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Betterment Editors
The editorial staff at Betterment aims to keep the Resource Center up to date with our evolving approach to financial advice, our product offerings, and new research. Articles attributed to the editorial staff may have originally been published under other Betterment team members or contributors. Read more detail on the Betterment Resource Center.
Articles by Betterment Editors
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What is a Fidelity Bond?
401(k) plan sponsors are required to purchase a fidelity bond to protect the plan against ...
What is a Fidelity Bond? 401(k) plan sponsors are required to purchase a fidelity bond to protect the plan against fraudulent or dishonest acts. Here are answers to common questions. What is a fidelity bond? A fidelity bond is a type of insurance required for those responsible for the day-to-day administration and handling of “funds or other property” of an ERISA (Employee Retirement Income Security Act of 1974) benefit plan such as a 401(k). The purpose of the bond is to protect the plan from losses due to acts of fraud or dishonesty including theft, embezzlement, larceny, forgery, misappropriation, wrongful abstraction, wrongful conversion and willful misapplication. What are “Funds Or Other Property”? “Funds or other property” refers to 401(k) plan assets. In addition to publicly-traded stocks, bonds, mutual funds, and exchange-traded funds, all employee and employer contributions are considered “funds,” whether they come in the form of cash, check or property. Who must be covered by a fidelity bond? Under ERISA, it is illegal to receive, disburse, or exercise custody or control of plan funds or property without having a fidelity bond in place. Therefore, anyone who handles or manages 401(k) funds must be covered by a fidelity bond. This includes anyone who has: Physical contact with cash, checks, or similar property Authority to secure physical possession of cash, checks, or similar property through access to a safe deposit box, bank accounts, etc. Authority to transfer plan funds either to oneself or a third party Authority to disburse funds Authority to sign or endorse checks Supervisory or decision-making authority over plan funds This requirement is not just limited to plan managers and plan sponsor employees. Third party service providers that have access to the plan’s funds or exercise decision-making authority over the funds may also require bonding. This includes investment advisors and third-party administrators (TPAs). How much coverage is required? ERISA requires each person handling the plan to be covered for at least 10% of the amount of funds they handle. The coverage can’t be less than $1,000 or more than $500,000, (unless the plan includes employer securities, in which case the maximum amount can be $1,000,000). The exception to the 10% rule applies to ‘non-qualifying plan assets” that may represent more than 5% of the plan’s total assets. Qualifying assets include items held by a financial institution such as a bank, insurance company, mutual funds, etc. Non-qualifying assets are those not held by any financial institution including tangibles such as artwork, collectibles, non-participant loans, property, real estate and limited partnerships. Fidelity bonds have a minimum term of one year. Longer-term bonds will typically include an inflation provision so the value of the bond will increase automatically. The bond amount should be reviewed and updated as the plan assets increase or decrease. Where can I obtain a fidelity bond? The bond must be issued by an underwriter from an insurance company that is listed on the Department of Treasury’s Listings of Approved Sureties. These are companies that have been certified by the Treasury Department. Fidelity bond application During the application process, some plan information may be required. Common items the application will ask is the plan name, address, IRS plan number (ex. 001), and trustee information. Most of the items asked can be found under the administrative information section (usually second to last page) within the Summary Plan Description (SPD). What happens if I don’t cover my plan with a Fidelity Bond? The existence and amount of the plan’s fidelity bond must be reported on your plan’s annual Form 5500 filing. Not having a bond, or not having sufficient coverage based on plan assets, may trigger a DOL audit and may risk the plan’s tax-qualified status. Additionally, the plan fiduciaries may be held personally liable for any losses that may occur from fraudulent or dishonest acts. -
SECURE Act 2.0: Getting Closer to Reality
SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to ...
SECURE Act 2.0: Getting Closer to Reality SECURE Act 2.0 would expand retirement plan coverage and make it easier for employers to offer retirement plan benefits. The Securing a Strong Retirement Act, or ‘SECURE Act 2.0’ as it is commonly called, came much closer to being realized with the House passing the bill by a wide margin, 414-5, on March 29, 2022. This coming almost a full year after the House Ways and Means Committee unanimously approved the bill. It is now off to the Senate for approval. The bill builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans. Key provisions of SECURE Act 2.0 related to 401(k) plans include: Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt. Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee. Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5). The new bill increases the RMD age even further: to 73 in 2023; 74 in 2030 and ultimately 75 in 2033. Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2022. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64. Catch-up contributions must be made in Roth. Currently, participants can choose whether to contribute pre-tax or Roth as their catch-up contributions. The new bill requires that all catch-up contributions be made in Roth moving forward. This will provide less tax diversification for participants but will generate more tax revenue to help offset the cost of some of the other provisions in the bill. Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes. Ability to contribute matching contributions in Roth dollars. Currently, all employer matching contributions must be made on a pre-tax basis. The bill proposes that employers would be allowed to offer matching contributions to participants on a Roth basis. Roth matching contributions would not be deductible for employers as pre-tax contributions are, but may provide beneficial tax benefits to employees. Additional incentives for employees to contribute. The only way an employer can currently incentivize employees to contribute to their 401(k) plan is through an employer match. The bill proposes that employers could now offer additional incentives, such as a small gift card benefit, to employees who contribute to their 401(k). One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to 2 years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan. Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act, employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2023 to allocate profit sharing and elective deferrals for the 2022 plan year. Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years. Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification. Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP and coverage testing. Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements. Retirement savings lost and found - SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants'' are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs. -
Pros and Cons of the New York State Secure Choice Savings Program
Answers to small businesses' frequently asked questions
Pros and Cons of the New York State Secure Choice Savings Program Answers to small businesses' frequently asked questions The New York State Secure Choice Savings Program was established to help the more than 3.5 million private-sector workers in the state who have no access to a workplace retirement savings plan. Originally enacted as a voluntary program in 2018, Gov. Kathy Hochul signed a law on Oct. 22, 2021, that requires all employees of qualified businesses be automatically enrolled in the state's Secure Choice Savings Program. If you’re an employer in New York, state laws require you to offer the Secure Choice Savings Program if you: Had 10 or more employees during the entire prior calendar year Have been in business for at least two years Have not offered a qualified retirement plan during prior two years If you’re wondering whether the Secure Choice Savings Program is the best choice for your employees, read on for answers to frequently asked questions. Do I have to offer my employees the Secure Choice Savings Program? No. State laws require businesses with 10 or more employees to offer retirement benefits, but you don’t have to elect the Secure Choice Savings Program if you provide a 401(k) plan (or another type of employer-sponsored retirement program). What is the Secure Choice Savings Program? The Secure Choice Savings Program is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the New York plan requires employers to automatically enroll employees at a 3% deferral rate. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice Savings Program provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. Why should I consider the Secure Choice Savings Program? The Secure Choice Savings Program is a simple, straightforward way to help your employees save for retirement. According to SHRM, it is managed by the program’s board, which is responsible for selecting the investment options. The state pays the administrative costs associated with the program until it has enough assets to cover those costs itself. When that happens, any costs will be paid out of the money in the program’s fund. Are there any downsides to the Secure Choice Savings Program? Yes, there are factors that may make the Secure Choice Savings Program less appealing than other retirement plans. Here are some important considerations: The Secure Choice Savings Program is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to the Secure Choice Savings Program—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. New York Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2022 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $20,500 in 2022 ($27,000 if they’re age 50 or older). So even if employees max out their contribution to the Secure Choice Savings Program, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, the Secure Choice Savings Program does not. Limited investment options—Secure Choice Savings Program offers a relatively limited selection of investments. Why should I consider a 401(k) plan instead of the Secure Choice Savings Program? For many employers—even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. What action should I take now? After the Secure Choice Savings Program opens for enrollment, you’ll have nine months to set up a payroll deposit retirement savings arrangement. No rollout date has been set yet, and the board can delay the program rollout as needed. We’ll keep you posted of any deadline updates. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. -
Employers Step Up and Stand Out with Student Loan Help
Here's why more companies are taking an active role.
Employers Step Up and Stand Out with Student Loan Help Here's why more companies are taking an active role. Your staff could very well be loaded up with student loan debt. Heck, you might even have some yourself. None of this is news. But as student loan debt continues to snowball in the U.S.–up to $1.75 trillion as of late 2021– you may be less familiar with the all-hands-on-deck mentality many employers are now taking toward the problem. Companies are getting off the sideline and taking a more active role in helping their workers manage student loans. Here’s how and, more importantly, why. Why companies are adding student loan help to their benefits toolbox The story of how companies came to help with student loans is really the story of the 401(k), or more specifically, why so many employees weren’t touching theirs. A mystery at first, the answer has grown increasingly clear: it’s tough to save for the future when you’re still paying off the past. For employees with student loans, every dollar in their paychecks can represent a zero-sum decision. Do they service their student loans or contribute to their 401(k)? In recent years, however, both employers and employees have signaled a growing expectation to work together on the issue. More than half (57%) of employees believe their company should help them pay off student loans according to exclusive Betterment research on employee financial wellness. Savvy companies have taken the issue to heart. By complementing their 401(k) with student loan management, they can offer a more holistic compensation package, one that accounts for the drag student loan debt now has on the workforce as a whole. The benefits are numerous: Recruiting and retention advantages When it comes to benefits packages, 401(k)s have become the standard. Translation: beyond a generous match, they don’t always differentiate your company from others. Offering something of unique value can not only attract top talent but keep it. Nearly 9 out of 10 (86%) of young workers say they'd stay at least five years with a company if it helped with student loans. Two-way tax benefits Just like with 401(k)s, offering your staff a student loan management tool is one thing, but the real magic lies in the match. Why is that? It unlocks tax perks for both parties. Thanks to legislation passed by Congress in 2020 (aka the CARES Act), companies can make tax-free annual contributions of up to $5,250 toward their employees’ student loans. This translates into a benefit that lowers both your company’s payroll taxes and your employees’ income taxes. This tax-free treatment is approved through 2025, and support is building for making it permanent. What to look for in a Student Loan Management tool First and foremost, you want a streamlined admin experience. For many benefits admins, adding another vendor on top of their 401(k) provider is a non-starter. The last thing you need is another login. With Betterment, you can get both benefits synced and served up at the same time. If you’re already familiar with Betterment’s 401(k) product, Student Loan Management slots into that experience seamlessly. Last but certainly not least, you want a tool that also makes your employees’ lives easier. Similar to the admin experience, we give your participants a clearer financial picture of their student loans and 401(k) all in one place. We also go the extra mile by helping them balance the competing demands of debt and investing. This tension, after all, is a big reason for student loan help’s rise as a bona fide benefit. It’s our mission to help you and your staff ease it. -
How to Help Your Employees Deal with Financial Stress
Employee financial concerns can have a major impact on your business. Learn what you can ...
How to Help Your Employees Deal with Financial Stress Employee financial concerns can have a major impact on your business. Learn what you can do to help ease employee financial stress. The COVID-19 crisis isn’t just a risk to our physical health—it’s also a risk to our economic health. In fact, a new survey from the National Endowment for Financial Education® (NEFE), revealed that nearly 9 in 10 Americans say that the pandemic is causing stress on their personal finances. With the unemployment rate hovering around 13%, many people are struggling to pay for housing, food, and other necessities. And even those who have jobs are feeling the squeeze. According to NEFE, the top ten financial stressors are: Having enough in emergency savings – 41% Job security – 39% Income fluctuations – 29% Paying utilities – 28% Paying rent or mortgage – 28% Financial market volatility – 25% Paying down/off credit card debt – 23% Having enough saved for retirement – 23% Paying health care bills – 19% Putting off major financial decisions – 17% Pandemic or no pandemic—many employees are feeling financial stress Between juggling childcare responsibilities and working from home, it’s no secret that employees are facing added pressure right now. Some may be forced to dramatically reduce their expenses because their spouse or partner has lost their job or had their hours reduced. Others may be caring for a sick relative—or even experiencing medical issues themselves. The pandemic has undoubtedly caused unprecedented levels of financial stress; however, even in the best of times, many employees are in financially precarious positions. In fact, according to research from Willis Towers Watson—conducted before the pandemic hit the United States—nearly two in five employees live paycheck to paycheck. And it’s not only those at lower income levels who are affected; even highly paid workers with generous employee benefits employees struggle financially. Notably, the survey of employees found that: 39% could not come up with $3,000 if an unexpected need arose within the next month 18% making more than $100,000 per year live paycheck to paycheck 70% are saving less for retirement than they think they should 32% have financial problems that negatively affect their lives 64% believe their generation is likely to be much worse off in retirement than that of their parents Employee financial concerns can have a major impact on your business Wondering what your employees are most concerned about? According to Fidelity Investments’® 2020 New Year Financial Resolutions Study, Americans’ top five financial concerns are: Unexpected expenses Personal debt (e.g., credit cards, mortgage, student loans) Not saving enough for short-term and/or long-term needs (e.g., retirement) Rising health care costs The economy, stock market volatility, or interest rates These financial challenges can increase stress levels, hurt job performance, and even damage health. Willis Towers Watson took a deeper dive into the attitudes of struggling employees who live paycheck to paycheck, and found that: 39% said money concerns keep them from doing their best at work 49% reported suffering from stress, anxiety or depression over the past two years (compared with 16% of employees without any financial worries) Only 39% of struggling employees were fully engaged at work If that’s not bad enough, a report from Salary Finance found that employees with money worries are 8.1 times more likely to have sleepless nights, 5.8 times more likely to not finish daily tasks, 4.3 times more likely to have troubled relationships with work colleagues, and 2.2 times more likely to be looking for a new job. As you can imagine, these feelings of disengagement, dissatisfaction, and anxiety can wreak havoc on employee wellbeing—and on your bottom line. In fact, Gallup research shows that U.S. businesses are losing a trillion dollars every year due to voluntary turnover. Companies may also experience reduced lost productivity, additional medical insurance expenses, increased absenteeism, and other unanticipated side effects of a workforce that’s financially stressed. More money isn’t always the answer It’s easy to read the statistics and think, “well, maybe we should just pay our employees more.” While your employees may appreciate a bonus or a raise—and it may temporarily ease some financial stress—it won’t solve the whole problem. Even highly paid employees experience financial stress because it’s less about the money and more about the money management and financial literacy. In fact, a Merrill Edge survey of more than 1,000 mass affluent Americans found that: 59% believe their financial life impacts their mental health 56% believe their financial life impacts their physical health 51% are worried about their finances over the next five years Excluding their mortgages, 73% are carrying some form of debt What can you do to help ease employee financial stress? You don’t need a big, expensive financial wellness program to help your employees. To begin, think about financial wellness benefits resources you already have at your disposal: Does your health insurance plan have an Employee Assistance Program (EAP)? In addition to helping employees navigate health care issues, EAPs frequently offer advice on budgeting, debt consolidation, retirement savings planning, and more. Do you have an in-house expert? Enlist your CFO or another financially savvy manager, CFO, or HR professional, to share savings tips or lead an information session to address common financial issues. answer commonly asked financial questions. Do you offer a 401(k) plan? If so, your 401(k) provider 401(k) provider likely offers a variety of educational tools and resources to help employees budget and save for retirement (and beyond). By leveraging these resources, you can begin the process of improving employee financial wellbeing. Betterment can help At Betterment, our mission is simple: to empower people to do what’s best for their money so they can live better. By using our innovative, online platform, employees can plan for their long- and short-term financial goals ranging from retirement to an emergency fund to a new house. Betterment’s unique technological solution: Takes into account employees’ ages, savings, and goals to create a personalized plan to help them save for the future they want Enables employees to link their outside assets, making it easy for them to see the full picture of their personal finances Can boost employees’ after-tax returns Beyond saving for retirement, Betterment helps employees gain control of their finances so they can reduce their stress and focus on what matters most. -
Tax Coordination for Betterment 401(k)
Learn how 401(k) participants can benefit from Betterment's automated tax-coordinated ...
