at all! 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? Betterment’s work surrounding the recommended plan restatement will be provided on a complimentary basis. Any additional changes will trigger the standard amendment fee.

What is a 401(k) Plan Audit? If an audit of your 401(k) plan is required, Betterment can help you understand what to expect and how to prepare. The Employee Retirement Income Security Act of 1974 (ERISA) requires that certain 401(k) plans be audited annually by a qualified independent public accountant subject. The primary purpose of the audit is to ensure that the 401(k) plan is operating in accordance with Department of Labor (DOL) and Internal Revenue Service (IRS) rules and regulations as well as operating consistent with the plan document, and that the plan sponsor is fulfilling their fiduciary duty. A 401(k) plan audit can be fairly broad in scope and usually includes a review of all of the transactions that took place throughout the plan year such as payroll uploads, distributions, corrective actions, and any earnings that were allocated to accounts. It will also include a review of administrative procedures and identify potential areas of concern or opportunities for improvement. When does a 401(k) Plan need an audit? Whether or not your plan requires an audit is determined by the number of participants in your plan at the beginning of the plan year. In this case, participants include not just those employees actively contributing to the plan but also those who were eligible but not participating as well as any terminated participants with a balance. Generally speaking, ERISA requires an audit for any plan that had 100 or more participants (so-called “large plans”) at the beginning of the plan year. However, as shown in the table below, there are exceptions to this general rule, captured in the “80-120 Participant Rule,” to address plans that may have fluctuating participant counts close to that 100 cut-off. Participant Count at Beginning of Plan Year Filing Status on Previous Year’s Form 5500 80-120 Participant Rule 100-120 participants Small Plan Considered a Small Plan (no audit required) until plan has more than 120 participants 80-100 participants Large Plan Considered a Large Plan (audit required) until plan has fewer than 80 participants It is therefore important to review the plan’s eligible participant count before engaging an auditor, especially if the participant count fluctuates between 80 and 120. If your plan falls under the large plan filer category, engaging a qualified independent auditor as soon as possible after plan year end is advisable. How do I prepare for a 401(k) plan audit? To get started, an auditor will request all plan-related documents, which will likely include: Executed plan document or an executed adoption agreement Any amendments to the plan document Current IRS determination letter (these are attached in the plan document we provide for plan sponsors to execute) Current and historical summary plan description and summaries of material modifications Copy of the plan’s fidelity bond insurance Copy of the most recent compliance test performed Service agreements In general, these documents should be easily accessible and current. That’s why it’s important for plan sponsors to safely keep all applicable plan-related documents, especially if there are changes made. In addition, the auditor will need financial reports of your plan. As part of its 3(16) fiduciary support services, Betterment provides a full audit package which includes: Participant contribution report Plan activity report Payroll records Schedule of plan assets Distributions and/or loans report Fees report Reports regarding investment allocation of plan assets Copies of prior Form 5500 (available on eFAST within the DOL website) Trustee certification/agreement It’s also possible that the auditor may request copies of the committee or board minutes that document considerations and decisions about the plan, including choosing service providers and monitoring plan expenses. What will happen during a 401(k) plan audit? Once the auditor receives all the necessary documents, they will review the plan to gain a solid understanding of the plan’s operations, internal controls and plan activity. The auditor will pick a sample of employees for distributions, loans or rollovers (activity of assets moving out or in of plan) and will request documentation that support such activity. For example, this may include loan applications, distribution paperwork and the image of the check or proof of funds being delivered to the participant. Once the assessments of the samples and financials are complete, the auditor will draft something called an “accountant’s opinion.” The plan sponsor should carefully review this document, which outlines any control deficiencies found during the audit. The auditor will also provide a final financial statement that must be attached to the plan’s Form 5500 before filing with the DOL. Important Deadlines for 401(k) Plan Audits Annual audits should be completed before the Form 5500 filing deadline. Form 5500s are required to be filed by the last day of the seventh month after the plan year ends. For example, if your plan year ends on December 31, your Form 5500 is due on July 31 of the following year. However, you may file an extension with the DOL using Form 5558 to get an additional 2 ½ months to file, pushing the due date to October 15 for calendar year plans. It’s important to meet the required deadline to avoid any DOL penalties.

What is the Right Default Savings Rate? Don’t let the 3% typical default rate anchor weigh you down. Place your anchor to windward at 6% or higher for safety and protection. 401(k) plan sponsors who implement auto-enrollment have a critical decision to make: at what savings rate should participants save? Because participants are not actively signing up for the plan, they are not making their own decision. Instead, the company will do it for them, selecting the right level of savings for all employees. This is a big responsibility for companies and getting it right will make the difference between a sufficiently saved population and one that will remain in the workforce beyond traditional retirement age. Understanding the 3% anchor Anchors can either hold someone steady or drag them down. They set an expectation and become a shortcut in people’s minds making it harder for them to process information that may point to a different, possibly more appropriate, fact. In the 401(k), 3% has been the traditional annual default savings amount. It’s clear that participants need to save closer to 10% - 20% each year for savings sufficiency. But asking decision makers to approve a change from a 3% savings rate to a 20% savings rate is a total non-starter. They’d be bracing for an employee rebellion. It’s clear to get to the savings level participants need, we must break the decision down into smaller steps and create a path for the participant to gradually achieve the greater savings level. How to not use 3% Let’s say, like many others in your industry, you have a 3% default savings rate. You know it’s not enough for participants and you hear about other plans that have increased the default savings rate to 6%. Still, you need to make a decision, but you worry about two things: 1) can you get the administrative decision makers to approve doubling the default savings rate? 2) will participants be upset that you are “taking” even more money from their paycheck? Reframing the default For decision makers and participants alike, the tactic is to reframe the default. In some situations, this can be done in a single presentation to decision makers and communication to participants. In other cases, in a particularly cynical environment, or one where there’s some financial hardship, it may take a series of discussions and communications to prepare the decision makers and participants alike. With decision makers: Lay the groundwork. Start wondering aloud if participants in your plan are saving enough. Share research that participants will need to save 10-20% of their annual income to have sufficient savings at retirement. Is 3% the right level for a default rate? Get the data. Start researching the savings levels of participants in your plan. What percentage of the population is saving less than 3%? How many are saving at exactly 3%? How many are saving more than 3%? Project the future. How it is in the participants’ best interest to increase their savings rate now to impact their future financial health? What power does compounding have to grow a nest egg? How does it improve their chances to be able to retire when they wish to? Drive employee engagement. Benefits are a tool for the company to drive employee engagement. Most people know they should be saving for retirement and be saving more. Research shows that participants who focus on retirement, recognize their high-quality plan, and appreciate their employer for providing it, have higher employee engagement. Determine the impact. Understand the impact to your company of your participants not saving enough. Combine the “under-saved” population with the “not saving at all” population. What percentage of your population could be unprepared to retire? If people start working longer, when does this begin to affect your business in terms of lost productivity and additional health care and disability costs? These steps may not all be necessary, but taken over time, one or more of them will likely get you the vote you’re looking for to increase the default savings rate. With participants: Communicate wisely. No one likes to hear that they’ll have to double their savings rate. So, rather than saying: “We’re doubling your default rate, now you’re saving 6%,” say: “Research shows you should save 10%-20% of your income for retirement. Right now you’re saving 3%. We’re going to help you start to save at 6%. It’s a small step in the right direction.” Activate the match. A great way to incent savings is through a company match. Let’s say you have a match of 3%: Remind those saving below the match threshold that this increase will automatically make them eligible to receive a more match money. For participants who were saving at 1%, they’ll get an additional 2% from the company. Relate the savings update to the match. You can either stretch the match if it was a 3% match before ($1 for $1 up to 3%) or convert it to your 6% goal ($0.50 to $0.50 on the first 6%). By aligning the default savings rate with the match you’ve created a new incentive to save at 6%. Reassure. Remind participants that if it is truly too hard for them to save right now, they can opt out. Maybe they can save more later. Set up a plan design cadence so that you occasionally reach back out to try to boost savings back up to 6%. In these examples, 6% is the new 3%. Is that the right level for a default savings rate? Probably not. But taking a step to increase the default savings rate even a little bit is important work. According to one survey, most large plans have now moved to a 6% default rate. Combined with more savings through automated annual increases, for example, it’s an important first step to get people saving more. Don’t let the 3% anchor weigh you down. Place your anchor to windward at 6% or higher for safety and protection. Laraine McKinnon is the author of “Known: How to Create a Great 401(k)” (© 2020, LMC17, LLC) and serves as an Advisor to Betterment for Business. She is founder and CEO of LMC17, a strategic consulting firm that focuses on hard-to-solve problems in the human resources and talent arena.

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.

Wondering If You Should Start a 401(k)? Now more than ever, your employees need help making well-informed decisions today to prepare for a brighter tomorrow. Here are three reasons why now is the time. 1. Your employees need help saving for retirement In these uncertain times, people across the nation are worried about their health—and their finances. Now more than ever, your employees need help making well-informed decisions today to prepare for a brighter tomorrow. 33% distracted by finances while at work1 60% say they won’t retire by 652 20% of younger workers save less than $100 monthly—including their 401(k)3 2. The SECURE Act offers you major tax incentives The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) is a game-changer for employers. In fact, it’s never been more cost-effective to start a 401(k) plan. Get up to $16,500 in tax credits! 3. A Betterment 401(k) plan is easy to get up and running and easy to maintain—for a fraction of the cost of most providers As little as 1 hour Our quick onboarding process takes under an hour—even less if you’re starting a new plan. Payroll integrations Betterment is integrated with some of the most commonly used payroll providers to help streamline your administrative processes. $125/mo base fee + $4/ participant/month Our low monthly administrative costs decrease as your company grows. With more than $19 billion in assets and more than half a million investors, Betterment can help your employees do what’s best with their money so they can live better. Ready for a better 401(k) plan? Talk to Betterment today.   1 2019 PWC Financial Wellness Survey 2 Americans Are Clueless When It Comes to Personal Finance, New York Post, Jan. 18, 2018 3 Employee Retirement and Preparedness: Millennials and Gen Z, Betterment for Business, 2019 4 Through the Small Employer Automatic Enrollment Credit, you may be able to claim a tax credit of $500 for each of the first three years an automatic enrollment feature is active. 5 As part of the SECURE Act, effective January 1, 2020, you may be able to claim additional tax credits for the first three years of a plan of 50% of the cost to establish and administer a plan, up to the greater of a) $500; or b) the lesser of $250 per eligible non-highly compensated employee eligible for the plan and $5,000.

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.

Understanding your 401(k) Plan Document Betterment will draft your 401(k) plan document, but it’s important that you understand what it includes and that you follow it as written. What exactly is a Plan Document? A 401(k) plan is considered a qualified retirement plan by the Internal Revenue Service (IRS), and as such, must meet certain requirements to take advantage of significant tax benefits. Every 401(k) retirement plan is required to have a plan document that outlines how the plan is to be operated. The plan document should reflect your organization’s objectives in sponsoring the 401(k) plan, including information such as plan eligibility requirements, contribution formulas, vesting requirements, loan provisions, and distribution requirements. As regulations change or your organization changes plan features and/or rules, the plan document will need to be amended. Your provider will likely draft your plan’s document, but because of your fiduciary duty, it is important that you as plan sponsor review your plan document, understand it, and refer to it if questions arise. Whether you are a small business or a large corporation, failure to operate the plan in a manner consistent with the document as written can result in penalties from the IRS and/or the Department of Labor (DOL). Understanding Your Fiduciary Responsibilities Although a given 401(k) plan may have multiple (and multiple types of) fiduciaries based on specific plan functions, the plan document identifies the plan’s “Named Fiduciary” who holds the ultimate authority over the plan and is responsible for the plan’s operations, administration and investments. Typically the employer as plan sponsor is the Named Fiduciary. The employer is also the “plan administrator” with responsibility for overall plan governance. While certain fiduciary responsibilities may be delegated to third parties, fiduciary responsibility can never be fully eliminated or transferred. All fiduciaries are subject to the five cornerstone rules of ERISA (Employee Retirement Income Security Act) when managing the plan’s investments and making decisions regarding plan operations: 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 (unless inconsistent with ERISA); Diversifying plan investments; and Paying only reasonable plan expenses. One of the best ways to demonstrate that you have fulfilled your fiduciary responsibilities is to document your decision-making processes. Many plan sponsors establish a formal 401(k) plan committee to help ensure that decisions are appropriately discussed and documented. Which Type of 401(k) Plan is Best for Your Organization? The plan document will identify the basic plan type, which usually falls into one of two categories. Both types allow employees to make contributions via payroll deduction. Traditional 401(k) plans provide maximum flexibility with respect to employer contributions and associated vesting schedules  (defining when those contributions become owned by the employee). However, these plans are subject to annual nondiscrimination testing to ensure that the plan benefits all employees—not just business owners or highly compensated employees (HCEs). Safe Harbor 401(k) plans are deemed to pass certain nondiscrimination tests but require employers to contribute to the plan on behalf of employees. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. The 2019 SECURE Act relaxed certain safe harbor requirements. Profit-sharing 401(k) plans include an additional component that allows employers to make more significant contributions to their employee accounts. Besides helping to attract and retain talent, small businesses can find this feature especially helpful In highly profitable years, since it reduces taxable income. There is no one plan type that is better than another, but this flexibility allows you to determine which type makes the most sense for your organization. Eligibility Requirements to Meet Your Needs Although the IRS mandates that employees age 21 or older with at least 1 year of service are eligible  to make employee deferrals, employers do have considerable flexibility in setting 401(k) plan eligibility: Age -- employers often choose to adopt a minimum age of 18 Service -- employers can establish requirements on elapsed time or hours Entry date -- employers may allow employees to participate in the plan immediately upon hiring but often require some waiting period. For example, employees may have to wait until the first of the month or quarter following their hire date. This flexibility allows employers to adopt eligibility requirements appropriate to their business needs. For instance, a company with high turnover or lots of seasonal workers may institute a waiting period to reduce the number of small balance accounts and the associated administrative costs. As a result of the SECURE Act, beginning in 2021, plans must provide access for part-time workers who haven’t met 1,000 hours in one year, but have worked for over 500 hours for an employer for at least three years. Automatic Enrollment may be the Way to Go Enrollment in a 401(k) plan can either be voluntary or automatic. As retirement savings has become ever more essential for workers, employers are increasingly choosing to adopt automatic enrollment, whereby a set percentage is automatically deferred from employee paychecks and contributed to the plan, unless an employee explicitly elects to “opt out” or not contribute. The benefit of automatic enrollment is that human inertia means most employees take no action and start saving for their future. In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90% compared to the roughly 50% participation rate for plans with voluntary enrollment. Employee Contribution Flexibility Provides Valuable Flexibility The plan document will specify the types of contributions (or “elective deferrals”) that eligible employees can make to the plan via payroll deduction. Typically these will be either pre-tax contributions or Roth (made with after-tax dollars) contributions. Allowing plan participants to decide when to pay the taxes on their contributions can provide meaningful flexibility and tax diversification benefits. Elective deferrals are often expressed as either a flat dollar amount or as a percentage of compensation. Employee contribution limits are determined each year by the IRS. The plan document must specify whether the plan will allow catch-up contributions for those age 50 and older. Able and/or Willing to Contribute to Employee Accounts? The plan document will also include provisions regarding employer contributions, which can be made on either a matching or non-matching basis. Matching contributions are often used to incentivize employees to participate in the plan. For example, an employer may match 50% of every $1 an employee contributes, up to a maximum of 6% of compensation. For traditional 401(k) plans, matching contributions can be discretionary so that the employer can determine not only how much to contribute in any given year but whether or not to contribute at all. As stated above, matching employer contributions are required for Safe Harbor 401(k) plans. The plan document may also permit the employer to make contributions other than matching contributions. These so-called “nonelective” contributions would be made on behalf of all employees who are considered plan participants, regardless of whether they are actively contributing. Vesting Schedules and Employee Retention Vesting simply means ownership. Employees own, or are fully vested, in their own contributions at all times. Employers with traditional 401(k) plans, however, often impose a vesting schedule on company contributions to encourage employee retention. Although there are a wide variety of approaches to vesting, one of the most common is to use a graded vesting schedule. For instance, an employee would vest in the employer contribution at a rate of 25% each year and be 100% vested after 4 years. Employer contributions as part of Safe Harbor 401(k) plans are vested immediately. Let Betterment help you create a 401(k) that works for you and your employees As a full-service provider, Betterment aims to make life easy for you. We will draft your plan document based on your preferences and our industry expertise of best practices. We will work to keep your plan in compliance at all times and can prepare amendments based on your changing needs. Sign up for a free demo to see the true impact of our 401(k) plan.