Tax Coordination for Betterment 401(k) Learn how 401(k) participants can benefit from Betterment's automated tax-coordinated strategy which can help employees reach their savings goal faster. For Betterment for Business 401(k) plan participants who also have a personal account with Betterment, using Tax Coordination for their Retirement goal can help increase their after-tax returns. At Betterment, we’re continually improving our investment advice, always with the goal of maximizing our customers’ take-home returns. Key to that pursuit is minimizing the amount lost to taxes. We’ve taken a huge step forward with a powerful service that could increase your employees’ after-tax returns, so they can have more money for retirement. Betterment’s Tax Coordination service is our very own, fully automated version of an investment strategy known as asset location. Automated asset location is the latest advancement in tax-smart investing. Introducing Betterment’s Tax Coordination feature for 401(k) plans Asset location is widely regarded as the closest thing there is to a “free lunch” in the wealth management industry. If your employees are saving in more than one type of account, it is a way to increase their after-tax returns without taking on additional risk. Millions of Americans wind up saving for retirement in some combination of three account types: 1. Taxable, 2. Tax-deferred (Traditional 401(k) or IRA), and 3. Tax-exempt (Roth 401(k) or IRA). Each type of account has different tax treatment, and these rules make certain investments a better fit for one account type over another. Choosing wisely can significantly improve the after-tax value of their savings when more than one account is in the mix. However, intelligently applying this strategy to a globally diversified portfolio is complex. A team of Betterment quantitative analysts, tax experts, software engineers, designers, and product managers worked for over a year building this powerful service. We are proud to offer Tax Coordination, the first automated asset location service, available to all investors. Next, let’s look at how asset location, the strategy behind TCP, adds value. How Does Tax Coordination Work? What is the idea behind asset location? To simplify somewhat: Some assets in a portfolio (bonds) grow by paying dividends. These are taxed annually, and at a high rate, which hurts the take-home return. Other assets (stocks) mostly grow by increasing in value. This growth is called capital gains and is taxed at a lower rate. Plus, it only gets taxed when you need to make a withdrawal—possibly decades later—and deferring tax is good for the return. Returns in 401(k)s and Individual Retirement Accounts (IRAs) don’t get taxed annually, so they shelter growth from tax better than a taxable account. We would rather have the assets that lose more to tax in these retirement accounts. In the taxable account, we prefer to have the assets that don’t get taxed as much.2 When investing in more than one account, many people select the same portfolio in each one. This is easy to do, and when you add everything up, you get the same portfolio, only bigger. Here’s what an asset allocation with 70% stocks and 30% bonds looks like, held separately in three accounts. The circles represent various asset classes, and the bar represents the allocation for all the accounts combined. Portfolio Managed Separately in Each Account But as long as all the accounts add up to the portfolio we want, each individual account on its own does not have to have that portfolio. Asset location takes advantage of this. Each asset can go in the account where it makes the most sense, from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase after-tax return, without taking on more risk. The concept of asset location is not new. Advisors and sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for maximum benefit is very mathematically complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts. For an optimal asset location strategy, an automated approach works best. Our software handles all of the complexity in a way that a manual approach just can’t match. We are the first automated investment service to offer this service to all of our customers. Who Can Benefit? To benefit from from Tax Coordination, the participant must have a balance in at least two of the following three types of Betterment accounts: Taxable account: If you can save more money for the long-term after making your 401(k) contributions, that money can be invested in a standard taxable account. Tax-deferred account: Betterment for Business traditional 401(k) or a traditional IRA. Investments grow with all taxes deferred until liquidation and then taxed at the ordinary income tax rate. Tax-exempt account: Betterment for Business Roth 401(k) or a Roth IRA. Investment income is never taxed—withdrawals are tax-free. Higher After-Tax Returns Betterment’s research and rigorous testing demonstrate that accounts managed by Tax Coordination are expected to yield meaningfully higher after-tax returns than uncoordinated accounts. Our white paper presents results for various account combinations. Here, we excerpt the additional “tax alpha” for one generalized case—an identical starting balance of $50,000 in each of three account types, a 30-year horizon, a federal tax rate of 28%, and a state tax rate of 9.3% (CA) both during the period and during liquidation. Equal Starting Balance in Three Accounts: Taxable, Traditional IRA, and Roth IRA Asset Allocation Additional Tax Alpha with TCP (Annualized) 50% Stocks 0.82% 70% Stocks 0.48% 90% Stocks 0.27% Source: TCP White Paper. Help Your Employees Get Started with Tax Coordination Ready to help your employees take advantage of the benefits of Tax Coordination? Direct them to this introductory article on Tax Coordination to get started. Learn more about how Betterment’s Tax Coordination feature can help your employees have more spending money in retirement. All return examples and return figures mentioned above are for illustrative purposes only. For much more on our TCP research, including additional considerations on the suitability of TCP to your circumstances, please see our white paper. For more information on our estimates and Tax Coordination generally, see full disclosure. -
Are 401(k) Contributions Tax Deductible for Employers?
Seize the tax deductions (and credits!). Contributing to employees’ 401(k) accounts may ...
Are 401(k) Contributions Tax Deductible for Employers? Seize the tax deductions (and credits!). Contributing to employees’ 401(k) accounts may cost less than you think. Vehicle expenses. Salaries. Office supplies. Rent. Utilities. Many business expenses can be claimed as tax deductions. But did you know that 401(k) plan contributions offer significant tax benefits, too? Read on to discover all the ways you can save on your tax bill. Snag the tax deductions Great news! Whether you decide to make employer matching contributions, profit sharing contributions, or safe harbor contributions to employee retirement accounts, they’re tax deductible. That means that you can subtract the value from your company’s taxable income. According to the IRS, employer contributions are deductible as long as they “don’t exceed the limitations described in section 404 of the Internal Revenue Code.” Wondering about the limits? Well, in 2020 the employer contribution limit is 25% of an employee’s compensation (eligible compensation is limited to $285,000 per participant). In addition, combined employer and employee contributions are limited to the lessor of $57,000 or 100% of the employee’s annual compensation. The tax benefits don’t end there… In addition to claiming big deductions by making employer contributions to your retirement plan, you can also save on taxes in a multitude of other ways. 1. 401(k) administration fees—Administrative fees are typically a business tax deduction. So not only does paying for administrative fees reduce the amount that comes out of individual 401(k) accounts, but they qualify as a business expense, thus reducing your business taxable income. 2. SECURE Act tax credits—Thanks to the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), you may be eligible for valuable tax credits for small employers. Even more valuable than a tax deduction, a tax credit subtracts the value from the taxes you owe! Plus, you can claim these credits for the first three years the plan or feature is in place: Tax credit for new plans—You may now be able to claim annual tax credits of 50% of the cost to establish and administer a retirement savings plan, up to the greater of: $500; or the lesser of: $250 per eligible non-highly compensated employee eligible for the plan; and $5,000. (Up to $15,000 in tax credits over three years!) Tax credit for adding eligible automatic enrollment—Earn an additional $500 annual tax credit for adding an eligible automatic enrollment feature to your new or existing plan. (Up to $1,500 in tax credits over three years!) 3. Benefit from your own contributions—Plan on contributing to your own 401(k) plan? You’ll save on your own taxes, too! In 2020, you can contribute up to $19,500 to your 401(k), and if you’re age 50 or older, you can make additional catch-up contributions of up to $6,500. Select either: Traditional 401(k) contributions with pretax dollars to enjoy the benefits of tax-deferred saving; or Roth 401(k) contributions with post-tax dollars, enabling you to make tax-free withdrawals in retirement Plus, offering your employees matching, profit-sharing, or safe harbor contributions may mean that you can increase your own personal contributions. That’s because, due to the mechanics of discrimination testing, higher 401(k) contributions made by non-highly compensated employees may help to increase allowable contributions for highly compensated employees. Learn more now. Reward your employees (and improve your company’s productivity) In addition to helping retain existing employees, a match is a powerful recruitment tool. In fact, a recent Betterment for Business study found that, for more than 45 percent of respondents, an employer’s decision to offer a 401(k) match was a factor in whether or not they took the job. Plus, you’d be surprised at the hidden costs of not offering an employer contribution. Just look at employee replacement and retention costs. When employers do not help facilitate employee retirement planning, they may be surprised by other costs that could rise, including higher relative salaries (beyond what might have been planned for), higher healthcare costs, or costs associated with loss of productivity. If the connection seems hard to believe, take a look at the research. According to a study from Prudential, every year an employee delays their retirement, it can cost their employer more than $50,000 due to a combination of factors including higher relative salaries, higher health care costs, younger employee retention through promotion, and several other elements. For companies that may be less concerned with an aging employee population, forgoing matches can still contribute to rising retention and replacement costs due to the impact of financial distress on employee performance. In a survey by the Society for Human Resource Management (SHRM), which measured the impact of personal financial stress on employee performance, 47% of HR professionals noticed that employees struggle with their “ability to focus on work.” Poor productivity not only costs the business in output, but can inevitably lead to higher employee turnover, which can lead to higher costs associated with retention and hiring. Make a smart compensation decision Are you debating between giving employees a raise and offering them a 401(k) plan contribution? Consider this example using $3,000. A $3,000 increase in base pay will mean a net increase to the employee of just $2,250, assuming 25% in income taxes and FICA combined. For the employer, that increase will cost $2,422.12, after FICA adjusted for a 25% in income tax rate. Employee Income After-Tax Employer Net Cost $3,000.00 Increased Pay $3,000.00 Increased Payroll ($750.00) Taxes @ 25% $229.50 FICA @ 7.65% ($807.38) Tax Deduction @ 25% $2,250.00 Net Paycheck $2,422.12 Net Cost Alternatively, a $3,000 contribution to an employer-sponsored 401(k) plan results in no FICA for either the employee or the employer. The employee would receive the full benefit of that $3,000 today on a pre-tax basis PLUS it would grow tax-free until retirement. As the employer, your tax deduction on that 401(k) contribution would be $750, meaning your cost is just $2,250 —or 7% less than if you had provided a $3,000 salary increase. Betterment can help boost tax savings even more... After you set up your 401(k) plan with Betterment, your employees can start investing for retirement and save on current taxes if they decide to save on a pre-tax basis. But Betterment provides additional tax saving strategies for those employees with two or more Betterment account types (including pre-tax 401(k) and Roth 401(k), but also a retail account) can have their investments optimized by using our Tax Coordination feature at no additional cost. This strategy generally places your least tax-efficient assets in your tax-advantaged accounts (like pre-tax 401(k)s), which already have big tax breaks, while diverting the most tax-efficient assets to your taxable accounts. …And help you take care of the paperwork You may be wondering: “Do I need to report 401(k) contributions?” The answer is “yes.” Specifically, employees’ contributions must be reported on their Form W2, Wage and Tax Statement, and Form W-3, Transmittal of Wage & Tax Statement. In addition, under the Employee Retirement Income Security Act of 1974 (ERISA), you are required to fulfill specific 401(k) plan reporting requirements, which include detailing employer and employee 401(k) contributions. While the paperwork can be complicated, an experienced 401(k) provider like Betterment can guide you through the process. Take the next step If you’re ready to get started, Betterment makes it easy for you to offer your employees a better 401(k) at a fraction of the cost of most providers. As your full-service 401(k) partner, we can help you: Design a plan with compelling features like automatic enrollment and employer contributions Select and monitor plan investments (Betterment assumes full responsibility as a 3(38) investment manager) Offer your employees personalized guidance to help them make strides toward their long- and short-term goals ranging from saving for retirement to paying down debt Manage important compliance and reporting requirements A Betterment 401(k) plan could be better for you—and better for your employees. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
Important 401(k) Compliance Dates and Deadlines
This chart will help you stay informed of important dates and deadlines associated with ...