Everything You Need to Know about a Form 5500 What is Form 5500? If you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. As you can imagine, the Internal Revenue Service (IRS) and the Department of Labor (DOL) like to keep tabs on employee benefit plans to make sure everything is running smoothly and there are no signs of impropriety. One of the ways they do that is with Form 5500. You may be wondering: What is Form 5500? Well, Form 5500—otherwise known as the Annual Return/Report of Employee Benefit Plan—discloses details about the financial condition, investments, and operations of the plan. Not only for retirement plans, the IRS Form 5500 must be filed by the employer or plan administrator of any pension or welfare benefit plan covered by ERISA, including 401(k) plans, pension plans, medical plans, dental plans, and life insurance plans, among others. If you’re a Betterment client, you don’t need to worry about many of these Form 5500 details because we do the heavy lifting for you. But if you’d like to get a general idea of what it takes to file a Form 5500 for a 401(k) plan, here are the top five things you need to know. 1. There are three different versions of Form 5500—each with its own unique requirements. Betterment drafts a signature-ready Form 5500 on your behalf. But if you were to do it yourself, you would select from one of the following form types based on your plan type: Form 5500-EZ – If you have a one-participant 401(k) plan —also known as a “solo 401(k) plan”—that only covers you (and your spouse if applicable), you can file this form. Have a solo 401(k) plan with less than $250,000 in plan assets as of the last day of the plan year? No need to file a Form 5500-EZ (or any Form 5500 at all). Lucky you! Form 5500-SF– If you have a small 401(k) plan—which is defined as a plan that covers fewer than 100 participants on the first day of the plan year—you can file a simplified version of the Form 5500 if it also meets the following requirements: It satisfies the independent audit waiver requirements established by the DOL. It is 100% invested in eligible plan assets—such as mutual funds and variable annuities—with determinable fair values. It doesn’t hold employer securities. Form 5500– If you have a large 401(k) plan—which is defined as a plan that covers more than 100 participants—or a small 401(k) plan that doesn’t meet the Form 5500-EZ or Form 5500-SF filing requirements, you must file a long-form Form 5500. Unlike Form 5500-EZ and Form 5500-SF, Form 5500 is not a single-form return. Instead, you must file the form along with specific schedules and attachments, including: Schedule A -- Insurance information Schedule C -- Service provider information Schedule D -- Participating plan information Schedule G -- Financial transaction schedules Schedule H or I -- Financial information (Schedule I for small plan) Schedule R -- Retirement plan information Independent Audit Certain forms or attachments may not be required for your plan. Is your plan on the cusp of being a small (or large) plan? If your plan has between 80 and 120 participants on the first day of the plan year, you can benefit from the 80-120 Rule. The rule states that you can file the Form 5500 in the same category (i.e., small or large plan) as the prior year’s return. That’s good news, because it makes it possible for large retirement plans with between 100 and 120 participants to classify themselves as “small plans” and avoid the time and expense of completing the independent audit report. 2. You must file the Form 5500 by a certain due date (or file for an extension). You must file your plan’s Form 5500 by the last day of the seventh month following the end of the plan year. For example, if your plan year ends on December 31, you should file your Form 5500 by July 31 of the following year to avoid late fees and penalties. If you’re a Betterment client, you’ll receive your signature-ready Form 5500 with ample time to submit it. Plus, we’ll communicate with you frequently to ensure you hit the deadline. But if you need a little extra time, you can file for an extension using Form 5558—but you have to do it by the original deadline for the Form 5500. The extension affords you another two and a half months to file your form. (Using the prior example, that would give you until October 15 to get your form in order.) What if you happen to miss the Form 5500 filing deadline? If you miss the filing deadline, you’ll be subject to penalties from both the IRS and the DOL: The IRS penalty for late filing is $25 per day, up to a maximum of $15,000. The DOL penalty for late filing can run up to $1,100 per day, with no maximum. There are also additional penalties for plan sponsors that willfully decline to file. That said, through the DOL’s Delinquent Filer Voluntary Compliance Program (DFVCP), plan sponsors can avoid higher civil penalty assessments by satisfying the program’s requirements. Under this special program, the maximum penalty for a single late Form 5500 is $750 for small 401(k) plans and $2,000 for large 401(k) plans. The DFVCP also includes a “per plan” cap, which limits the penalty to $1,500 for small plans and $4,000 for large plans regardless of the number of late Form 5500s filed at the same time. 3. The Form 5500 filing process is done electronically in most cases. For your ease and convenience, Form 5500 and Form 5500-SF must be filed electronically using the DOL’s EFAST2  processing system. EFAST2 is accessible through the agency’s website or via vendors that integrate with the system. To ensure you can file your Form 5500 quickly, accurately, and securely, Betterment facilitates the filing for you. However, Form 5500-EZ can only be filed using a paper form. If you would prefer to file electronically, you can file Form 5500-SF instead (only answering the Form 5500-EZ questions). Whether you file electronically or via hard copy, remember to keep a signed copy of your Form 5500 and all of its schedules on file. Once you file Form 5500, your work isn’t quite done. You must also provide your employees with a Summary Annual Report (SAR), which describes the value of your plan’s assets, any administrative costs, and other details from your Form 5500 return. The SAR is due to participants within nine months after the end of the plan year. (If you file an extension for your Form 5500, the SAR deadline also extends to December 15.) For example, if your plan year ends on December 31 and you submitted your Form 5500 by July 31, you would need to deliver the SAR to your plan participants by September 30. While you can provide it as a hard copy or digitally, you’ll need participants’ prior consent to send it digitally. In addition, participants may request a copy of the plan’s full Form 5500 return at any time. As a public document, it’s accessible to anyone via the DOL website. 4. It’s easy to make mistakes on the Form 5500 (but we help you avoid them). As with any bureaucratic form, mistakes are common and may cause issues for your plan or your organization. Mistakes may include: Errors of omission such as forgetting to indicate the number of plan participants Errors of timing such as indicating a plan has been terminated because a resolution has been filed, yet there are still assets in the plan Errors of accuracy involving plan characteristic codes and reconciling financial information Errors of misinterpretation or lack of information such as whether there have been any accidental excess contributions above the federal limits or failure to report any missed contributions or late deposits Want to avoid making errors on your Form 5500? By completing the form on your behalf, all you need to do is review, sign, and submit—it’s as simple (and error-free) as that. If you’re considering doing it yourself, be on the lookout for these common errors (which could trigger an audit from the IRS): 5. Betterment drafts a signature-ready Form 5500 for you, including related schedules When it comes to Form 5500, Betterment does nearly all the work for you. Specifically, we: Prepare a signature-ready Form 5500 that has all the necessary information and related schedules Remind you of the submission deadline so you file it on time Guide you on how to file the Form 5500 (it only takes a few clicks) and make sure it’s accepted by the DOL Provide you with an SAR that’s ready for you to distribute to your participants

The Case for Including ETFs in Your 401(k) Plan At Betterment, we firmly believe Exchange-traded funds (ETFs) are better for 401(k) plan participants. Wondering if ETFs may be appropriate for your plan? Mutual funds dominate the retirement investment landscape, but in recent years, exchange-traded funds (ETFs) have become increasingly popular—and for good reason. They are cost-effective, highly flexible, and technologically sophisticated. And at Betterment, we firmly believe they’re also better for 401(k) plan participants. Wondering if ETFs may be appropriate for your 401(k) plan? Read on. What’s the difference between mutual funds and ETFs? Let’s start with what ETFs and mutual funds have in common. Both consist of a mix of many different assets, which helps investors diversify their portfolios. However, they have three key differences: ETFs can be traded like stocks. However, mutual funds may only be purchased at the end of each trading day based on a calculated price. Mutual funds are either actively managed by a fund manager who decides how to allocate assets or passively managed by tracking a specific market index (such as the S&P 500). However, ETFs are usually passively managed. Mutual funds tend to have higher fees and higher expense ratios than ETFs. Why do mutual funds cost so much more than ETFs? Many mutual funds are actively managed—requiring in-depth analysis and research—which drives the costs up. However, while active managers claim to outperform popular benchmarks, research conclusively shows that they rarely succeed in doing so. See what we mean. Mutual fund providers generate revenues from both stated management fees, as well as less direct forms of compensation, for example: Revenue sharing agreements—These agreements among 401(k) plan providers and mutual fund companies include: 12(b)-1 fees, which are disclosed in a fund’s expense ratios and are annual distribution or marketing fees Sub Transfer Agent (Sub-TA) fees for maintaining records of a mutual fund’s shareholders Internal fund trading expenses—The buying and selling of internal, underlying assets in a mutual fund are another cost to investors. However, unlike the conspicuous fees in a fund’s expense ratio, these brokerage expenses are not disclosed and actual amounts may never be known. Instead, the costs of trading underlying shares are simply paid out of the mutual fund’s assets, which results in overall lower returns for investors. Soft-dollar arrangements—These commission arrangements, sometimes called excess commissions, exacerbate the problem of hidden expenses because the mutual fund manager engages a broker-dealer to do more than just execute trades for the fund. These services could include nearly anything—securities research, hardware, or even an accounting firm’s conference hotel costs! All of these costs mean that mutual funds are usually more expensive than ETFs. These higher expenses come out of investors’ pockets. That helps to explain why a majority of actively managed funds lag the net performance of passively managed funds, which lag the net performance of ETFs with the same investment objective over nearly every time period. Want to know more about mutual funds’ hidden fees? What else didn’t I realize about mutual funds? Often, there are conflicts of interest with mutual funds. The 401(k) market is largely dominated by players who are incentivized to offer certain funds: Some service providers are, at their core, mutual fund companies. And therefore, some investment advisors are incentivized to promote certain funds. This means that the fund family providing 401(k) services and the advisor who sells the plans may have a conflict of interest. As noted in a report by the Center for Retirement Research (CRC), 76% of plans had trustees affiliated with mutual fund management companies, which creates a conflict of interest. Why is it unusual to see ETFs in 401(k)s? Mutual funds continue to make up the majority of assets in 401(k) plans for various reasons, not despite these hidden fees and conflicts of interest, but because of them. Plans are often sold through distribution partners, which can include brokers, advisors, recordkeepers or third-party administrators. The fees embedded in mutual funds help offset expenses and facilitate payment of every party involved in the sale. However, it’s challenging for employers and employees because the fees aren’t easy to understand even with the mandated disclosure requirements. Another reason why it’s unusual to see ETFs in a 401(k) is existing technology limitations. Most 401(k) recordkeeping systems were built decades ago and designed to handle once-per-day trading, not intra-day trading (the way ETFs are traded)—so these systems can’t handle ETFs on the platform (at all). However, times are changing. ETFs are gaining traction in the general marketplace and companies like Betterment are leading the way by offering ETFs. Why should I consider ETFs for our company’s 401(k)? Simply put, ETFs are the next level in access, flexibility, and cost. Here’s a look at key attributes that may make ETFs right for your 401(k) plan: Low cost—As we’ve described, ETFs generally cost far less than mutual funds. Diversified—Most exchange-traded funds—and all ETFs used by Betterment—are considered a form of mutual fund under the Investment Company Act of 1940, which means they have explicit diversification requirements. Appropriate diversification ensures that you’re not overly exposed to individual stocks, bonds, sectors, or countries—which may mean better returns in the long run. Flexible—ETFs are extremely versatile. They can be accessed by anyone with a brokerage account and just enough money to buy at least one share (and sometimes less—at Betterment we trade fractional shares, allowing our customers to diversify as little as $10 across a portfolio of 12 ETFs.) Sophisticated—ETFs take advantage of decades of technological advances in buying, selling, and pricing securities. Learn more about these five attributes now. What’s even better than ETFs? At Betterment, we believe that a portfolio of ETFs in conjunction with personalized, unbiased advice is the ideal solution for today’s retirement savers. Our retirement advice adapts to your employees’ desired retirement timeline and can be customized if they’re more conservative or aggressive investors. Not only that, we also link employees’ outside investments, savings accounts, IRAs—even spousal/partner assets—to create a real-time snapshot of their finances. It makes saving for retirement (and any other short- or long-term goals) even easier. You may be wondering: What about target-date funds? Well, target-date funds are still popular, but financial advice has progressed far beyond using one data point—employees’ desired retirement age—to determine their investing strategy. Here’s how: Target-date funds are only in five-year increments (for example, 2045 Fund or 2050 Fund). Betterment can tailor our advice to the exact year your employees want to retire. Target-date funds ignore how much employees have saved. At Betterment, we can tell your employees if they‘re on or off track, factoring in all of their retirement savings, Social Security, pensions, and more. Target-date funds only contain that company’s underlying investments (for example, Vanguard target-date funds only have Vanguard investments). No single company is the best at every type of investment, so don’t limit your employees’ retirement to just one company’s investments. Find out why target-date funds are out of date. Smart, savvy advice for today’s retirement savers Betterment’s automated advice engine and portfolio selection are guided by a human team of experts on our investment committee. They are free to select the best investments we can find, regardless of who makes them. Now what? You may be thinking: it’s time to have a heart-to-heart with your 401(k) provider or plan’s investment advisor. If so, here’s a list of questions to ask: Do you offer ETFs? If not, why not? What are the fees associated with our funds? Are there revenue sharing agreements in place? Are there any soft-dollar arrangements we should be aware of? Are you incentivized to offer certain funds? Are there any conflicts of interests that we should be aware of?