Important 401(k) Compliance Dates and Deadlines This chart will help you stay informed of important dates and deadlines associated with your 401(k) plan. Offering a 401(k) plan has many benefits - for your organization as well as for your employees! Administering said 401(k) can be tricky though, and plan sponsors have several responsibilities to keep their plan operating in compliance with federal regulations. Thankfully, Betterment is here to help. Some tasks are handled by Betterment, but others need to be done by the plan sponsor. This chart provides you with important dates and deadlines associated with administering your plan for the 2021 and 2022 calendar years. Date Responsibility For 2021 Plan Year For 2022 Plan Year Jan 13, 2022 Betterment & Plan Sponsor Betterment loads prior year census template and compliance questionnaire to Compliance Hub. Action Item: Plan Sponsor completes census template and compliance questionnaire. Jan 31, 2022 Betterment IRS Forms 1099-R available to participants. Jan 31, 2022 Plan Sponsor Action Item: Deadline to submit prior year census data and compliance questionnaire to Compliance Hub. Feb 10, 2022 Betterment Annual Return of Withheld Federal Income Tax (Form 945) due. Feb 14, 2022 Betterment Deadline to send quarterly participant statements (typically sent within a few days of quarter end). Mar 1, 2022 Plan Sponsor Deadline for Plan Sponsors to report employees who participated in multiple plans that have excess deferrals (402(g) excess) to Betterment. Mar 15, 2022 Betterment & Plan Sponsor Deadline for refunds to participants for failed ADP/ACP tests(s). Action Item: Plan Sponsor to approve corrective action by this date. Failure to meet this deadline could result in a 10% tax penalty for plan sponsors. Mar 15, 2022 Plan Sponsor Employer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for incorporated entities. Mar 15, 2022 Plan Sponsor Deadline for S-Corps and Partnerships to establish traditional (non-Safe Harbor) plan for the prior tax year unless tax deadline extended. Apr 1, 2022 Plan Sponsor Action Item: Deadline to confirm that Initial Required Minimum Distributions (RMDs) were taken by participants who turned 72 before previous year-end, are retired/terminated and have a balance. Apr 15, 2022 Plan Sponsor Employer contributions (e.g., profit sharing, match, safe harbor) due for deductibility for LLCs, LLPs, sole proprietorships (unincorporated entities). Apr 15, 2022 Plan Sponsor Deadline for C-Corps and Sole Props to establish traditional (non-SH) plan for the prior tax year unless tax deadline extended. Apr 15, 2022 Betterment Deadline to complete corrective distributions for 402(g) excess deferrals. May 15, 2022 Betterment Deadline to send quarterly participant statements (typically sent within a few days of quarter end). Jun 30, 2022 Betterment Deadline for EACA plan refunds to participants for failed ADP/ACP tests(s). Failure to meet this deadline could result in a 10% tax penalty for plan sponsors. Jul 29, 2022 Plan Sponsor Deadline to distribute Summary of Material Modifications (SMM) to participants (only if plan was amended). Jul 31, 2022 Betterment & Plan Sponsor Cycle 3 DC plan restatement deadline. Betterment to prepare plan documents for execution. Action Item: Deadline for Plan Sponsor to electronically sign restated document. Aug 1, 2022 Betterment & Plan Sponsor Deadline to electronically submit Form 5500 (and third-party audit if applicable) OR request an extension (Form 5558). Betterment to prepare Forms. Action Item: Plan Sponsor required to file electronically. Aug 1, 2022 Plan Sponsor For new plans only: Deadline to sign with Betterment to establish a new safe harbor plan for 2022. Deferrals must be started by 10/1/22. Aug 14, 2022 Betterment Deadline to send quarterly participant statements (typically sent within a few days of quarter end). Sep 15, 2022 Plan Sponsor Deadline for S-Corps and Partnerships to establish traditional (non-SH) plan for the prior tax year if tax deadline extended. Sep 30, 2022 Plan Sponsor Action Item: Deadline to distribute Summary Annual Report (SAR) to participants and beneficiaries (unless Form 5500 extension filed; deadline to distribute will be December 15). Oct 1, 2022 Plan Sponsor Deadline to establish a new safe harbor 401(k) plan. The plan must have deferrals for at least 3 months to be safe harbor for this plan year. Oct 15, 2022 Plan Sponsor Deadline for C-Corps and Sole Props to establish traditional (non-SH) plan for the prior tax year if tax deadline extended. Oct 17, 2022 Plan Sponsor Deadline to electronically submit Form 5500 (and third-party audit if applicable) if granted a Form 5558 extension. Betterment to prepare Forms. Action Item: Plan Sponsor required to file electronically. Nov 2, 2022 Plan Sponsor Deadline to notify SIMPLE IRA participants their plan will terminate December 31 in order to adopt a new 401(k) plan for 2023. One company cannot sponsor a SIMPLE IRA and a 401(k) plan at the same time. Nov 14, 2022 Betterment Deadline to send quarterly participant statements (though typically sent within a few days of quarter end). By Dec 1, 2022 Betterment & Plan Sponsor Annual Notices (listed below) prepared by Betterment and sent to Plan Sponsor. Action Item: Plan Sponsor to Disseminate paper copies if required. Dec 1, 2022 Plan Sponsor If applicable, deadline to distribute to participants for 2023 plan year: - Safe harbor notice - Qualified default investment alternative (QDIA) notice - Automatic enrollment notice Dec 1, 2022 Plan Sponsor Deadline to execute amendment to make traditional plan a 3% safe harbor nonelective plan for the 2022 plan year. Dec 1, 2022 Plan Sponsor Deadline to execute amendment to make a traditional plan a safe harbor match plan for the 2023 plan year. Dec 15, 2022 Plan Sponsor Action Item: Deadline to distribute Summary Annual Report (SAR) to participants, if granted a Form 5558 extension. Dec 31, 2022 Plan Sponsor Deadline to distribute ADP/ACP refunds for the prior year; a 10% excise will apply Deadline to fund a QNEC for plans that failed ADP/ACP compliance testing. Deadline to execute amendment to make traditional plan a 4% safe harbor nonelective plan for the 2021 plan year. Dec 31, 2022 Plan Sponsor Deadline to make safe harbor and other employer contributions for 2021 plan year. Dec 31, 2022 Plan Sponsor Action Item: Deadline for Annual Required Minimum Distributions (RMDs). -
ESG Investments in 401(k) Plans: Part 2
The new DOL proposal provides clarity with ESG investing.
ESG Investments in 401(k) Plans: Part 2 The new DOL proposal provides clarity with ESG investing.In the beginning of 2021, we discussed the US Department of Labor (DOL)’s “final rule” entitled “Financial Factors in Selecting Plan Investments,” pertaining to ESG (environmental, social, governance) investments within a 401(k) plan. In March, the DOL under the Biden administration stated that they were not going to enforce the previous administration’s rule until they had completed their own review. Most recently, the Biden DOL released its own proposal, reworking parts of the rule to be more favorable to the inclusion of ESG investments within 401(k)s and clarifying areas that had a chilling effect on fiduciaries performing their responsibilities. So what’s changed? 2020 Rule New Proposal Evaluating investments Investment choices must be based on “pecuniary” factors, which include time horizon, diversification, risk, and return. Clarifies that ESG factors are permissible and are financially material in the consideration of investments. Qualified default investment alternative (QDIA) Cannot select investment based on one or more non-pecuniary factors. ESG factors are permissible, allowing the possibility of wider adoption of ESG funds and portfolios. Tie-breaker test (when deciding between investments) Non-financial factors such as ESG are permissible. However, they must have detailed documentation. Permitted to select investments based on “collateral benefits” such as ESG. Where collateral benefits form the basis for investment choice, disclosure of collateral benefits required. Detailed tie-breaker documentation not required. Proxy voting Fiduciaries are not required to vote every proxy or exercise every shareholder right. Revised language stresses the importance of proxy voting in line with fiduciary obligations. Special monitoring for proxy voting when outsourcing responsibilities. Proxy voting activities must be recorded. Additional special monitoring is not required. Removal of record keeping of proxy activities. Safe harbors: a fiduciary can choose not to vote proxy if (a) the proposal is related to business activities or investment value (b) percentage ownership or the proposal being voted on is not significant enough to materially impact. Removal of safe harbors. Voting to further political or social causes “that have no connection to enhancing the economic value of the plan's investment” through proxy voting or shareholder activism is a violation. Opens the door to ESG factors when voting proxies as under the proposed rule that they are economically material. Why is this important? Under the new proposal, the DOL clarifies that “climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.” Under the previous rule, many ESG factors would not count as a “pecuniary” factor. However, in actuality ESG factors have a high likelihood of impacting financial performance in the long run. For example, climate change can shift environmental conditions, force companies to transition and adapt to these shifts, lead to disruptions in business cycles and new innovations, and ultimately be a material financial risk over time when a company declines from failing to adapt. For retirement plans, the DOL’s revised proposal acknowledges that ESG risks could be important to consider when reviewing investments for strategic portfolio construction. Driving impact through ESG investing and proxy voting works. We’ve seen this concept in action with Engine No.1 winning three ExxonMobil board seats in a six month long proxy battle. The change in having three new board members that are conscious of climate change and favor transitioning away from fossil fuels will benefit the company in the long term as renewable energy grows in prominence. After its successful proxy battle with Exxon, Engine No. 1 reported cordial discussions with representatives of Chevron Corp. regarding the company’s emissions reduction strategy, and also has reportedly built a stake in General Motors and expressed support for GM’s management actions relating to increased electric vehicle production and GM’s long-term strategy. Ernst & Young also published data showing an increasing trend of how more Fortune 100 companies are incorporating ESG initiatives into proxy statements. For example, 91% disclosed they are incorporating workplace diversity into their initiatives in 2021 versus 61% in 2020. Demand for ESG products will continue We believe demand for ESG-focused investing will continue to grow, and it is important that regulations are clarified to accommodate this trend. Bloomberg projects that global assets in ESG will exceed $50 trillion by 2025, which is significant as it will represent a third of projected global assets under management. In the US, $17 trillion is invested in ESG assets. Trends within ESG ETFs tell the same story where fund flows this year have increased by more than 1000% compared to flows seen just three years ago. How Betterment incorporates ESG investing in 401(k) plans At Betterment, we believe investing through an ESG lens matters, especially within 401(k) plans which tend to have a longer time horizon. We’ve found many ways to thoughtfully weave ESG investing into our portfolio strategies. Betterment has a 10+ years track record of constructing globally diversified portfolios, along with a history of implementing ESG investment strategies in 401(k)s using our Socially Responsible Investing (SRI) portfolios. The SRI portfolios come in three different flavors: Broad Impact, Social Impact, and Climate Impact. Each of these portfolios allow our clients to choose how they want to invest to best align their portfolio with their values. Perceptions of higher fees in the ESG investment space has been a misconception that has historically posed an obstacle to the adoption of pro-ESG regulation. Expense ratios of ESG ETFs have declined to 0.20%, which is low compared to the 0.53% average expense ratio of all ETFs in the US. Within Betterment’s SRI portfolios, and depending on the investor’s overall portfolio allocation to stocks relative to bonds, the asset weighted expense ratios of the Broad Impact, Social, and Climate portfolios range from 0.12-0.18%, 0.13-0.20%, 0.13-0.20% respectively. Another misconception is that in order to adopt ESG investing, you have to sacrifice performance goals. As a 3(38) investment fiduciary, Betterment reviews fund selection on an ongoing basis to ensure we’ve performed our due diligence in selecting investments suitable for participants' desired investing objectives. To determine if there were in fact any financial tradeoffs associated with an SRI portfolio strategy relative to the Betterment Core, we examined evidence based on both historical and forward-looking returns. When adjusting for the stock allocation level and Betterment fees, we found that: There were no material performance differences The portfolios were highly correlated overall Over certain time horizons the SRI portfolios actually outperformed the Betterment Core portfolio In the table below, we compare the equity ESG ETFs that we invest in our Broad Impact portfolio and the broad market capitalization weighted equity ETFs that we invest in our Core portfolio strategy. ETF Ticker ETF Fund Name Exposure 3 months 6 months Year to Date 1 Year 3 Years* Since Common Inception Period* (12/23/2016) ESGU iShares ESG Aware MSCI USA ETF US ESG 0.28% 8.99% 15.35% 30.60% 17.19% 17.37% VTI Vanguard Total Stock Market ETF US -0.06% 8.21% 15.18% 32.09% 16.00% 16.50% ESGD iShares ESG Aware MSCI EAFE ETF International Developed ESG -0.79% 4.55% 8.15% 26.05% 8.12% 10.03% VEA Vanguard FTSE Developed Markets ETF International Developed -1.52% 4.08% 8.26% 26.60% 8.19% 10.08% ESGE iShares ESG Aware MSCI EM ETF Emerging Markets ESG -7.98% -2.78% -0.79% 19.04% 9.65% 11.87% VWO Vanguard FTSE Emerging Markets ETF Emerging Markets -6.94% -2.14% 1.37% 18.47% 9.63% 10.58% Source: Bloomberg, Betterment as of 9/30/2021. Market performance information is based on the returns of ETFs tracked by Betterment, using returns data from Bloomberg, for the time periods ending in 9/30/2021. Fund-level fees are included in each ETF return and dividends are assumed to be reinvested in the fund from which the dividend was distributed. Performance is provided for illustrative purposes to compare broad market ETFs to the ESG ETFs that are used in some of the Betterment Socially Responsible Investing (SRI) portfolios. The ETF performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used in the Betterment SRI portfolios will differ from the performance of the returns reflected here.*Periods longer than 1 year are annualized. Our forward-looking analysis does not provide any basis for concluding that, over the long term, there will be a meaningful difference in performance between our SRI and Betterment Core portfolios. You can read about our full methodology and performance testing in our SRI Portfolios white paper. Another example of how we’ve incorporated ESG impact investing is through the addition of the Engine No. 1 Transform 500 ETF (VOTE) into all three of our SRI portfolio strategies last quarter. With VOTE ETF, you can still maintain exposure to the 500 largest companies within the US at an inexpensive expense ratio of 0.05%. That may seem counterintuitive since it mirrors owning the S&P 500 Index, however the magic happens behind the scenes as the fund manager uses share ownership to vote proxies in favor of ESG initiatives. This is a new form of shareholder activism and another way performance goals, exposure, and fees do not have to be sacrificed to make a difference. What’s next? We are hopeful that ease of interpretation with this rule may allow wider adoption of ESG products as investment options and may lead to greater incorporation of ESG factors in the decision making process as we do believe they are material. This has been a focus of Betterment’s as we seek to remain ahead of the trend with our product solutions. The public comment period for the proposed rule begins Thursday, Oct. 14 and will close on Dec. 13. We will continue to monitor ongoing developments and keep you informed. Note: Higher bond allocations in your portfolio decrease the percentage attributable to socially responsible ETFs. -
What are New Comparability Profit Sharing Plans?