Understanding 401(k) Fees Come retirement time, the number of 401(k) plan fees charged can make a major difference in your employees’ account balances—and their futures. Did you know that the smallest 401(k) plans often pay the most in fees? According to a research study, most large plans with over $100 million in assets pay fees below 1%. However, small plans often pay between 1.5% and 2%—or even more! We believe that you don’t have to pay high fees to provide your employees with a top-notch 401(k) plan. In fact, Betterment offers comprehensive plan solutions for a fraction of the cost of most providers. Why do 401(k) fees matter? The difference between a 1% fee and a 2% fee may not sound like much, but in reality, higher 401(k) fees can take a major bite out of your participants’ retirement savings. Consider this example: Triplets Jane, Julie, and Janet each began investing in their employers’ 401(k) plan at the age of 25. Each had a starting salary of $50,000, increased by 3% annually, and contributed 6% of their pre-tax salary with no company matching contribution. Their investments returned 6% annually. The only difference is that their retirement accounts were charged annual 401(k) fees of 1%, 1.5%, and 2%, respectively. Forty years later, they’re all thinking about retiring and decide to compare their account balances. Here’s what they look like: Annual 401(k) fee Account balance at age 65 Jane 1% $577,697 Julie 1.5% $517,856 Janet 2% $465,894   As you can see, come retirement time, the amount of fees charged can make a major difference in your employees’ account balances—and their futures. Why should employers care about 401(k) fees? You care about your employees, so naturally, you want to help them build brighter futures. But beyond that, it’s your fiduciary duty as a plan sponsor to make sure you’re only paying reasonable 401(k) fees for services that are necessary for your plan. The Department of Labor (DOL) outlines rules that you must follow to fulfill this fiduciary responsibility, including “ensuring that the services provided to the plan are necessary and that the cost of those services is reasonable” and has published a guide to assist you in this process. Generally, any firm providing services of $1,000 or more to your 401(k) plan is required to provide a fee disclosure, which is the first step in understanding your plan’s fees and expenses. It’s important to note that the regulations do not require you to ensure your fees are the lowest available, but that they are reasonable given the level and quality of service and support you and your employees receive. Benchmark the fees against similar retirement plans (by number of employees and plan assets, for example) to see if they’re reasonable. Your 401(k) provider should be able to assist you with the benchmarking process or you may wish to use other industry resources such as the 401k Averages Book. What are the main types of fees? Typically, 401(k) fees fall into three categories: administrative fees, individual service fees, and investment fees. Let’s dig a little deeper into each category: Plan administration fees—Paid to your 401(k) provider, plan administration fees typically cover 401(k) set-up fees, as well as general expenses such as recordkeeping, communications, support, legal, and trustee services. These costs are often assessed as a flat annual fee. Investment fees—Investment fees, typically assessed as a percentage of assets under management, may take two forms: fund fees that are expressed as an expense ratio or percentage of assets, and investment advisory fees for portfolio construction and the ongoing management of the plan assets. Betterment, for instance, acts as investment advisor to its 401(k) clients, assuming full fiduciary responsibility for the selection and monitoring of funds. And as is also the case with Betterment, the investment advisory fee may even include personalized investment advice for every employee. Individual service fees—If participants elect certain services—such as taking out a 401(k) loan—they may be assessed individual fees for each service. Wondering what you and your employees are paying in 401(k) fees? Fund fees are detailed in the funds’ prospectuses and are often wrapped up into one figure known as the expense ratio, expressed as a percentage of assets. Other fees are described in agreements with your service providers. High quality, low fees Typically, mutual funds have dominated the retirement investment landscape, but in recent years, exchange-traded funds (ETFs) have become increasingly popular in large part because of their lower fees. At Betterment, we believe that a portfolio of ETFs, in conjunction with personalized, unbiased advice, is the ideal solution for today’s retirement savers. Who pays 401(k) fees: the employer or the participant? The short answer is that it depends. As the employer, you may have options with respect to whether certain fees may be allocated to plan participants. Expenses incurred as a result of plan-related business expenses (so-called “ settlor expenses”) cannot be paid from plan assets. An example of such an expense would be a consulting fee related to the decision to offer a plan in the first place. Other costs associated with plan administration are eligible to be charged to plan assets. Of course, just because certain expenses can be paid by plan assets doesn’t mean you are off the hook in monitoring them and ensuring they remain reasonable. Plan administration fees are often paid by the employer. While it could be a significant financial responsibility for you as the business owner, there are three significant upsides:   Reduced fiduciary liability—As you read, paying excessive fees is a major source of fiduciary liability. If you pay for the fees from a corporate account, you reduce potential liability.   Lowered income taxes—If your company pays for the administration fees, they’re tax deductible! Plus, you can potentially save even more with the new SECURE Act tax credits for starting a new plan and for adding automatic enrollment.   Increased 401(k) returns—Do you take part in your own 401(k) plan? If so, paying 401(k) fees from company assets means you’ll be keeping more of your personal retirement savings. Fund fees are tied to the individual investment options in each participant’s portfolio. Therefore, these fees are paid from each participant’s plan assets. Individual service fees are also paid directly by investors who elect the service, for example, taking a plan loan. How can you minimize your 401(k) fees? Minimizing your fees starts with the 401(k) provider you choose. In the past, the price for 401(k) plan administration was quite high. However, things have changed, and now the era of expensive, impersonal, unguided retirement saving is over. Innovative companies like Betterment now offer comprehensive plan solutions at a fraction of the cost of most providers. Betterment combines the power of efficient technology with personalized advice so that employers can provide a benefit that’s truly a benefit, and employees can know that they’re invested correctly for retirement. No hidden fees. Maximum transparency. Costs are often passed to the employee through fund fees, and in fact, mutual fund pricing structures incorporate non-investment fees that can be used to pay for other types of expenses. Because they are embedded in mutual fund expense ratios, they may not be explicit, therefore making it difficult for you to know exactly how much you and your employees are paying. In other words, most mutual funds in 401(k) plans contain hidden fees. At Betterment, we believe in transparency. Our use of ETFs means there are no hidden fees, so you and your employees are able to know how much you’re paying. Plus, our pricing structure unbundles the key offerings we provide—advisory, investment, record keeping, and compliance—and assigns a fee to each service. A clearly defined fee structure means no surprises for you—and more money working harder for your employees.

401(k) Automatic Enrollment: The Easiest Way to Help Employees Save If you’ve ever wondered if 401(k) automatic enrollment might be right for your employees, read on for answers to the most frequently asked questions. “Maybe when I turn 30.” “Maybe when I get a bonus.” “Maybe when I pay off my student loan.” “Maybe when my horoscope tells me it’s time to invest.” When it comes to enrolling in their 401(k) plan, employees often say “maybe later.” But the fact of the matter is the best time to save for retirement is right now because time (and the power of compounding) is on their side. That’s where 401(k) automatic enrollment comes in. If you’ve ever wondered if it might be right for your employees, read on for answers to the most frequently asked questions. What is 401(k) automatic enrollment? Automatic enrollment (otherwise known as auto-enrollment) allows employers to automatically deduct elective deferrals from employees’ wages unless they elect not to contribute. Simply put, it means your employees don’t have to lift a finger to start saving for retirement. How does automatic enrollment work? Typically, employees must go online, make a phone call, or submit paperwork to enroll in their retirement plan. It takes effort, and employees who are on the fence about enrolling might not take the time to do it. Before they know it, years have passed, and they’ve missed out on valuable time that they will never get back. However, you can automatically enroll employees and do all the work for them. 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 can decide to:  Opt out—Employees can “opt out” of 401(k) plan participation in advance (at Betterment, employees can do this easily online). Change the contribution amount or investments—Instead of just rolling with the default automatic enrollment elections, employees can elect their own contribution rate and investment funds. Do nothing—Employees don’t have to take any action. If they do nothing, once the “opt-out” timeframe has elapsed, they will automatically begin deferring a certain percentage of their pay to their employer’s plan. = As you can imagine, many employees do nothing, and as a result, start saving for their future (which is fantastic!). In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! That’s in stark contrast to the roughly 50% participation rate for plans in which employees must actively opt in. What are the different kinds of automatic enrollment? There are actually three different kinds of automatic enrollment arrangements: Basic Automatic Contribution Arrangement (ACA) When employees become eligible to participate in the 401(k) plan, they will be automatically enrolled at preset contribution rates. Prior to being automatically enrolled, employees have the opportunity to opt out or change their contribution rates. Eligible Automatic Contribution Arrangement (EACA) is similar to ACA, but the main difference is that employees may request a refund of their deferrals within the first 90 days. Qualified Automatic Contribution Arrangement (QACA) has basic automatic enrollment features. However, it also requires both an annual employer contribution and an increase in the employee contribution rate for each year the employee participates. For this reason, a QACA 401(k) plan is exempt from most annual compliance testing. If at first you don’t succeed, try again If employees opt out of 401(k) participation, that’s it, right? Well, not quite. According to the Plan Sponsor Council of America, in 2018, nearly 8% of plans annually re-enrolled employees who had previously opted out (that’s up from 4% that did so in 2013). What are the most common automatic enrollment elections? You have the freedom to select the percentage of employees’ compensation that is automatically contributed to the 401(k) plan. A 3% default contribution rate is still the most popular; however, more employers are electing higher default rates. That’s because research shows that opt-out rates don’t appreciably change even if the default rate is increased. And because many financial experts recommend a savings rate of at  least 10%, using a higher automatic enrollment default rate gets employees even more of a head start. In addition to selecting the contribution percentage, you’re also responsible for selecting the default investments for employees’ deferrals. According to the IRS, you can help limit your investment liability by using default investments that meet certain criteria for transferability and safety, such as well-diversified funds or portfolios. What’s good (and not so good) about automatic enrollment? The best thing about automatic enrollment is that it helps employees—of all ages and salary levels—start saving for retirement. It makes saving for the future painless and productive (and offers significant tax advantages). Plus, an increased participation rate makes it easier for your plan to pass required compliance tests. However, there are a couple downsides to consider. When a plan uses automatic enrollment, often the default rate is set low (say around 3%). For most employees, this low saving rate may not be enough to live comfortably in retirement. But because employees didn’t actively choose the rate, they may not be inclined to increase it on their own.  Wondering how to combat retirement saving inertia? Betterment can help by offering your employees personalized retirement advice. How can Betterment help? As an experienced 401(k) plan provider, Betterment can help your employees save for their futures with compelling plan design features like  automatic enrollment and personalized financial advice. In fact, we offer employees specific advice on  contribution rates, investment options, and which accounts to use (including those they may hold elsewhere). That way, even if your employees are automatically enrolled in the plan, they’ll get the advice and encouragement they need to boost their contribution rate, select appropriate investments, and save for the retirement they envision. Your employees deserve a better 401(k) plan. The information provided is education only and is not investment or tax advice.

Share the Wealth: Everything you need to know about profit sharing 401(k) plans In addition to bonuses, raises, and extra perks, many employers elect to add profit sharing to their 401(k) plan. Read on for answers to frequently asked questions. Has your company had a successful year? A great way to motivate employees to keep up the good work is by sharing the wealth. In addition to bonuses, raises, and extra perks, many employers elect to add profit sharing to their 401(k) plan. Wondering if it might be right for your business? Read on for answers to frequently asked questions about profit sharing 401(k) plans. What is profit sharing? Let’s start with the basics. Profit sharing is a way for you to give extra money to your staff. While you could make direct payments to your employees, it’s very common to combine profit sharing with an employer-sponsored retirement plan. That way, you reward your employees—and help them save for a brighter future. What is a profit sharing plan? A profit sharing plan is a type of defined contribution plan that allows you to help your employees save for retirement. With this type of plan, you make “nonelective contributions” to your employees’ retirement accounts. This means that each year, you can decide how much cash (or company stock, if applicable) to contribute—or whether you want to contribute at all. It’s important to note that the name “profit sharing” comes from a time when these plans were actually tied to the company’s profits. Nowadays, companies have the freedom to contribute what they want, and they don’t have to tie their contributions to the company’s annual profit (or loss). In a pure profit sharing plan, employees do not make their own contributions. However, most companies offer a profit sharing plan in conjunction with a 401(k) plan. What is a profit sharing 401(k) plan? A 401(k) with profit sharing enables both you and your employees to contribute to the plan. Here’s how it works:  The 401(k) plan allows employees to make their own salary deferrals—up to $19,500 per year (or $26,000 for employees over age 50) The profit sharing component allows employers to contribute up to $58,000 per employee (or $64,500 for employees over age 50), or 100% of their salary, whichever is lower. However, this limit includes employees’ 401(k) contributions, so typically, employers calculate their contributions keeping the $19,500 401(k) employee salary deferral maximum in mind.  After the end of the year, employers can make their pre-tax profit sharing contribution, as a percentage of each employee’s salary or as a fixed dollar amount Employers determine employee eligibility, set the vesting schedule for the profit sharing contributions, and decide whether employees can select their own investments (or not) What’s the difference between profit sharing and an employer match? Profit sharing and employer matching contributions seem similar, but they’re actually quite different: Employer match—Employer contributions that are tied to employee savings up to a certain percentage of their salary (for example, 50 cents of every dollar saved up to 6% of pay) Profit sharing—An employer has the flexibility to choose how much money—if any at all—to contribute to employees’ accounts each year; the amount is not tied to how much employees save. What kinds of profit sharing plans are there? There are three  main types of profit sharing plans:  Pro-rata plan—Every plan participant receives employer contributions at the same rate. For example, every employee receives the equivalent of 5% of their salary or every employee receives a flat dollar amount such as $1,000. Why is it good? It’s simple and rewarding. New comparability profit sharing plan (otherwise known as “cross-tested plans”)—Employees are placed into separate benefit groups that receive different profit sharing amounts. For example, business owners (or other highly compensated employees) are in one group that receives the maximum contribution and all other employees are in another group and receive a lower amount. Why is it good? It offers owners the most flexibility. Age-weighted profit sharing plan—Employees are given profit sharing contributions based on their retirement age. That is, the older the employee, the higher the contribution. Why is it good? It helps with employee retention. How do I figure out our company’s profit sharing contribution? First, consider which type of profit sharing plan you’ll be using—pro-rata, new comparability, or age-weighted. Next, take a look at your company’s profits, business outlook, and other financial factors. Keep in mind that: There is no set amount that you have to contribute You don’t need to make contributions Even though it’s called “profit sharing,” you don’t need to show profits on your books to make contributions The IRS notes that the “comp-to-comp” or pro-rata method is one of the most common ways to determine each participant’s allocation. Using this method, you calculate the sum of all of your employees’ compensation (the “total comp”). To determine the profit sharing allocation, divide the profit sharing pool by the total comp. You then multiply this percentage by each employee’s salary. Here’s an example of how it works: Your profit sharing pool is $15,000, and the combined compensation of your three eligible employees is $180,000. Therefore, each employee would receive a contribution equal to 8.3% of their salary. Employee Salary Calculation Profit sharing contribution Taylor $40,000 $15,000 x 8.3% $3,333 Robert $60,000 $15,000 x 8.3% $5,000 Lindsay $80,000 $15,000 x 8.3% $6,667 What are the key benefits of profit sharing for employers? It’s easy to see why profit sharing helps employees, but you may be wondering how it helps your small business. Consider these key benefits: Provide a valuable benefit (while controlling costs)—With employer matching contributions, your costs can dramatically rise if you onboard several new employees. However, with profit sharing, the amount you contribute is entirely up to you. Business is doing well? Contribute more to share the wealth. Business hits a rough spot? Contribute less (or even skip a year). Attract and retain top talent—Profit sharing is a generous perk when recruiting new employees. Plus, you can tweak your profit sharing rules to aid in retention. For example, some employers may elect to have a graded or cliff profit sharing contribution vesting schedule to motivate employees to continue working for their company. Rack up the tax deductions—Profit sharing contributions are tax deductible and not subject to payroll (e.g., FICA) taxes! So if you’re looking to lower your taxable income in a profitable year, your profit sharing plan can help you make the highest possible contribution (and get the highest possible tax write-off). Motivate employees to greater success—Employees who know they’ll receive financial rewards when their company does well are more likely to perform at a higher level. Companies may even link profit sharing to performance goals to motivate employees. Employees love profit sharing It’s no surprise that employees love profit sharing. Retirement is one of the biggest expenses employees face—and it means a lot to know that their employer is contributing to their future. Get a profit sharing 401(k) plan your employees will love. What are the nuts and bolts of profit sharing 401(k) plans? The IRS clearly defines the rules for contributions, tax deduction limits, and other aspects of profit sharing plans. Here’s a quick overview of the most important regulations: Contribution limits—Employers can only contribute up to 100% of an employee’s compensation, or up to $57,000 per employee (or $63,500 for employees over the age of 50), whichever is lower. Calculation rules—When calculating an employee’s profit sharing contribution, only compensation up to $285,000 per year can be considered. Tax deduction limits—Employers can deduct profit sharing contributions from their taxes up to maximum contribution limits (generally, up to 25% of the total eligible compensation across eligible employees). Disclosure—Like with a typical 401(k) plan, employers must issue disclosures and file the appropriate forms with the Department of Labor and IRS. Deadline—Employers must make their contributions to the profit sharing plan by their company tax filing deadline (unless they file an extension). Are there any downsides to offering a profit sharing plan? Contribution rate flexibility is one of the greatest benefits of a profit sharing 401(k) plan—but it could also be one of its greatest downsides. If business is down one year and employees get a lower profit sharing contribution than they expect, it could have a detrimental impact on morale. However, for many companies, the advantages of a profit sharing 401(k) plan outweigh this risk. How do I set up a profit sharing 401(k) plan? If you already have a 401(k) plan, it’s as easy as adding an amendment to your plan document. However, you’ll want to take the time to think through how your profit sharing plan supports your company’s goals. Betterment can help. At Betterment, we handle everything from nondiscrimination testing to plan design consulting to ensure your profit sharing 401(k) plan is fully optimized. And as a 3(38) fiduciary, we take full responsibility for selecting and monitoring your investments so you can focus on running your business—not managing your retirement plan. Ready for a better profit sharing 401(k) plan? The information provided is education only and is not investment or tax advice. 