This plan design gives small business owners significant flexibility when it comes to ...
What are New Comparability Profit Sharing Plans? This plan design gives small business owners significant flexibility when it comes to profit sharing contribution allocations. To retain their tax-qualified status, 401(k) plans are prohibited from discriminating in favor of key owners, officers, and highly compensated employees. Some small businesses that want to help their employees save for retirement may put off offering profit sharing contributions due to the financial burden of a “pro-rata” allocation compared to what the owners might get. For these types of small businesses, a specific profit sharing plan design may provide the solution. Called new comparability, it allows businesses to remain in compliance while making larger contributions to its older participants, typically owners and highly compensated employees. A Different Testing Approach Most profit sharing plans (i.e., pro rata, integrated plans), are deemed to pass nondiscrimination automatically using the safe harbor approach, while new comparability plans are required to pass the general test to prove its not discriminating against non-highly compensated employees. New comparability allows employees to be segmented into more groups so that owners can be considered separately from, say, non-owner HCEs. In addition, testing is based on projected benefits at retirement that are derived from contributions, rather than on the contributions themselves. This “cross-testing” is a bit of a hybrid approach whereby the 401(k) (a defined contribution plan) is tested as if it were a traditional pension (i.e., defined benefit) plan. Plans using this method are able to pass testing and be compliant because younger NHCEs have more time until retirement, and so their projected benefit based on lower contributions falls within an acceptable range of the projected benefit of older HCEs receiving a larger contribution. Using the new comparability plan design, a plan could, for instance, make 401(k) contributions of 10% to owners and 6% to NHCEs. Or contribute 10% to one owner, 8% to another owner, and 5% to NHCEs. Minimum “gateway requirement” To take advantage of the new comparability profit sharing plan design, the contribution to all NHCEs must be a minimum of: One-third of the highest contribution rate given to any HCE; or 5% of the participants gross compensation Firms Well-Suited to New Comparability The new comparability profit sharing plan design is a good solution for companies with fewer than 50 employees that have a group of older owners and/or HCEs that are important to the success of their organization. Companies that tend to implement this design feature include: Law Firms Medical Practices Accounting Firms Service Companies Plan sponsors interested in this feature can include the profit sharing contribution in their plan documents as discretionary, meaning they are never obligated to make a contribution in any given year. This is helpful, too, since your employee demographics will likely change from year to year and so may your profit sharing allocation decisions. In addition to the benefits that a retirement plan provides to employees, profit sharing plans provide real benefits to small business owners. Profit sharing contributions are tax deductible and not subject to payroll taxes (e.g. FICA). The new comparability profit plan design gives small business owners significant flexibility to offer a 401(k) that meets the needs of their organization. -
Helping Latinx Employees With Their Unique Retirement Needs
Support Latinx employees this Hispanic American Heritage Month—learn about their unique ...
Helping Latinx Employees With Their Unique Retirement Needs Support Latinx employees this Hispanic American Heritage Month—learn about their unique challenges when saving for retirement. National Hispanic American Heritage Month spans from September 15 through October 15 and, as a part of this month of recognition, we asked ourselves at Betterment for Business: "What are the unique challenges facing Latinx-American employees today? How can we learn about these challenges and address them as a part of our ongoing effort to promote Diversity, Equity and Inclusion at Betterment?" It turns out that not only do Latinx-Americans—the largest ethnic group in the U.S.—have disproportionately low retirement savings, but they also have disproportionately low access to savings. Plus gender and age also play a factor. For employers committed to building out a financial wellness program that helps all employees, understanding the intersectional issues and how Latinx employees have unique needs and challenges is key. In this article, we’ll cover three important learnings that can help inform your wellness programs, and build support for Latinx employees during this National Hispanic American Heritage Month and beyond. Latinx Employee Savings Lag Behind White Employees According to a 2018 report by Unidos US and the National Institute of Retirement Security, “four out of five Latino households have less than $10,000 in retirement savings, compared to one out of two White households.” And when comparing otherwise similar White and Latino households, researchers also found that “69% of working Latinos do not own any assets in a retirement account, compared to 37% of White households.” When Latino families are saving for retirement, they are saving significantly less money than their White counterparts. That said, younger Latinxs are eager to save. For example, they are 25% more likely to own an investment property than non-Hispanic White households, according to the Hispanic Wealth Project. Encourage Latinx employees to continue to diversify their investments and to set aside retirement savings in addition to their other assets—especially if you offer an employer-sponsored match that can help them reach their goals even faster. Access to Employer-Sponsored Retirement Plans is Also an Issue For Latinx-Americans, access to retirement-sponsored retirement plans is “significantly” lower than it is for White workers. Overall, about 31% of Latinx workers participate in a retirement plan, compared to 53% of White workers. But, to put this into further context, when Latinxs have access and are eligible to participate in a plan, “they show slightly higher take-up rates when compared to other races and ethnicities.” In other words, when a retirement plan is offered, Latinxs are more likely to take advantage, but they are significantly less likely to have that access in the first place. As such, Latinx-Americans, particularly younger populations, feel the pressure of providing a social safety net to their families and loved ones. They are 77% more likely to live in multi-generational households than non-Hispanic White households and, when surveyed, one half agreed that it was more important to help friends and family members now than to save for their own retirement. It is important to offer a full-picture financial wellness solution that helps to address the unique needs of Latinx workers, which can include planning for the retirement of their loved ones or investing in additional real estate for their growing families. Older Women are Disproportionately Affected More than one in five Latinx women over the age of 65 live in poverty. And without the income from work, this population would not be able to meet the cost of basic living expenses. Separately, Black and Latinx women make up a disproportionate share of domestic workers, with Latinx women making up over 29% of domestic workers as compared to only 17% of all other workers. Only 19% of domestic workers have access to health or retirement benefits, compared to 49% of other workers. COVID-19 exacerbated this disparity. According to the UN, domestic workers were particularly vulnerable to the economic effects of COVID-19 globally, causing 46% of Latinx survey respondents (compared to 42% of non-Hispanic Whites) to draw from their savings to cover expenses since the beginning of the pandemic. Consider your employee population and how factors like the pandemic may have affected them and the members of their household. Offer financial planning services and remind them that it’s never too late to get started with their savings, debt repayment, or other financial goals. -
Plan Design Matters
Thoughtful 401(k) plan design can help motivate even reluctant retirement savers to start ...
Plan Design Matters Thoughtful 401(k) plan design can help motivate even reluctant retirement savers to start investing for their future. Designing a 401(k) plan is like building a house. It takes care, attention, and the help of a few skilled professionals to create a plan that works for both you and your employees. In fact, thoughtful plan design can help motivate even reluctant retirement savers to start investing for their future. How to tailor a 401(k) plan you and your employees will love As you embark on the 401(k) design process, there are many options to consider. In this article, we’ll take you through the most important choices so you can make well-informed decisions. Since certain choices may not be available on the various pricing models of any given provider, make sure you understand your options and the trade-offs you’re making. Let’s get started! 401(k) eligibility When would you like employees to be eligible to participate in the plan? You can opt to have employees become eligible: Immediately – as soon as they begin working for your company After a specific length of service – for example, a period of hours, months, or years of service It’s also customary to have an age requirement (for example, employees must be 18 years or older to participate in the plan). Plus, you may want to add an “employee class exclusion” to prevent part-time, seasonal, or temporary employees from participating in the plan. Once employees become eligible, they can immediately enroll – or, you can restrict enrollment to a monthly, quarterly, or semi-annual basis. If you have immediate 401(k) eligibility and enrollment, in theory, more employees could participate in the plan. However, if your company has a higher rate of turnover, you may want to consider adding service length requirements to alleviate the unnecessary administrative burden of having to maintain many small accounts of employees who are no longer with your organization. Enrollment Enrollment is another important feature to consider as you structure your plan. You may simply allow employees to enroll on their own, or you can add an automatic enrollment feature. Automatic enrollment (otherwise known as auto-enrollment) allows employers to automatically deduct elective deferrals from employees’ wages unless they elect not to contribute. With automatic enrollment, all employees are enrolled in the plan at a specific contribution rate when they become eligible to participate in the plan. Employees have the freedom to opt out and change their contribution rate and investments at any time. As you can imagine, automatic enrollment can have a significant impact on plan participation. 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. If you decide to elect automatic enrollment, consider your default contribution rate carefully. A 3% default contribution rate is still the most popular; however, more employers are electing higher default rates because research shows that opt-out rates don’t appreciably change even if the default rate is increased. Many financial experts recommend a savings rate of at least 10%, so using a higher automatic enrollment default rate gets employees even more of a head start. Auto-escalation Auto-escalation is an important feature to look out for as you design your plan. It enables employees to increase their contribution rate over time as a way to increase their savings. With auto-escalation, eligible employees will automatically have their contribution rate increased by 1% every year until they reach a maximum cap of 15%. Employees can also choose to set their own contribution rate at any time, at which point they will no longer be enrolled in the auto-escalation feature. For example, if an employee is auto-enrolled at 6% with a 1% auto-escalation rate, and they choose to change their contribution rate to 8%, they will no longer be subject to the 1% increase every year. Compensation You’re permitted to exclude certain types of compensation for plan purposes, including compensation earned prior to plan entry and fringe benefits for purposes of compliance testing and allocating employer contributions. You may choose to define your compensation as: W2 (box 1 wages) plus deferrals – Total taxable wages, tips, prizes, and other compensation 3401(a) wages – All wages taken into account for federal tax withholding purposes, plus the required additions to W-2 wages listed above Section 415 Safe Harbor – All compensation received from the employer which is includible in gross income Employer contributions Want to encourage employees to enroll in the plan? Free money is a great place to start! That’s why more employers are offering profit sharing or matching contributions. In fact, EBRI and Greenwald & Associates’ found that nearly 73% of workers said they were likely to save for retirement if their contributions were matched by their employer. Some of the more common employer contributions are: Safe harbor contributions – With the added bonus of being able to avoid certain time-consuming compliance tests, safe harbor contributions often follow one of these formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. Discretionary matching contributions – You decide what percentage of employee 401(k) deferrals to match and the maximum percentage of pay to match. For example, you could elect to match 50% of contributions on up to 6% of compensation. One advantage of having a discretionary matching contribution is that you retain the flexibility to adjust the matching rate as your business needs change. Non-elective contributions – Each pay period, you have the option of contributing to your employees’ 401(k) accounts, regardless of whether they contribute. For example, you could make a profit sharing contribution (one type of non-elective contribution) at the end of the year as a percentage of employees’ salaries or as a lump-sum amount. In addition to helping your employees build their retirement nest eggs, employer contributions are also tax deductible (up to 25% of total eligible compensation), so it may cost less than you think. Plus, offering an employer contribution can play a key role in recruiting and retaining top employees. In fact, a Betterment for Business study found that more than 45% of respondents considered a 401(k) match to be a factor when deciding whether to accept a job. 401(k) vesting If you elect to make an employer contribution, you also need to decide on a vesting schedule (an employee’s own contributions are always 100% vested). Note that all employer contributions made as part of a safe harbor plan are immediately and 100% vested. The three main vesting schedules are: Immediate – Employees are immediately vested in (or own) 100% of employer contributions as soon as they receive them. Graded – Vesting takes place in a gradual manner. For example, a six-year graded schedule could have employees vest at a rate of 20% a year until they are fully vested. Cliff – The entire employer contribution becomes 100% vested all at once, after a specific period of time. For example, if you had a three-year cliff vesting schedule and an employee left after two years, they would not be able to take any of the employer contributions (only their own). Like your eligibility and enrollment decisions, vesting can also have an impact on employee participation. Immediate vesting may give employees an added incentive to participate in the plan. On the other hand, a longer vesting schedule could encourage employees to remain at your company for a longer time. Service counting method If you decide to use length of service to determine your eligibility and vesting schedules, you must also decide how to measure it. Typically, you may use: Elapsed time – Period of service as long as employee is employed at the end of period Actual hours – Actual hours worked. With this method, you’ll need to track and report employee hours Actual hours/equivalency – A formula that credits employees with set number of hours per pay period (for example, monthly = 190 hours) 401(k) withdrawals and loans Naturally, there will be times when your employees need to withdraw money from their retirement accounts. Your plan design will have rules outlining the withdrawal parameters for: Termination In-service withdrawals (at attainment of age 59 ½; rollovers at any time) Hardships Qualified Domestic Relations Orders (QDROs) Required Minimum Distributions (RMDs) Plus, you’ll have to decide whether to allow participants to take 401(k) plan loans (and the maximum amount of the loan). While loans have the potential to derail employees’ retirement dreams, having a loan provision means employees can access their money if they need it and employees can pay themselves back plus interest. If employees are reluctant to participate because they’re afraid their savings will be “locked up,” then a loan provision can help alleviate that fear. Investment options When it comes to investment methodology, there are many strategies to consider. Your plan provider can help guide you through the choices and associated fees. For example, at Betterment, we believe that ETFs offer investors significant diversification and flexibility at a low cost. Plus, we offer ETFs in conjunction with personalized, unbiased advice to help today’s retirement savers pursue their goals. Get help from the experts Your 401(k) plan provider can walk you through your plan design choices and help you tailor a plan that works for your company and your employees. Once you’ve settled on your plan design, you will need to codify those features in the form of a formal plan document to govern your 401(k) plan. At Betterment, we draft the plan document for you and provide it to you for review and final approval. Your business is likely to evolve—and your plan design can evolve, too. Drastic increase in profits? Consider adding an employer match or profit sharing contribution to share the wealth. Plan participation stagnating? Consider adding an automatic enrollment feature to get more employees involved. Employees concerned about access to their money in an uncertain world? Consider adding a 401(k) loan feature. Need a little help figuring out your plan design? Talk to Betterment. Our experts make it easy for you to offer your employees a better 401(k) quickly and easily—all for a fraction of the cost of most providers. -
401(k) Considerations for Highly Compensated Employees
Help ensure your 401(k) plan benefits every employee – from senior executives to ...