How an Employer Benefits from Offering a 401(k) A 401(k) plan offers many valuable benefits to employees, but what’s in it for employers? The good news is that there are many compelling employer benefits, too. Tax advantages. Investing opportunities. Matching contributions. As you know, a 401(k) plan offers many valuable benefits to employees. But what’s in it for employers? The good news is that there are many compelling employer benefits, too. Let’s start with defining exactly what a 401(k) is—and why it might be a great fit for your company. What is a 401(k)? A 401(k) plan is an employer-sponsored retirement savings plan that enables employees to contribute a portion of their paycheck to a tax-advantaged retirement account. In 2020, employees can contribute up to $19,500 to their 401(k), and if they’re age 50 or older, they can make additional catch-up contributions of up to $6,500. Unlike other plans—such as the SIMPLE IRA or Roth IRA—401(k) plans have higher contribution limits. Under IRS guidelines, employees can make Traditional 401(k) contributions with pre-tax dollars. In addition, many employers offer the opportunity to make Roth 401(k) contributions with post-tax dollars—enabling employees to make tax-free withdrawals in retirement. Once they contribute to the plan, participants can invest their money in a range of investment options. For employees, a 401(k) plan is a convenient and effective way to save for the retirement they envision. Want to learn more about 401(k) plans? Betterment can help. Do you have to offer a 401(k)? The simple answer is you don’t have to provide a 401(k). However, according to a recent survey from the Society for Human Resource Management (SHRM), 93% of organizations offer traditional retirement savings plans such as a 401(k). Why are these plans so common? Well, they feature many outstanding benefits for employers and employees alike. Here are the top five 401(k) benefits for employers: Benefit #1: Attract and retain talented employees When it comes to recruiting and retention, the 401(k) is a powerful tool. In fact, according to a Betterment for Business survey: 67% of plan participants said that a good 401(k) was very important or important in their evaluation of a job offer 46% of plan participants said offering an employer match played a role in deciding whether to take a job In the battle for top talent, a competitive 401(k) plan with perks like matching contributions can entice employees to join (or stay with) your company. In fact, according to the recent SHRM survey, 74% of employers match employee contributions at some level. Not only that, but a company match costs less than you think.  Consider these three ways to use your 401(k) as a powerful recruiting tool: Demonstrate your commitment to current and prospective employees. By offering a 401(k) plan that has low fees, a competitive employer match, and a good selection of investments, you signal that you care about your employees’ futures. Think strategically about your vesting schedule if you decide to include company matching contributions. Some employers may elect to have a gradual vesting schedule as a motivator for employees to continue working at their company; however, immediate vesting may be a great selling point when recruiting new staff members. Communicate the benefits. You could have the best 401(k) plan, but if you aren’t communicating the benefits of participation, then you’re missing a vital opportunity. Whether you decide to send an email or host an event, be sure to get the word out about the value of your 401(k) plan. Benefit #2: Help your employees build a brighter future Saving for retirement is one of the most daunting financial goals employees face. In fact, many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus. This can have a damaging impact on business output, and lead to higher employee turnover—and increase costs associated with hiring and retention. By offering your employees a 401(k) plan—and the guidance they need to make the most of it—you can help reduce their financial stress and allow them to focus on what matters most. Go beyond retirement Buying a car. Saving for a house. Paying down debt. At Betterment, we know that saving for retirement is only one aspect of your employees’ financial lives. That’s why our easy-to-use online platform links employee savings accounts, outside investments, IRAs—even spousal/partner assets—to create a real-time snapshot of their finances, making it easy for them to see the big picture. By offering personalized advice, Betterment can help your employees make strides toward their long- and short-term financial goals. Benefit #3: Enjoy valuable tax advantages The government wants to encourage retirement savings—and as a result, the IRS grants some valuable tax benefits that can really add up over time: A tax credit to help defray 401(k) start-up costs—You may be eligible if you can answer “yes” to the following questions: Do you have 100 or fewer employees? Did you pay each of them at least $5,000 last year? Was there at least one “non-highly compensated employee” who earned less than $120,000 last year? If you meet these qualifications, you are likely eligible for a tax credit. Historically, the credit was 50% of your 401(k) plan start-up costs up to a maximum of $500 a year. However, with the recent passage of the SECURE Act, the limit is now the greater of: $500 or The lesser of $250 multiplied by the number of non-highly compensated employees eligible for participation or $5,000 Plus, you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits! A tax credit for adding automatic enrollment to a new or existing plan—Thanks to the SECURE Act, small businesses can now earn an additional $500 tax credit for adding an automatic enrollment feature to their plan. The credit is available for each of the first three years the feature is active for a total of $1,500 in tax credits. Tax deduction for employer matching or profit sharing contributions—Employer contributions are tax-deductible; however, we recommend you consult the IRS website or talk to a tax accountant for the rules governing these deductions. In addition, some of the fees for plan administration may be tax deductible. If you think these benefits sound great, you may be asking yourself: Can my company afford to offer a 401(k)? As an employer, you know that providing quality employee benefits can be pricey. However, employers and employees typically share the cost of providing a 401(k) plan through a combination of asset-based and/or per-participant fees. At Betterment, our fees are a fraction of the cost of most providers. Not only that, but we’re always up front and fully transparent about our pricing. That means no surprises for you and more money working harder for your employees. Seize the benefits Are you ready to dive deeper into the benefits of offering a 401(k) plan? Talk to Betterment today. As your full-service partner, we can help you with everything from enrolling new participants to managing the transition when employees retire. We handle all the details to help make life easier for you—and the future even brighter for your employees.

Basics of a 401(k) Plan Today’s 401(k)s hold more than $5.9 trillion in assets with over 100 million people contributing. But what is a 401(k) and would your company benefit from one? Since the 1980s, the 401(k) has rapidly become the retirement plan of choice for companies across the United States. In fact, today’s 401(k)s hold more than $5.9 trillion in assets and more than 100 million people have contributed. But what exactly is a 401(k)—and would your company benefit from offering one? Let’s start with the basics. How Does a 401(k) Work? Contributions A 401(k) plan is an employer-sponsored retirement savings plan that enables employees to contribute a portion of their paycheck to a tax-advantaged retirement account. In 2020, employees can contribute up to $19,500 to their 401(k), and if they’re age 50 or older, they can make additional catch-up contributions of up to $6,500. Under IRS guidelines, employees may make two types of 401(k) contributions: Traditional and Roth. All plans offer Traditional 401(k) contributions, and many also offer Roth 401(k) contributions. Here’s how they compare: Traditional 401(k) contributions are made with pre-tax dollars. This means that contributions are deducted directly from employee paychecks before income taxes are withheld. The money contributed to the plan—and any associated earnings—grow tax-deferred until employees withdraw it, typically in retirement. At that time, withdrawals are considered ordinary income and employees will pay federal and possibly state taxes depending upon where they live. If they want to withdraw money before they turn age 59 ½, they’ll also be subject to a 10% penalty unless they qualify for an exception. Roth 401(k) contributions are made with post-tax dollars. This means that the money is deducted from employee paychecks after tax dollars have been withheld. Because they already paid their taxes, employees can withdraw contributions—and any earnings—tax-free if they’re age 59 ½ or older and have held their Roth 401(k) account for at least five years. (Unlike a Roth IRA, there are no income limits for participating in a Roth 401(k). Investments Employees can invest their contributions in a range of options. For guidance on investment choices, talk to your 401(k) provider or financial advisor. When thinking about your investment offering, ask these questions: Does our investment offering provide employees with enough choice? Are our investments cost-effective? For example, does the line-up include indexed mutual or exchange-traded funds? Do we default employees into or at the very least offer diversified portfolios for those who don’t want to choose their own funds? Enrollment As an employer, you decide on the eligibility and enrollment methodology. Typically, it is handled in the following ways: Anytime enrollment – Some employers allow both new and existing employees to enroll in the 401(k) retirement plan at any time, including as soon as they’re hired. Conditional enrollment – Some employers require employees to work a certain number of hours or days before becoming eligible to participate. For example, they may require employees be 21 years old and have one year of service before enrolling in the plan. Open enrollment – Some companies only allow employees to enroll in the 401(k) plan during certain defined time frames, such as during a month-long open enrollment period at the end of the year. Automatic enrollment – To encourage employees to save, many employers also include an auto-enrollment feature. With this feature, employees are automatically enrolled in the plan at a certain contribution percentage. For example, employees may be enrolled at a 3% contribution rate. Of course, employees can always opt out before or after they’re automatically enrolled in the 401(k) plan. Which IRS Requirements Should You Know About? Because 401(k) plans offer valuable tax advantages, the IRS has a very strict set of requirements that you must follow. For example, employee contributions made under the plan must meet specific nondiscrimination requirements. To ensure that your plan satisfies these requirements, you must perform annual tests verifying that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees. In addition, the IRS has specific regulations on participation, automatic enrollment, contribution limits, vesting, distributions, and many other aspects of 401(k)s. Wondering how to navigate the rules and regulations? A qualified 401(k) plan provider like Betterment can help you take care of all the details. Five questions to ask 401(k) providers It’s important to choose a provider that not only offers a comprehensive 401(k) solution, but also acts in the best interests of you and your employees. That’s because partnering with the wrong 401(k) provider can leave you vulnerable to high fees, poor investment options, unanticipated administrative burdens, low plan utilization, and misunderstood legal liability. Here are five important questions to ask a prospective retirement plan provider: How is fiduciary liability allocated between you and the plan? Do you provide dedicated support and what kind of 401(k) experience does your staff have? What are the total fees and are they explicitly expressed, rather than embedded in expense ratios? How do you help me stay on top of my compliance requirements? How do you help employees make the most of the plan? At Betterment, we welcome these important questions and invite you to compare our responses with those of our competitors. Find out how we can offer you a better 401(k) plan today. How Much Does a 401(k) Cost? When you think about offering a 401(k) plan, a primary consideration is cost—both for your company and your employees. That’s because fees can eat away at returns over time, taking a serious bite out of employees’ retirement accounts. Although it’s common for certain costs to be paid by participants, it’s a good idea to understand how the total costs will impact them. The main types of expenses associated with a 401(k) plan include: Fund fees Investment management fees Administration and compliance fees Transaction fees Recordkeeping fees Fees are typically assessed in the following ways: Asset-based: Expenses are based on the amount of assets in the plan, represented as percentages or basis points. Per-person/per-participant: Expenses are based upon the number of eligible employees or actual participants in the plan. Transaction-based: Expenses are based on the execution of a particular plan service or transaction. Often, expenses are made up of a combination of asset-based and per-participant fees. With asset-based fees, employees with higher balances pay more. With per-participant fees, all employees pay the same amount—therefore, employees with lower balances pay a higher percentage of their account assets (and those with higher balances pay a lower percentage). So as you think about a fee structure, carefully review fees on both a dollar basis and an asset percentage basis, and consider how growth in employees or assets may impact those numbers. Historically, however, 401(k)s  have had complex fee structures. While fund fees are understandably netted from fund returns, plan providers may also route payments for other services through investment returns. This embedding of fees, while legal and reported, can be difficult for employers and employees to understand and track. According to the Investment Company Institute, the average fee for plans with $1 million to $10 million in assets is 1.17 percent. At Betterment, our fees are often well below industry average. Plus, we’re always explicit about our pricing. A clearly defined fee structure means no surprises for you—and more money working harder for your employees. How Does a 401(k) Benefit Employees (and Employers)? A 401(k) plan offers many valuable benefits for employees and employers alike. For employees, top benefits include: Convenience—Automatic payroll deductions make it easy for employees to invest for retirement—and potentially grow their money over time. Matching contributions—Many companies elect to include an employer match to help encourage employees to save (for example, 50 cents on the dollar, up to 6%). Earning “free money” is a top perk for employees. Tax advantages—Whether employees decide to save on a pre-tax basis, post-tax basis, or both, they enjoy valuable tax benefits, which can benefit their bottom line. For employers, top benefits of offering a 401(k) plan include: Talent recruitment and retention—Many employees expect a 401(k) plan to be part of their benefit package—and perks like matching contributions are powerful incentives to join (or stay with) a company. Tax advantages—You may be eligible for an annual $500 tax credit, and any employer contributions you make to your employees’ 401(k) accounts are tax-deductible. A stronger, more productive workforce—According to a study from Prudential, every year an employee delays retirement can cost their employer more than $50,000 due to a combination of factors including higher relative salaries and higher health care costs. A solid 401(k) plan can help ease employees’ financial stress—and help them with saving for retirement. As you can see, a 401(k) plan offers significant benefits, but is it right for your company? Betterment can help you understand the fine points of 401(k) plans and make an educated decision.