401(k) Considerations for Highly Compensated Employees Help ensure your 401(k) plan benefits every employee – from senior executives to entry-level workers. Read on for more information. Smart savers 401(k) considerations for highly compensated employees A 401(k) plan should help every employee – from senior executives to entry-level workers – save for a more comfortable future. To help ensure highly compensated employees (HCEs) don’t gain an unfair advantage through the 401(k) plan, the IRS implemented certain rules that all plans must follow. Wondering how to navigate these special considerations for HCEs? Read on for answers to commonly asked questions. 1. What is an HCE? According to the IRS, an HCE is an individual who: Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or Received compensation from the business of more than $130,000 (if the preceding year is 2020 or 2021), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation. 2. Why are there special considerations for HCEs? Does your plan offer a company match? If so, consider this example: Joe is a senior manager earning $200,000 a year. He can easily afford to max out his 401(k) plan contributions and earn the full company match (dollar-for-dollar up to 6%). Thomas is an entry-level administrative assistant earning $35,000 a year. He can only afford to contribute 2% of his paycheck to the 401(k) plan, and therefore, isn’t eligible for the full company match. Not only that, Joe can contribute more – and earn greater tax benefits – than Thomas. It doesn’t seem fair, right? The IRS doesn’t think so either. To ensure HCEs don’t disproportionately benefit from the 401(k) plan, the IRS requires annual compliance tests known as non-discrimination tests. 3. What is non-discrimination testing? In order to retain tax-qualified status, a 401(k) plan must not discriminate in favor of key owners and officers, nor highly compensated employees. This is verified annually by a number of tests, which include: Coverage tests – These tests review the ratio of HCEs benefitting from the plan (i.e., of employees considered highly compensated, what percent are benefiting) against the ratio of non-highly compensated employees (NHCEs) benefiting from the plan. Typically, the NHCE percentage benefiting must be at least 70% or 0.7 times the percentage of HCEs considered benefiting for the year, or further testing is required. These tests are performed across employee contributions, matching, and after-tax contributions, and non-elective (employer, non-matching) contributions. ADP and ACP tests – The Actual Deferral Percentage (ADP) Test and the Actual Contribution Percentage (ACP) Test help to ensure that HCEs are not saving significantly more than the employee base. The tests compare the average deferral (traditional and Roth) and employer contribution (matching and after-tax) rates between HCEs and NHCEs. Top-heavy test – A plan is considered top-heavy when the total value of the Key employees’ plan accounts is greater than 60% of the total value of the plan assets. (The IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.) 4. What if my plan doesn’t pass non-discrimination testing? You may be surprised to learn that it’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. If your plan fails, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! Not to mention the fact that you may upset several top employees, which could have a detrimental impact on employee satisfaction and retention. 5. How can I avoid this headache-inducing situation? If you want to bypass compliance tests, consider a safe harbor 401(k) plan. A safe harbor plan is like a typical 401(k) plan except it requires you to: Contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan Ensure the mandatory employer contribution vests immediately – rather than on a graded or cliff vesting schedule – so employees can always take these contributions with them when they leave To fulfill safe harbor requirements, you can elect one of the following employer contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. Want to contribute more? You absolutely can – the above percentages are only the minimum required of a safe harbor plan. 6. How can a safe harbor plan benefit my top earners? With a safe harbor 401(k) plan, you can ensure that your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing). 7. What are the upsides (and downsides) of a safe harbor plan? Beyond ensuring your HCEs can max out their contributions, a safe harbor plan can help you: Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future). Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve company productivity and profitability. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Bypass certain tests altogether by electing a safe harbor 401(k). Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan. Of course, these benefits come with a cost; specifically the expense of increasing your overall payroll by 3% or more. So be sure to evaluate whether your company has the financial capacity to make employer contributions on an annual basis. 8. Are there other ways for HCEs to save for retirement? If you decide against a safe harbor plan, you can always encourage your HCEs to take advantage of other retirement-saving avenues, including: Health savings account (HSA) – If your company offers an HSA – typically available to those enrolled in a high-deductible health plan (HDHP) – individuals can contribute up to $3,600, families can contribute up to $7,200, and employees age 55 or older can contribute an additional $1,000 in 2021. The key benefits are: Contributions are tax free, earnings grow tax-free, and funds can be withdrawn tax-free anytime they’re used for qualified health care expenses. The HSA balance carries over and has the potential to grow unlike a “use-it-or-lose-it” FSA. Once employees turn 65, they can withdraw money from an HSA for any purpose – not just medical expenses – without penalty. However, they will have to pay income tax, so they may want to consider reserving it for medical expenses in retirement. Traditional IRA – If employees make after-tax contributions to a traditional IRA, all earnings and growth are tax-deferred. For 2021, the IRA contribution maximum is $6,000 and employees age 50 or older can make an additional $1,000 catch-up contribution. Roth IRA – HCEs may still be eligible to contribute to a Roth IRA, since Roth IRAs have their own separate income limits. But even if an employee’s income is too high to contribute to a Roth IRA, they may be able to convert a Traditional IRA into a Roth IRA via the “backdoor” IRA strategy. To do so, they would make non-deductible contributions to their Traditional IRA, open a Roth IRA, and perform a Roth IRA conversion. This is a more advanced strategy, so for more information, your employees should consult a financial advisor. Taxable Account – A taxable account is a great way to save beyond IRS limits. If employees are maxed out their 401(k) and IRA and want to keep saving, they can invest extra cash in a taxable account. Want to learn more? Betterment can help. Helping HCEs navigate retirement planning can be a challenge. If you’re considering a safe harbor plan or want to explore new ways to enhance retirement savings for all your employees, talk to Betterment today. -
Everything You Need to Know About 401(k) Blackout Periods
Maybe you’ve heard of a 401(k) blackout period, but if you don’t know exactly what it is ...
Everything You Need to Know About 401(k) Blackout Periods Maybe you’ve heard of a 401(k) blackout period, but if you don’t know exactly what it is or how to explain it to your employees, read on. You’ve probably heard of a 401(k) plan blackout period – but do you know exactly what it is and how to explain it to your employees? Read on for answers to the most frequently asked questions about blackout periods. What is a blackout period? A blackout period is a time when participants are not able to access their 401(k) accounts because a major plan change is being made. During this time, they are not allowed to direct their investments, change their contribution rate or amount, make transfers, or take loans or distributions. However, plan assets remain invested during the blackout period. In addition, participants can continue to make contributions and loan repayments, which will continue to be invested according to the latest elections on file. Participants will be able to see these inflows and any earnings in their accounts once the blackout period has ended. When is a blackout period necessary? Typically, a blackout period is necessary when: 401(k) plan assets and records are being moved from one retirement plan provider to another New employees are added to a company’s plan during a merger or acquisition Available investment options are being modified Blackout periods are a normal and necessary part of 401(k) administration during such events to ensure that records and assets are accurately accounted for and reconciled. In these circumstances, participant accounts must be valued (and potentially liquidated) so that funds can be reinvested in new options. In the event of a plan provider change, the former provider must formally pass the data and assets to the new plan provider. Therefore, accounts must be frozen on a temporary basis before the transition. How long does a blackout period last? A blackout period usually lasts about 10 business days. However, it may need to be extended due to unforeseen circumstances, which are rare; but there is no legal maximum limit for a blackout period. Regardless, you must give advance notice to your employees that a blackout is on the horizon. What kind of notice do I have to give my employees about a blackout period? Is your blackout going to last for more than three days? If so, you’re required by federal law to send a written notice of the blackout period to all of your plan participants and beneficiaries. The notice must be sent at least 30 days – but no more than 60 days – prior to the start of the blackout. Typically, your plan provider will provide you with language so that you can send an appropriate blackout notice to your plan participants. If you are moving your plan from another provider to Betterment, we will coordinate with your previous recordkeeper to establish a timeline for the transfer, including the timing and expected duration of the blackout period. Betterment will draft a blackout notice on your behalf to provide to your employees, which will include the following: Reason for the blackout Identification of any investments subject to the blackout period Description of the rights otherwise available to participants and beneficiaries under the plan that will be temporarily suspended, limited, or restricted The expected beginning and ending date of the blackout A statement that participants should evaluate the appropriateness of their current investment decisions in light of their inability to direct or diversify assets during the blackout period If at least 30 days-notice cannot be given, an explanation of why advance notice could not be provided The name, address, and telephone number of the plan administrator or other individual who can answer questions about the blackout Who should receive the blackout notice? All employees with a balance should receive the blackout notice, regardless of their employment status. In addition, we suggest sending the notice to eligible active employees, even if they currently don’t have a balance, since they may wish to start contributing and should be made aware of the upcoming blackout period. What should I say if my employees are concerned about an upcoming blackout period? Reassure your employees that a blackout period is normal and that it’s a necessary event that happens when significant plan changes are made. Also, encourage them to look at their accounts and make any changes they see fit prior to the start of the blackout period. Thinking about changing plan providers? If you’re thinking about changing plan providers, but are concerned about the ramifications of a blackout period, worry no more. Switching plan providers is easier than you think, and Betterment is committed to making the transition as seamless as possible for you and your participants. -
Why You Should Have a 401(k) Committee and How to Create One
A 401(k) committee can help improve plan management and alleviate your administrative ...
Why You Should Have a 401(k) Committee and How to Create One A 401(k) committee can help improve plan management and alleviate your administrative burden. Are you thinking about starting a 401(k) plan or have a plan and are feeling overwhelmed with your current responsibilities? If you answered “yes” to either of these questions, then it might be time to create a 401(k) committee, which can help improve plan management and alleviate your administrative burden. Want to learn more? Read on for answers to frequently asked questions about 401(k) committees. 1. What is a 401(k) committee? A 401(k) committee, composed of several staff members, provides vital oversight of your 401(k) plan. Having a 401(k) committee is not required by the Department of Labor (DOL) or the IRS, but it’s a good fiduciary practice for 401(k) plan sponsors. Not only does it help share the responsibility so one person isn’t unduly burdened, it also provides much-needed checks and balances to help the plan remain in compliance. Specifically, a 401(k) committee handles tasks such as: Assessing 401(k) plan vendors Evaluating participation statistics and employee engagement Reviewing investments, fees, and plan design 2. Who should be on my 401(k) committee? Most importantly, anyone who serves as a plan fiduciary should have a role on the committee because they are held legally responsible for plan decisions. In addition, it’s a good idea to have: Chief Operating Officer and/or Chief Financial Officer Human Resources Director One or more members of senior management One or more plan participants Senior leaders can provide valuable financial insight and oversight; however, it’s also important for plan participants to have representation and input. Wondering how many people to select? It’s typically based on the size of your company – a larger company may wish to have a larger committee. To avoid tie votes, consider selecting an odd number of members. Once you’ve selected your committee members, it’s time to appoint a chairperson to run the meetings and a secretary to document decisions. 3. How do I create a 401(k) committee? The first step in creating a 401(k) committee is to develop a charter. Once documented, the committee charter should be carefully followed. It doesn’t have to be lengthy, but it should include: Committee purpose – Objectives and scope of authority, including who’s responsible for delegating that authority Committee structure – Number and titles of voting and non-voting members, committee roles (e.g., chair, secretary), and procedure for replacing members Committee meeting procedures – Meeting frequency, recurring agenda items, definition of quorum, and voting procedures Committee responsibilities – Review and oversight of vendors; evaluation of plan statistics, design and employee engagement; and appraisal of plan compliance and operations Documentation and reports – Process for recording and distributing meeting minutes and reporting obligations Once you’ve selected your committee members and created a charter, it’s important to train members on their fiduciary duties and impress upon them the importance of acting in the best interest of plan participants and beneficiaries. With a 401(k) committee, your plan should run more smoothly and effectively. -
Pros and Cons of OregonSaves for Small Businesses
Answers to frequently asked questions about the OregonSaves retirement program for small ...
Pros and Cons of OregonSaves for Small Businesses Answers to frequently asked questions about the OregonSaves retirement program for small businesses. Launched in 2017, OregonSaves was the first state-based retirement savings program in the country. Now, it has more than $100 million in assets. Even the smallest businesses are required to facilitate OregonSaves if they don’t offer an employer-sponsored retirement plan. In fact, the deadline for employers with four or fewer employees is targeted for 2022. If you’re wondering whether OregonSaves is the best choice for your employees, read on for answers to frequently asked questions. 1. Do I have to offer my employees OregonSaves? No. Oregon laws require businesses to offer retirement benefits, but you don’t have to elect OregonSaves. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is OregonSaves? OregonSaves is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, you must automatically enroll your employees into the program. Specifically, the Oregon plan requires employers to automatically enroll employees at a 5% deferral rate with automatic, annual 1% increases until their savings rate reaches 10%. All contributions are invested into a Roth IRA. As an eligible employer, you must facilitate the program, set up the payroll deduction process, and send the contributions to OregonSaves. The first $1,000 of an employee’s contributions will be invested in the OregonSaves Capital Preservation Fund, and savings over $1,000 will be invested in an OregonSaves Target Retirement Fund based on age. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. (They can also opt out of the annual increases.) 3. Why should I consider OregonSaves? OregonSaves is a simple, straightforward way to help your employees save for retirement. Brought to you by Oregon State Treasury, the program is overseen by the Oregon Retirement Savings Board and administered by a program service provider. As an employer, your role is limited and there are no fees to provide OregonSaves to your employees. 4. Are there any downsides to OregonSaves? Yes, there are factors that may may make OregonSaves less appealing than other retirement plans. Here are some important considerations: OregonSaves is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in OregonSaves. For example, single filers with modified adjusted 2021 gross incomes of more than $140,000 would not be eligible to contribute. However, 401(k) plans aren’t subject to the same income restrictions. OregonSaves is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—OregonSaves only allows after-tax (Roth) contributions. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to OregonSaves, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, OregonSaves does not. Limited investment options—OregonSaves offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer OregonSaves; however, employees do pay approximately $1 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of OregonSaves? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you can benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. It’s important to note that the proposed SECURE Act 2.0 may offer even more tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contribution limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with OregonSaves, that means more employee savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What action should I take now? If you decide that OregonSaves is most appropriate for your company, visit the website to register. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
Pros and Cons of Illinois Secure Choice for Small Businesses
Answers to frequently asked questions about the Illinois Secure Choice retirement program ...
Pros and Cons of Illinois Secure Choice for Small Businesses Answers to frequently asked questions about the Illinois Secure Choice retirement program for small businesses. Since it was launched in 2018, the Illinois Secure Choice retirement program has helped thousands of people in Illinois save for their future. If you’re an employer in Illinois, state laws require you to offer Illinois Secure Choice if you: Have 25 or more employees during all four quarters of the previous calendar year Have been in operation for at least two years Do not offer an employer-sponsored retirement plan If your company has recently become eligible for Illinois Secure Choice or you’re wondering whether it’s the best choice for your employees, read on for answers to frequently asked questions. 1. Do I have to offer my employees Illinois Secure Choice? No. Illinois laws require businesses with 25 or more employees to offer retirement benefits, but you don’t have to elect Illinois Secure Choice. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is Illinois Secure Choice? Illinois Secure Choice is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, you must automatically enroll your employees in the program. Specifically, the Illinois plan requires employers to automatically enroll employees at a 5% deferral rate, and contributions are invested in a Roth IRA. As an eligible employer, you must set up the payroll deduction process and remit participating employee contributions to the Secure Choice plan provider. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. 3. Why should I consider Illinois Secure Choice? Illinois Secure Choice is a simple, straightforward way to help your employees save for retirement. It’s administered by a private-sector financial services firm and sponsored by the State of Illinois. As an employer, your role is limited and there are no fees to offer Illinois Secure Choice. 4. Are there any downsides to Illinois Secure Choice? Yes, there are factors that may make Illinois Secure Choice less appealing than other retirement plans like 401(k) plans. Here are some important considerations: Illinois Secure Choice is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in Illinois Secure Choice. For example, single filers with modified adjusted gross incomes of more than $140,000 in 2021 would not be eligible to contribute. However, 401(k) plans aren’t subject to the same income restrictions. Illinois Secure Choice is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—Illinois Secure Choice only allows after-tax (Roth) contributions. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to Illinois Secure Choice, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, Illinois Secure Choice does not. Limited investment options—Illinois Secure Choice offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer Illinois Secure Choice; however, employees do pay approximately $0.75 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of Illinois Secure Choice? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. It’s important to note that the proposed SECURE Act 2.0 may offer even more tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contribution limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with Illinois Secure Choice, that means more employee savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What action should I take now? If you decide that Illinois Secure Choice is most appropriate for your company, visit the website to register. If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
A Guide to Safe Harbor 401(k) Plans
Stress less by setting up a Safe Harbor 401(k). You can bypass some of the tests and ...
A Guide to Safe Harbor 401(k) Plans Stress less by setting up a Safe Harbor 401(k). You can bypass some of the tests and focus on helping your employees save for their financial futures. “Your 401(k) plan failed.” Those words can strike fear in the hearts of even the most seasoned business owners. However, there’s a way to avoid the stress of your plan’s annual nondiscrimination testing. By setting up a safe harbor 401(k), you can bypass some of the tests, such as the ADP and ACP tests, and focus on helping your employees save for their financial futures. But is a safe harbor 401(k) right for your company? Read on for answers to frequently asked questions about safe harbor 401(k) plans. What is nondiscrimination testing? Before we explore safe harbor plans, let’s talk about nondiscrimination tests. Mandated by ERISA, these annual tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. The three main nondiscrimination tests are: Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs). Actual contribution percentage (ADC) test—Compares the average employer contributions received by HCEs and NHCEs. Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. (IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.] Why is it hard for 401(k) plans to pass nondiscrimination testing? It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. So, you may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. If you offer employees a safe harbor 401(k) plan, you can avoid these time-consuming, headache-inducing compliance tests. What is a safe harbor 401(k) plan? So, let’s back up for a minute. What exactly is a safe harbor 401(k) plan? Put simply, it’s a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company. To fulfill safe harbor requirements, you can elect one of the following general contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement. What are the benefits of a safe harbor 401(k) plan? At the end of the day, you want your employees to achieve the retirement they envision—and a safe harbor 401(k) plan can help them pursue it (while saving you time and effort). Consider these top five reasons to elect a safe harbor 401(k) plan: Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. In fact, a Betterment for Business study found that nearly half of respondents said a company match was a factor in whether or not they accepted a new job. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future). Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve your company’s productivity and profitability. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Skip the tests altogether by electing a safe harbor 401(k). Reward your top earners—With a safe harbor 401(k) plan, you can ensure that you and your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing). Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan. An ideal solution for small businesses If you’ve failed nondiscrimination testing in the past—or are concerned that your lower earning employees won’t participate in a 401(k) plan—a safe harbor plan may be the best solution for your small business. Get a safe harbor 401(k) plan that works for you and your employees. Start now. What are the key cost considerations of offering a safe harbor 401(k) plan? The main consideration is that safe harbor contributions could increase your overall payroll by 3% or more depending upon your participation rates and contribution formula. Therefore, it’s important to think about whether your company has the financial capacity to make employer contributions on an annual basis. The good news is that 401(k) plans—including those with safe harbor provisions—are more affordable than they have been in the past. In fact, providers like Betterment now offer comprehensive plan solutions at low costs. Learn more now. How do I set up a safe harbor 401(k) plan? If you’re thinking about setting up a safe harbor plan or adding a safe harbor match to your existing plan, here are a few safe harbor 401(k) rules you need to know: Starting a new plan—For calendar year plans, October 1 is the final deadline for starting a new safe harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts. So, if you’re mulling over a safe harbor plan, be sure to talk to your plan provider well in advance. Adding a safe harbor match to an existing plan—If you want to add a safe harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1. However, employees are required to receive a notice at least 30 days prior. Adding a safe harbor nonelective contribution to an existing plan—Thanks to the SECURE Act, plans that want to become a nonelective safe harbor plan have newfound flexibility. An existing plan can implement a 3% nonelective safe harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective safe harbor contribution of 4% or more have until the end of the following year in which the plan will become a safe harbor. Importantly, the SECURE Act eliminated the usual employee notice requirement for nonelective safe harbor plans. Communicating with employees—Every year, eligible employees need to be notified about their rights and obligations under your safe harbor plan (except for those with nonelective contributions, as noted in the previous bullet). Notice must be given at least 30 days, but no more than 90 days, before the beginning of the plan year. Want to learn more about notices? Visit the IRS website.A plan provider like Betterment will be able to assist you with everything you need to create the safe harbor 401(k) plan that’s right for your company. How do I select a safe harbor 401(k) plan provider? When it comes to choosing the right provider, it’s all about asking the right questions. Here’s how Betterment would answer them: Do you have experience setting up safe harbor 401(k) plans? Our team has significant experience working with safe harbor 401(k) plans. We help you understand each step of the onboarding process so you can start your plan quickly and easily. Plus, we have the expertise you need to handle every detail—from safe harbor 401(k) eligibility rules to investment options. How much does your service cost? Our fees are a fraction of the cost of most providers. Plus, we’re always fully transparent about fees so there are no surprises for you or your employees. How easy will it be for me to administer our plan on an ongoing basis? Our intuitive platform works to reduce your administrative burden. That means you’ll stay informed of what you need to do and when you need to do it—simplifying plan administration. Do you offer financial wellness support for employees? Our high-tech solution enables us to give employees holistic, personalized advice on everything from contribution rates to investments. Plus, we can link employees’ outside investments, savings accounts, IRAs, and spousal/partner assets, so they can get a big picture view of their long- and short-term financial goals. What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year? If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year! Betterment is not a tax advisor. Please consult a qualified tax professional. -
What Employers Should Know About Timing of 401(k) Contributions
One of the most important aspects of plan administration is making sure money is ...