A Step-By-Step Guide to 401(k) Plan Compliance Testing Betterment for Business is your partner throughout your 401(k) plan’s compliance testing. We’re excited to work with you and provide resources to keep you informed along the way. We encourage you to review this series of tutorial videos that will help guide you through the milestones of the testing process. Introduction to Compliance Start here. This brief overview walks through the types of compliance tests and how they can impact a 401(k) plan. Your Betterment for Business Compliance Hub This guide shows how to go through your compliance hub, fill out the annual questionnaire, download your plan’s census file, and then re-upload it after you’ve reviewed the file. Annual Census Review This introduction to the census file highlights the key fields to review. Specifically, it covers who should be included within the census, and how to account for employees’ hours worked, compensation, 401(k) contributions and employer contributions. Request Census Information Hours and Compensation Employee and Employer Contributions Action Notifications If your plan has any year-end action items to address, you’ll receive a notification from Betterment. This video covers the types of action items and how to complete them. About Betterment 401(k) plan administration services provided by Betterment for Business LLC. Investment advice to plans and plan participants provided by Betterment LLC, an SEC registered investment adviser. Brokerage services provided to clients of Betterment LLC by Betterment Securities, an SEC registered broker-dealer and member FINRA/SIPC. Betterment LLC and Betterment Securities are affiliates of Betterment for Business LLC. Betterment for Business is an award-winning turnkey 401(k) service that includes plan administration for employers, and personalized, unconflicted investment advice for all plan participants. Powered by Betterment’s smart investment technology, Betterment for Business is one of the most efficient and cost-effective providers in the space, and offers a globally diversified portfolio of ETFs, tax-efficient portfolio management, smart rebalancing, automated investing, fee analysis on synced external accounts, and our retirement planning advice tool. Learn more.

Evaluating 401(k) Plans? Look for Value and Transparent Pricing Traditionally, 401(k) fee structures have been complex and it’s nearly impossible to determine costs. Pricing for a Betterment 401(k) is clear and transparent. When assessing 401(k) plans, some providers may lose you in the fine print. Betterment’s 401(k) offers valuable plan features for both employers and employees, at a clear price. It’s nearly impossible for employers to determine exactly what they’re getting when evaluating 401(k) plan products and services. That’s why each year 75% of employers (or plan sponsors) conduct a review of their 401(k) services to ensure that they are meeting their fiduciary obligations, which include offering reasonably priced investment options to their employees, or plan participants. If employers wish to compare an existing plan with another, they’ll submit a Request For Proposal (RFP) to other potential plan providers. Once they receive and attempt to review RFPs, however, is when the process becomes difficult to draw pure price and product comparisons. Deciphering the best value among plans and providers is, needless to say, a complex task. So how can employers properly evaluate a 401(k) provider’s value? Lost in the Fine Print The 401(k) industry continues to struggle with communicating the value of its products and services, as evidenced by RFPs that only compare cost without demonstrating value. This is due to the myriad of products and services comprising the retirement plan landscape. Employers cannot escape confusing pricing tables based on a number of criteria, including upfront costs, number of monthly plan participants, and total amounts invested. These pricing tables are usually accompanied by a long list of additional services and costs, often involving multiple vendors, such as a recordkeeper, third-party administrator (TPA), custodian, consultant, and/or advisor. It’s often hard to compile these into a bottom-line, all-in cost. Nor do employers have a clear idea of the potential conflicts of interest and revenue-sharing arrangements hidden within the pricing (e.g., a recordkeeper recommending a certain fund line-up because they reap rewards for doing so). Employers are hard-pressed to find publicly available pricing for 401(k) services. Take, for example, Charles Schwab’s website, which states that “fees vary and are based on business needs and solutions”; Fidelity’s website states that fees “vary by plan”; and Vanguard’s website touts that its fund expense ratio is 82% less than the industry average. Yet none of these websites specify the total cost of their respective 401(k) plans. This reveals a troubling fact about traditional 401(k) players—a lack of pricing transparency limits an employer’s ability to understand how the products differ and whether the fees are appropriate. Assessing a 401(k) vendor then becomes challenging, particularly for businesses without the resources to fully vet pricing and features of such plans. As a result, plan comparisons are usually apples to oranges, and decisions are based on other factors such as ease of administration (e.g., payroll integration) or relationships. Betterment for Business: A Better 401(k) Solution Betterment, the largest independent robo-advisor, recently launched Betterment for Business, the only turnkey 401(k) service that includes personalized management for all 401(k) plan participants. Just like its retail predecessor, Betterment’s 401(k) has a clear and transparent pricing model. When compared to traditional advisory solutions, robo-advised 401(k) plans are also generally less costly. Traditionally, the cost of administrative services was hidden in different share classes of mutual fund expenses. This is not the case with exchange-traded funds (ETFs), where revenue-sharing is rare, and in which Betterment invests. One key advantage of being an independent advisor is that Betterment’s investment selection process is designed solely to advance investors’ best interests and is not tainted by financial incentives from other investment firms. This model of investment selection is built on transparency and independence. In addition, specialty services (discussed in detail below), such as goal-based investing, synced outside accounts, and a proprietary retirement planning tool known as RetireGuide, combine for a holistic approach to investing. When the Department of Labor fully implements its fiduciary rule governing conflicts of interest, the bar for 401(k) plan transparency will be lifted to new heights and drive purchasing decisions like never before, according to Al Otto, a senior independent investment manager and advisor with Shepherd Kaplan, LLC. As an ERISA 3(38) fiduciary, Betterment is legally responsible for managing a plan’s assets, a role that reduces plan sponsors’ exposure to claims that they breached their own fiduciary duties. As such, Betterment is poised for continued success in a regulatory environment that will likely hold plan fiduciaries to a higher standard. Behind the Machinery Betterment’s full suite of 401(k) features are considerably human for a company built on robo-advised, automated investment advice. Perhaps even more noteworthy is 24/7 personalized investment advice for plan participants. Unlike many 401(k) plans that put the onus on individuals to opt-in for advice (which they often don’t even realize is available to them, thus don’t sign up), Betterment’s advice is active from the moment employees log in. Betterment’s technology analyzes a customer’s unique financial data when making investment advice. Not surprisingly, the power of robo-advised algorithms transcends human capacity for portfolio analysis. While critics may argue that algorithms cannot replicate the wisdom of experienced financial planners or offer hand-holding through emotional periods of market volatility, Betterment distills from the collective wisdom of experienced CFPs, CFAs, and other experts when writing algorithms and designing its website. The Best Value for the Cost The initial task for 401(k) plan sponsors is to accurately compare costs. Betterment for Business’s pricing is clear and concise, whereas some of the industry’s leading players bury services and costs details in the fine print. There are also no hidden costs, nor does Betterment receive additional revenues from revenue sharing agreements from the non-proprietary, low-cost ETFs in which it invests. Once proper cost comparisons are made, attention can be turned to uncovering the value of products and services being offered. Employees Get Personalized Management, Employers Get an Affordable 401(k) Solution Betterment’s 401(k) offering, Betterment for Business, made its mark with groundbreaking technology, an online service, and a mobile app that 401(k) plan sponsors and participants alike have found easy to use. Mindful of the growing need for affordable investment advice to boost retirement readiness, Betterment’s 401(k) solution is the only provider to include personalized retirement advice to all participants without additional charges. RetireGuide, Betterment’s retirement planning tool, helps to tell people how much they’ll need to save for retirement based on current as well as future income, taxes, and even retirement location. When customers sync their outside investments, Betterment shows customers which providers are charging higher fees. Customers can also see opportunities to invest idle cash, and receive personalized retirement advice that tells them how much they’ll need to retire comfortably, Betterment manages to be competitive in price due to its advanced technological platform. Robo-advised investing has become increasingly meaningful to various generations of workers and their dependents who are growing more accustomed to using technology for the most important financial decisions on a daily basis. The larger point is that it’s important to value bundled core product and service offerings such as Betterment’s when assessing the overall prices from plan sponsors.