What Employers Should Know About Timing of 401(k) Contributions One of the most important aspects of plan administration is making sure money is deposited in a timely manner—to ensure that employer contributions are tax-deductible and employee contributions are in compliance. Timing of employee 401(k) contributions (including loan repayments) When must employee contributions and loan repayments be withheld from payroll? This is a top audit issue for 401(k) plans, and requires a consistent approach by all team members handling payroll submission. If a plan is considered a ‘small plan filer’ (typically under 100 eligible employees), the Department of Labor is more lenient and provides a 7-business day ‘safe harbor’ allowing employee contributions and loan repayments to be submitted within 7 business days of the pay date for which they were deducted. If a plan is larger (>100 eligible employees), the safe harbor does not apply, and the timeliness is based on the earliest date a plan sponsor can reasonably segregate employee contributions from company assets. Historically, plans leaned on the outer bounds of the requirement (by the 15th business day of the month following the date of the deduction effective date), but today with online submissions and funding via ACH, a company would generally be hard-pressed to show that any deposit beyond a few days is considered reasonable. To ensure timely deposits, it’s imperative for plan sponsors to review their internal processes regularly. All relevant team members -- including those who may have to handle the process infrequently due to vacations or otherwise -- understand the 401(k) deposit process completely and have the necessary access. I am a self-employed business owner with income determined after year-end. When must my 401(k) contributions be submitted to be considered timely? If an owner or partner of a company does not receive a W-2 from the business, and determines their self-employment income after year-end, their 401(k) contribution should be made as soon as possible after their net income is determined, but certainly no later than the individual tax filing deadline. Their 401(k) election should be made (electronically or in writing) by the end of the year reflecting a percentage of their net income from self employment. Note that if they elect to make a flat dollar 401(k) contribution, and their net income is expected to exceed that amount, the deposit is due no later than the end of the year. Timing of employer 401(k) contributions We calculate and fund our match / safe harbor contributions every pay period. How quickly must those be deposited? Generally, there’s no timing requirement throughout the year for employer matching or safe harbor contributions. The employer may choose to pre-fund these amounts every pay period, enabling employees to see the value provided throughout the year and to benefit from dollar cost averaging. Note that plans that opt to allocate safe harbor matching contributions every pay period are required to fund this at least quarterly. When do we have to deposit employer contributions for year-end (e.g., true-up match or safe harbor deposits, employer profit sharing)? Employer contributions for the year are due in full by the company tax filing deadline, including any applicable extension. Safe harbor contributions have a mandatory funding deadline of 12 months after the end of the plan year for which they are due; but typically for deductibility purposes, they are deposited even sooner. -
Pros and Cons of CalSavers for Small Businesses
Answers to frequently asked questions about the CalSavers Retirement Savings Program
Pros and Cons of CalSavers for Small Businesses Answers to frequently asked questions about the CalSavers Retirement Savings Program The clock is ticking! By state law, businesses with 50 or more employees in California must provide a retirement program to their employees by June 30, 2021. And employers with five or more employees must provide a program by June 30, 2022. If you’re an employer in California, you must offer the CalSavers Retirement Savings Program—or another retirement plan such as a 401(k). Faced with this decision, you may be asking yourself: Which is the best plan for my employees? To help you make an informed decision, we’ve provided answers to frequently asked questions about CalSavers: 1. Do I have to offer my employees CalSavers? No. California laws require businesses with 50 or employees to offer retirement benefits, but you don’t have to elect CalSavers. If you provide a 401(k) plan (or another type of employer-sponsored retirement program), you may request an exemption. 2. What is CalSavers? CalSavers is a Payroll Deduction IRA program—also known as an “Auto IRA” plan. Under an Auto IRA plan, if you don’t offer a retirement plan, you must automatically enroll your employees into a state IRA savings program. Specifically, the CalSavers plan requires employers with at least five employees to automatically enroll employees at a 5% deferral rate with automatic annual increases, up to a maximum of 8%. As an eligible employer, you must withhold the appropriate percentage of employees’ wages and deposit it into the CalSavers Roth IRA on their behalf. Employees retain control over their Roth IRA and can customize their account by selecting their own contribution rate and investments—or by opting out altogether. 3. Why should I consider CalSavers? CalSavers is a simple, straightforward way to help your employees save for retirement. CalSavers is administered by a private-sector financial services firm and overseen by a public board chaired by the State Treasurer. As an employer, your role is limited to uploading employee information to CalSavers and submitting employee contributions via payroll deduction. Plus, there are no fees for employers to offer CalSavers, and employers are not fiduciaries of the program. 4. Are there any downsides to CalSavers? Yes, there are factors that may make CalSavers less appealing than other retirement plans. Here are some important considerations: CalSavers is a Roth IRA, which means it has income limits—If your employees earn above a certain threshold, they will not be able to participate in CalSavers. For example, single filers with modified adjusted gross incomes of more than $140,000 would not be eligible to contribute. If they mistakenly contribute to CalSavers—and then find out they’re ineligible—they must correct their error or potentially face taxes and penalties. However, 401(k) plans aren’t subject to the same income restrictions. CalSavers is not subject to worker protections under ERISA—Other tax-qualified retirement savings plans—such as 401(k) plans—are subject to ERISA, a federal law that requires fiduciary oversight of retirement plans. Employees don’t receive a tax benefit for their savings in the year they make contributions—Unlike a 401(k) plan—which allows both before-tax and after-tax contributions—CalSavers only offers after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until withdrawn and may eventually be tax-free. Contribution limits are far lower—Employees may save up to $6,000 in an IRA in 2021 ($7,000 if they’re age 50 or older), while in a 401(k) plan employees may save up to $19,500 in 2021 ($26,000 if they’re age 50 or older). So even if employees max out their contribution to CalSavers, they may still fall short of the amount of money they’ll likely need to achieve a financially secure retirement. No employer matching and/or profit sharing contributions—Employer contributions are a major incentive for employees to save for their future. 401(k) plans allow you the flexibility of offering employer contributions; however, CalSaver does not. Limited investment options—CalSavers offers a relatively limited selection of investments, which may not be appropriate for all investors. Typical 401(k) plans offer a much broader range of investment options and often additional resources such as managed accounts and personalized advice. Potentially higher fees for employees—There is no cost to employers to offer CalSavers; however, employees do pay $0.83-$0.95 per year for every $100 in their account, depending upon their investments. While different 401(k) plans charge different fees, some plans have far lower employee fees. Fees are a big consideration because they can seriously erode employee savings over time. 5. Why should I consider a 401(k) plan instead of CalSavers? For many employers —even very small businesses—a 401(k) plan may be a more attractive option for a variety of reasons. As an employer, you have greater flexibility and control over your plan service provider, investments, and features so you can tailor the plan that best meets your company’s needs and objectives. Plus, you’ll benefit from: Tax credits—Thanks to the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Plus, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. Tax deductions—If you pay for plan expenses like administrative fees, you may be able to claim them as a business tax deduction. With a 401(k) plan, your employees may also likely have greater: Choice—You can give employees, regardless of income, the choice of reducing their taxable income now by making pre-tax contributions or making after-tax contributions (or both!) Not only that, but employees can contribute to a 401(k) plan and an IRA if they wish—giving them even more opportunity to save for the future they envision. Saving power—Thanks to the higher contributions limits of a 401(k) plan, employees can save thousands of dollars more—potentially setting them up for a more secure future. Plus, if the 401(k) plan fees are lower than what an individual might have to pay with CalSavers, that means more employer savings are available for account growth. Investment freedom—Employees may be able to access more investment options and the guidance they need to invest with confidence. Case in point: Betterment offers 500+ low-cost, globally diversified portfolios (including those focused on making a positive impact on the climate and society). Support—401(k) providers often provide a greater degree of support, such as educational resources on a wide range of topics. For example, Betterment offers personalized, “always-on” advice to help your employees reach their retirement goals and pursue overall financial wellness. Plus, we provide an integrated view of your employees’ outside assets so they can see their full financial picture—and track their progress toward all their savings goals. 6. What if I miss the retirement program mandate deadline? The state will notify you of your company’s non-compliance. Ninety days after the notification, if you still fail to comply, there is a penalty of $250 per eligible employee. If non-compliance extends 180 days or more, there is an additional penalty per eligible employee. As you can imagine, your company could end up paying thousands of dollars in fees for non-compliance! 7. What action should I take now? If you decide that CalSavers is most appropriate for your company, visit the CalSavers website to register before: June 30, 2021 – for businesses with 50+ employees in California June 30, 2022 – for businesses with 5+ employees in California If you decide to explore your retirement plan alternatives, talk to Betterment. We can help you get your plan up and running fast—and make ongoing plan administration a breeze. Plus, our fees are well below industry average. That can mean more value for your company—and more savings for your employees. Get started now. Betterment is not a tax advisor, and the information contained in this article is for informational purposes only. -
Helping Employees Set Up a Financial Safety Net
Employers are looking for ways to help their employees save for unexpected financial ...
Helping Employees Set Up a Financial Safety Net Employers are looking for ways to help their employees save for unexpected financial emergencies. Betterment’s 401(k) platform can help. Your water heater fails. Your car breaks down on the side of the road. Your spouse loses their job because of a global pandemic. Life is filled with challenges, and some are more stressful and expensive than others. As a small business owner, you’ve likely witnessed firsthand how financial emergencies can impact your employees. Not only does the stress affect employees’ personal lives, it can also affect their work performance, attendance, and focus. That’s why an emergency fund —with enough money to cover at least a few months of expenses—is such an important part of your employees’ overall financial plan. However, many people lack this critical safety net. Rainy day funds are running dry According to research by the Employee Benefit Research Institute (EBRI), half of workers say they have a rainy day fund that could cover three months of expenses in the case of sickness, job loss, economic downturn, or another emergency. However, only one in five families actually has liquid savings of more than three months of income. Notably, EBRI found that the lack of an emergency savings fund was not limited to just younger employees or those with lower incomes—it’s an issue that transcends age and income. When faced with an emergency, employees without a financial safety net may turn to credit cards, take a payday loan, or even raid their retirement savings—triggering early withdrawal penalties and derailing their retirement savings progress. Having a solid emergency fund can help prevent employees from spiraling into a difficult financial predicament with wide-reaching implications. Craig Copeland, Senior Research Associate at EBRI, explains, “Given the low percentage of workers and families who have sufficient savings to cover a loss of income for any extended period, emergency savings programs could be directly beneficial to workers and indirectly beneficial to employers through higher employee satisfaction.” In fact, more employers than ever are encouraging their employees to save for unexpected financial emergencies. Emergency fund 101 So, what should your employees consider when setting up an emergency fund? At Betterment, we recommend: Saving at least three to four months of expenses—If employees have a financial safety net, they’ll feel more confident focusing on other important goals like retirement or home ownership. Investing emergency fund money—By investing their money—not socking it away in a low-interest savings account—employees don’t run the risk of losing buying power over time because of inflation. In fact, our current recommended allocation for an emergency fund is 30% stocks and 70% bonds. Making it automatic—Setting up a regular, automatic deposit can help employees stick to their savings plan because it reduces the effort required to set aside money in the first place. With an emergency fund, your employees have the peace of mind of knowing that they have a financial cushion in the case they need it now or in the future. Helping employees save for today—and someday Some employees may feel like they have to choose between building their emergency fund and saving in their workplace retirement plan. But it doesn’t have to be a choice. With the right 401(k) plan provider, your employees can save for retirement and build an emergency fund at the same time. For example, the Betterment platform is “more than just a 401(k) in that it provides: Quick and easy emergency saving fund set-up Betterment makes it easy to establish an emergency savings fund—helping ensure employees don’t need to dip into their 401(k) when faced with unexpected financial difficulties. If your employees aren’t sure how much to save, Betterment can calculate it for them using their gross income, zip code, and research from the American Economic Association and the National Bureau of Economic Research.Betterment will also estimate how much employees need to save to build the emergency fund they want to reach their target amount in their desired time horizon. Using our goals forecaster, employees can model how much they need to save each month to reach their emergency fund goal and view different what-if scenarios that take into account monthly savings, time horizons, and target amounts. Linked accounts for big picture planning 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. That means that in a single, holistic view, employees can track both their 401(k) plan account and their emergency fund. Personalized advice to help employees save for today (and someday) By offering personalized advice, Betterment can help your employees make strides toward their long- and short-term financial goals. Our retirement advice and automated tax saving strategies like tax loss harvesting can help them avoid unnecessary taxes and save more for the long term. Ready for a better way to help your employees prepare for the inevitable—and the unexpected? Talk to Betterment today. -
Did Your 401(k) Plan Fail Its Compliance Test?
After another busy 401(k) compliance season, we sat down with Mikang Kim, Senior 401(k) ...