How to Pick Investments for Your 401(k) We believe there’s a better way when it comes to 401(k) investments. It starts with us providing a high level of investment fiduciary protection. You know how important it is to offer a 401(k) plan in today’s marketplace. Having a competitive retirement plan can help your organization attract and retain talent and be a key component to an overall financial wellness program. Your employees may be years away from retirement, but a 401(k) plan, and the educational resources that often come with it, can help them feel more confident about their futures; and especially if your organization offers a 401(k) match and/or profit-sharing contribution, balances in employee retirement accounts can really add up quickly. Whether you are starting up a 401(k) plan for the first time or your organization already has a 401(k) plan, it’s important to keep current with market trends. This is especially critical if your company has a high percentage of positions in competitive fields, where an attractive 401(k) plan can be a deciding factor for people (either prospective hires or current employees (who may be evaluating competing job offers).    Your 401(k) Decisions Some of those trends may revolve around plan design, including whether or not to offer a matching contribution, automatic enrollment, or whether to convert your plan to a safe harbor design that eliminates compliance testing. Each of these decisions will likely have a significant financial impact to your organization and therefore must be weighed carefully.  One of the most visible decisions you have to make is around investments. It’s not just that you might pick funds that your employees don’t like (although you might hear about that!); selecting and monitoring funds is one of the most important fiduciary responsibilities that you can have as a plan sponsor. And the consequences of not executing that responsibility can be serious and expensive.  In fact, in recent years there have been a significant number of lawsuits against plan sponsors alleging that 401(k) funds have been too expensive. Fund expenses are deducted from fund assets meaning that they directly negatively impact fund returns and reduce amounts that participants would otherwise have been able to accumulate in their retirement accounts. Said differently, fund fees are embedded in fund expense ratios, so the amount that employees pay is determined by how they are invested.   Traditional Approach to 401(k) Investment Selection Most 401(k) plans today offer a menu of mutual funds, selected from various companies based on a number of factors including investment performance and fees. Often plan sponsors retain a financial advisor to assist in identifying appropriate funds, but typically the employer retains full fiduciary responsibility for the selection and monitoring of funds.  Having a broad array of investment options across asset classes (stock funds as well as bond funds; domestic as well as international) and investment styles (large cap as well as mid and small cap) allows employees to create a diversified portfolio; provided, of course, they feel comfortable selecting their investments. And research shows that many employees don’t feel comfortable selecting and monitoring investments; that’s why many plan investment menus also include target date funds and default employees into them.  Target date funds are presented in a series, each targeting a specific retirement date (year) which corresponds to an individual’s investment time horizon. In addition to being well-diversified, target date funds also adjust their asset allocation over time, becoming more conservative as the retirement date approaches, which reduces an investor’s risk in accordance with his or her shorter time horizon.  Mutual Funds in 401(k) Plans  Mutual funds are a popular choice for 401(k) plans because many employees are familiar with them, recognize the brand names, and might even be invested in the same funds outside their 401(k). From an employer perspective, mutual funds are a comfortable choice because of their price structure, which often enables the various service providers associated with the 401(k) plan to be compensated directly from the funds’ expense ratio, meaning they are paid for by the participants.  While using mutual funds may be a convenient way for plans to pay for necessary and legitimate fees, having all these expenses embedded in the expense ratio makes it difficult for both employers and employees to understand the true costs of the fund.  While required fee disclosures are intended to facilitate understanding the complicated fee structure, there is little evidence that this has increased employer and employee awareness around hidden 401(k) fees.  If you think these expenses may be insignificant, think again. Administering a 401(k) plan involves many moving parts, carried out by a number of parties. Examples of the firms that may assist a plan sponsor with 401(k) investments and administration may include:     Investment Company Company that manages investment funds Custodian Holds assets in trust and processes transactions Recordkeeper Tracks each individual participant’s assets Third-Party Administrator Performs compliance testing, assists with government reporting Financial Advisor Advises plan sponsor on investment selection for the plan Accounting Firm Performs annual audit for larger plans (with 100+ participants or certain assets) Understanding Your Investment Fiduciary Responsibilities  Like most plan sponsors, the day-to-day responsibilities of your business leave little time for extensive investment research and analysis. Many plan sponsors engage service providers to take on the fiduciary investment duties. However, the scope of fiduciary protection provided by 401(k) providers can vary greatly.  Some providers disclaim any fiduciary responsibilities and simply make a menu of investments available, leaving the plan sponsor with the fiduciary responsibility and liability for choosing options for the 401(k) plan.  Some providers will agree to share your fiduciary investment duties. This level is referred to as ERISA 3(21) investment advice. Under this model, investment advisors or service providers agree to be subject to the fiduciary standards with respect to their investment recommendations and are subject to the DOL’s enforcement jurisdiction. But the plan sponsor retains the final discretion regarding which investments will be included in the plan and shares legal responsibility for each investment decision. The Betterment Approach  At Betterment, we believe there’s a better way when it comes to 401(k) investments. For starters, we provide a level of investment fiduciary protection, serving as your plan’s 3(38) investment manager. This means we assume full discretionary responsibility for selecting and monitoring the plan’s investment options, relieving you of fiduciary liability for selecting plan investments.  ERISA Section 3(38) Fiduciary Responsibility  As a 3(38) investment manager, Betterment will take on the following duties, moving them from your 401(k) plan to-do list to ours:  Develop an Investment Policy Statement. It is a plan governance best practice for 401(k) plan sponsors to adopt an investment policy statement that defines the strategic objectives for the plan's investments and the criteria that will be used to evaluate investments.  As the investment manager we are responsible for creating the due diligence process for selecting and monitoring investments and will select the investments for your 401(k) plan.  We will monitor investment performance and replace any investments that do not perform well or when comparable investments with lower fees become available.  With Betterment as your ERISA 3(38) investment manager, you are not responsible for monitoring our investment decisions. You have fully delegated that fiduciary duty to us.  One of the more challenging investment fiduciary duties is the requirement to analyze 401(k) plan fees and ensure only reasonable expenses are paid from plan assets, as required by the DOL Fee Disclosures rules (ERISA 408(b)(2)). This is no simple task for a busy employer trying to run a business. Exchange-Traded Funds (ETFs) As noted earlier, fee structures for traditional 401(k) investments can be complex, complicating the fee analysis for both sponsors and participants. Betterment, as a 3(38) investment manager, takes on the duty to monitor investment fees and eliminates many of the concerns associated with traditional 401(k) investment models because of its exclusive use of Exchange Traded Funds.  Compared to mutual funds, ETFs have a more transparent fee structure, which means the 401(k) service providers aren’t being compensated behind the scenes. With no embedded fees, all plan vendors have to charge clear and explicit fees for their services, making it easier for plan sponsors to evaluate, compare, and understand the true costs of plan administration. And it makes it easier for employees to see where their money is going. Investment Advice for Employees  Some 401(k) products that offer ERISA 3(38) services limit the investment management services to plan sponsor support, leaving employees on their own to decide how their savings should be allocated among the investments available. Betterment’s 3(38) investment management support extends to participants as well as plan sponsors. We recognize that professional investment support is crucial to helping your employees become more financially secure – in both the short term and long term. Specifically, Betterment helps your employees determine: how much it costs to retire, given their desired lifestyle and where they may choose to live; and how much to defer from today’s paycheck into the 401(k) plan to meet their long-term savings goals. By providing additional personal information such as household income, and already existing retirement savings balances, employees receive more tailored recommendations, including advice on how much they should be saving and which accounts to use.  Betterment will build a personalized investment portfolio to help each employee achieve their savings goals, and will allocate each portfolio across asset classes, giving employees diversified exposure to over 36,000 stocks and bonds from companies and governments in over 100 countries. In addition, risk is automatically managed over time, and the portfolio is regularly rebalanced to help keep the goal on track. A Smarter Approach to 401(k) Investing Betterment’s investment approach combines smart technology with low-cost, index-based ETFs to relieve employers from one of their most important fiduciary duties: having to select and monitor 401(k) funds. We also make it easier for employees to save for their future by creating efficient and diversified long-term portfolios on a goals-based platform.