Did Your 401(k) Plan Fail Its Compliance Test? After another busy 401(k) compliance season, we sat down with Mikang Kim, Senior 401(k) Compliance Manager at Betterment, to get her perspective on plan failures: why they happen, what a plan sponsor can do about them, and how to decrease the likelihood of failing going forward. Compliance Failure Q&A Q: First things first: what exactly is 401(k) compliance testing and when is it performed? Sometimes called “non-discrimination” testing, compliance testing is conducted shortly after the close of a plan year, so roughly mid-January through mid-April for calendar year plans. In short, a 401(k) plan must pass these tests each year to verify that it does not benefit highly compensated employees (HCEs) at the expense of non-highly compensated employees (NHCEs) unfairly. Although there are a number of compliance tests, one of the most important is the “actual deferral percentage,” or ADP, test. Q: What exactly does the ADP test look at? With the ADP test, we compare the average 401(k) deferral percentage for HCEs to the average 401(k) deferral percentage of NHCEs. If the difference is greater than a certain margin (as shown in the table below), the plan is said to have “failed” the ADP test. Average NHCE rate Maximum HCE Average Rate Under 2% 2 x NHCE Rate 2% to 8% 2% + NHCE Rate Over 8% 1.25 x NHCE Rate It’s important to note that the average deferral rate for testing purposes takes into account all eligible employees, including both active and terminated employees for the plan year. As a side note, this might differ from how the average deferral rate is defined for plan health purposes, which usually looks at the average deferral rate only of those participants who are actively contributing. Q: What exactly are the consequences of failing the ADP test? It’s probably scarier than it sounds because it can be fairly easily corrected. There are two ways to correct the failure. One is to refund excess 401(k) contributions to the impacted HCEs. The refund amount is dependent on the size of the failure, but it is taxable to the affected employees (often owners and senior managers) who will likely be unpleasantly surprised by this turn of events. It’s never an easy conversation for the plan administrator to have. The second method is to make a corrective contribution (equal to the failed margin) known as a Qualified Non-elective Contribution (QNEC) to all of the non-highly compensated employees. This may be costly to the employer, but if the failed margin is small and the company is on the smaller side, this may be a good alternative to correct the failure. Generally, this correction needs to be completed by two and a half months after the end of the plan year being tested (March 15 for calendar year plans). Q: OK, before we go any further, let’s make sure everyone is on the same page with respect to the definitions of HCE and NHCE. Ah, and that’s where some of the 401(k) fun comes in because there are actually different ways that these categories of employees can be defined. And the plan sponsor has some flexibility in choosing the definition that may make it easier for the plan to pass compliance testing. But one thing that’s important to know is that you only have to define who falls within the HCE category since NHCEs are just the residual (i.e., everyone else). Compensation is understandably one factor in determining whether someone is an HCE or not. But it’s based on prior year compensation data. So if we’re in February of 2021, doing 2020 compliance testing on a plan, we’d need 2019 compensation data from the plan sponsor. That can cause a lot of confusion at first, especially for plans that just started up. For example, a plan that started in June 2020 will understandably question why they need to provide us with company compensation data —before the 401(k) plan was even in existence. It’s because we need to determine who was an HCE, and that’s based on the prior year, also known as a “lookback year.” Obviously, if the company wasn’t even in existence in the prior year, we would then have to rely on more recent data. And in fact, in such a case, we wouldn’t rely on compensation to define HCEs, but just the ownership definition, which we’ll get into. Q: So it sounds like the next logical question then is: what are the different HCE definitions? Sure. Certain types of employees are automatically defined as HCEs regardless of their compensation. This can be tricky for businesses, especially those that are small and/or family run. An HCE is an employee who meets one of the following criteria: Ownership in Current or Prior Year – regardless of compensation, owns over 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. This includes family members. Prior year compensation exceeds IRS definition of HCE. This is regardless of current year compensation. In 2019, this amount was $125,000. Q: I guess this leads to other methods of defining HCEs and NHCEs. Exactly. Alternatively, larger plans especially may wish to define HCEs using the Top-Paid Group Election (TPG) method that allows them to limit the number of HCEs to their top 20% of employees based on prior year compensation. This must be defined in the plan document and could be beneficial if high earners who aren’t in that top 20% are contributing significantly, which in turn can help boost the average contribution rate of the other 80%. One thing to note is that any employees who are considered highly compensated under the ownership definition will still be treated as HCEs, regardless of compensation. So the exact percentage of HCEs using the TPG method may actually exceed 20%. Q: So what are some factors that contribute to ADP testing failures? One of the most common challenges we see happens when plans start late in the year. Often, HCEs who have more discretionary income are so excited about the plan and the ability to maximize their savings and their tax deferrals. So even with just a few payroll periods left in the year, they maximize their contributions, contribute at much higher rates than NHCEs, and cause the plan to fail. Plans that start late in the year should be aware of this potential problem. If they don’t want to delay starting the plan, they should communicate to HCEs that they will be unlikely to contribute the maximum annual amount (and may risk receiving a taxable refund of contributions after the year ends). Our message to plan administrators, though, is this: if the sole focus for starting a 401k plan is to allow the owner or other HCEs to max out their contributions, be forewarned that your plan may fail the ADP test. Remember that as a fiduciary, you must operate the plan in the interests of all of your employees. Q: Any other things to watch out for? Other plans that may need to be more cautious include small plans, especially where the owner may be the only HCE. If other employees aren’t contributing or contributing enough, that can be difficult. Another wrinkle can occur when there are HCEs who are earning less than the statutory maximum compensation amount. Among other things, this is the maximum amount that can be used when performing the test calculations. Consider an HCE under age 50 who is contributing the maximum annual 401(k) contribution of $19,500. If they are earning the statutory maximum compensation amount of $285,000 for 2020, that is the equivalent of 6.8% of salary. However, if they are earning just $150,000 (which also qualifies them as an HCE), that same $19,500 translates into a 13% contribution rate. So the range of HCE compensation can have a huge impact on that HCE ADP. Q: How can plans ensure that they don’t fail the ADP test? For those who aren’t aware, there’s one very easy solution. The ADP compliance test can be bypassed altogether if the plan adopts a Safe Harbor plan design, which requires a mandatory contribution. Of course, the company needs to weigh the added expense against the benefits of reduced compliance headaches and potentially better funded retirements for their employees. But for plans who are starting late in the year, adopting Safe Harbor is a great way to avoid potential testing failures and having to refund contributions to HCEs. Q: And what if the Safe Harbor plan design is just too costly? Short of adopting a Safe Harbor plan design, there are other things plans can do to reduce the likelihood of failing the test. For instance, implementing automatic enrollment for all employees at a rate that is sufficiently high can go a long way. Most people do not opt-out of the plan or change their default contribution amount. So if the plan contributes everyone at, say 6%, there’s probably a much better chance that the plan will pass ADP testing. In addition, sometimes (but not always) a matching contribution can really motivate employees to save more. For instance, if employees have to contribute 6% to earn the maximum employer contribution, they will be more likely to contribute that amount. Often this requires clear and consistent communication to be sure that employees newly eligible for the plan are also aware of the matching feature and how they can earn the maximum amount. That said, if an employer is willing to take on the expense of a matching contribution, then a Safe Harbor plan design may make more sense since that eliminates the uncertainty associated with compliance testing altogether. Plans may also decide to use the Prior Year testing method, which allows them to limit HCE plan contributions going forward based on the results of the prior year tests. This is not a guarantee that the plan will pass the ADP test, but it reduces the likelihood. Q: What’s your advice to plans that have failed the ADP test? First of all, don’t panic. It’s not uncommon for plans to fail the ADP test. That said, it’s worth analyzing what else is going on with plan design that could be negatively impacting participation or contribution rates. For instance: Is the eligibility requirement restricting from contributing to the plan who otherwise might thereby helping boost NHCE engagement? Is the plan being made available to all employees who are eligible according to the plan document? Unless it’s written in the plan document that part-time and/or seasonal employees such as interns cannot contribute to the plan until they meet certain eligibility requirements (specific to this employee class), they must be given the opportunity to contribute to the plan. Are definitions of plan compensation (excluding pre-participation compensation for instance) skewing the average contribution percentages and impacting testing in unexpected ways? Of course, we caution everyone that testing can change from year to year, especially for new plans or companies just starting out, so it’s not something that’s one and done. New plans who pass their first year should especially guard against getting too complacent in thinking they won’t have any problems in the future. In addition, plans should monitor plan engagement, paying attention not just to the participation rate but the average contribution rate of different employee groups, and continue to communicate the benefits of the plan, particularly to those groups who need to hear it most. Betterment can work with plans to develop a strategy for reaching out to their employees. Q&A was conducted in 2021 and is meant to be educational in nature. -
Related Companies and Controlled Groups: What this means for 401(k) plans
When companies are related, how to administer 401(k) plans will depend on the exact ...
Related Companies and Controlled Groups: What this means for 401(k) plans When companies are related, how to administer 401(k) plans will depend on the exact relationship between companies and whether or not a controlled group is deemed to exist. Understanding Controlled Groups Under IRS Code sections 414(b) and (c), a controlled group is a group of companies that have shared ownership and, by meeting certain criteria, can combine their employee bases into one 401(k) plan. The controlled group rules were put into place to ensure that the plan provides proper coverage of employees and that it does not discriminate against non-highly compensated employees. Parent-Subsidiary Controlled Group: When one corporation owns at least an 80% interest in another corporation. The 80% ownership threshold is determined either by owning 80% of the total value of the corporation’s shares of stock or by owning enough stock to hold 80% of the voting power. Brother-Sister Controlled Group: When two or more entities are controlled by the same person or group of people, provided that the following criteria are met: Common ownership: Same five or fewer shareholders own at least an 80% controlling interest in each company. Identical ownership: The same five or fewer shareholders have an identical share of ownership among all companies which, in the aggregate, is more than 50%. In this first example below, a brother-sister controlled group exists between Company A and Company B since the three owners together own more than 80% of Companies A and B, and their identical ownership is 75%. Owner Company A Company B Identical Ownership Mike 15% 15% 15% Tory 40% 50% 40% Megan 40% 20% 20% Total 95% 85% 75% In this second example below, a brother-sister controlled group does not exist between Company A and Company B since the identical ownership is only 15%, well below the required 50% threshold. Owner Company A Company B Company C Identical Ownership Jon 100% 15% 15% 15% Sarah 0% 40% 50% 0% Chris 0% 40% 20% 0% Total 100% 95% 85% 15% Combined Controlled Group: More complicated controlled group structures might involve a parent/subsidiary relationship as well as one or more brother/sister relationship. Three or more companies may constitute a combined controlled group if each is a member of a parent-subsidiary group or brother-sister group and one is: A common parent company included in a parent-subsidiary group and Is also included in a brother-sister group of companies. In the below example, we see that Company A and B are in a brother-sister controlled group as the common ownership for both are at least 80% and the identical ownership is greater than 50%. However, since Company B also owns 100% of Company C, there’s a parent-subsidiary controlled group, which results in a combined controlled group situation. Owner Company A Company B Company C Identical Ownership Ariel 80% 85% 80% Company B 100% Controlled groups and 401(k) plans If related companies are determined to be part of a controlled group, then employers of that controlled group are considered a single employer for purposes of 401(k) plan administration. So even if multiple 401(k) plans exist among the employers within a single controlled group, they must meet the requirements as if they were a single-employer for purposes of: Determining eligibility Determining HCEs ADP & ACP testing Coverage testing Top heavy testing Compensation and contribution limits Vesting determination Maximum contribution and benefit limits Given the complexities associated with controlled group rules and how it may impact 401(k) plan administration, we encourage companies that might have questions related to controlled groups to consult with their attorney or tax accountant. -
A Business Owner’s Guide to Employee Financial Wellness
If employees are stressed about their finances, it can have a negative impact on their ...
A Business Owner’s Guide to Employee Financial Wellness If employees are stressed about their finances, it can have a negative impact on their work performance and on your company as a whole. Employees Are Looking to You for Help As a business leader, there’s a lot you can do to help. We at Betterment put together this guide, which includes tips on free and affordable benefits, as well as an annual checklist. We hope the guide helps your employees and business stay happy, healthy, and financially secure. -
Financial Wellness Begins with a Great 401(k) Plan
Adding a 401(k) plan—or improving the plan you currently offer—can dramatically improve ...
Financial Wellness Begins with a Great 401(k) Plan Adding a 401(k) plan—or improving the plan you currently offer—can dramatically improve the financial wellness of your workforce. “How will I pay down my debt?” “Will I be able to afford retirement?” “How can I save for my future and put my kid through college?” These are the questions that are keeping your employees up at night. With the pandemic raging—and increasing concerns about health care, job security, and market fluctuations—financial stress is at an all-time high. In fact, the National Endowment for Financial Education® (NEFE), revealed that nearly 9 in 10 Americans say that the pandemic is causing stress on their personal finances. As an employer or a business owner, you may be wondering what you can do to help. Well, the answer is simpler than you may think. Adding a 401(k) plan—or improving the plan you currently offer—can dramatically improve the financial wellness of your workforce. Your employees may be more financially stressed than you might think According to research from Willis Towers Watson, nearly two in five employees live paycheck to paycheck. And it’s not only those at lower income levels who are affected; even highly paid employees struggle financially. Notably, the survey found that: 39% could not come up with $3,000 if an unexpected need arose within the next month 18% making more than $100,000 per year live paycheck to paycheck 70% are saving less for retirement than they think they should 32% have financial problems that negatively affect their lives 64% believe their generation is likely to be much worse off in retirement than that of their parents As you can imagine, this financial stress seeps into every aspect of your employees’ lives—including their productivity, engagement, and wellbeing at work. In fact, according to Willis Towers Watson, 39% of struggling employees said money concerns keep them from doing their best at work, and 49% reported suffering from stress, anxiety, or depression over the last two years. Financial stress can also trigger higher health care costs, more frequent sick days, and other unanticipated—and financially damaging—side effects. What will all this financial stress cost your business? Well, Gallup research shows that U.S. businesses are losing a trillion dollars every year due to voluntary turnover. Plus, the cost of re-hiring and re-training is compounded in smaller businesses because the loss of knowledge, subject matter expertise, and skills can be difficult to manage when there isn’t a deep bench of succession. Financial wellness is within reach—and this is what it looks like If financial stress can damage the fabric of your organization, financial wellness can help repair that damage. The Consumer Financial Protection Bureau defines financial well-being as: Having control over day-to-day, month-to-month finances Having the capacity to absorb a financial shock Being on track to meet financial goals Having the financial freedom to make choices to enjoy life In a practical sense, being financially healthy means spending within one’s means, having a plan for the future, and feeling confident that today’s decisions today will have a positive impact on the future. Employers who take steps to increase employee financial wellness—such as implementing a 401(k) plan—often experience benefits like increased retention and reduced absenteeism. According to an employee survey, 74% of employees say that financial wellness programs are an important workplace benefit and 60% say they’d be more likely to stay at a job if their employer offered financial wellness benefits that help them better manage their finances. The good news is that some 401(k) plans transcend retirement saving to focus on improving overall financial health. The path to financial wellness starts with a great 401(k) plan While employees may have investments outside of work, quite often, their employer-sponsored 401(k) plan serves as their primary long-term savings vehicle. That’s because features like convenient payroll deduction and automatic enrollment make it easy for employees to save for their future. And for those lucky enough to work for organizations that provide employer contributions, employees can be quite motivated to participate. However, according to the Bureau of Labor Statistics, only about half of employees participate in a retirement plan at work—illustrating a great opportunity for more employers to offer a plan (or work to increase participation). However, not all 401(k) plans are created equal. Some do a far better job at improving employee financial wellness than others. When evaluating 401(k) plan providers, consider the following questions: What types of educational tools and resources are offered and how accessible are they? Many 401(k) providers provide a wealth of educational tools and resources—including webinars and online articles—designed to help employees not just save for retirement but address other financial concerns such as budgeting, debt management, and how to manage taxes. Is personalized advice available and part of the overall fee? 401(k) education has advanced beyond traditional, staid group enrollment meetings, and technology can be essential in helping employees engage with the plan. This may even include individualized and comprehensive advice that can help employees make more informed decisions. Does the platform enable employees to see the bigger picture? Does the provider allow employees to sync outside accounts and track financial goals beyond retirement? Platforms that give employees a holistic view of their finances facilitate good saving habits. How do the fees stack up? Expensive (and sometimes hidden) fees can take a bite out of savings—and disrupt employees’ financial future. Affordable and transparent fees are critical to helping employees keep more of their savings working for them. What types of investments are offered and will they appeal to your employees? Plan providers often have unique perspectives on investments, so take the time to understand whether they will appeal to employees and how strategies will help employees reach their goals. Boost plan participation to boost financial wellness Even if your 401(k) plan offers a more robust approach that can help improve employee financial wellness, the critical first step is to get employees to take advantage of the plan. But that’s sometimes easier said than done. If you’ve struggled with participation rates in the past, consider: Giving away “free money”— Employer contributions (matching, safe harbor, or profit sharing) reward your employees and incentivize them to save for their future through your 401(k) plan. Enhancing communication—Whether you want to send an email, host a meeting, or talk to employees individually, get the word out about the benefits of your 401(k) plan and the full scope of available features. Targeted communication may help employees get started on the road to financial security. Revamping plan features—Consider shortening (or removing) the waiting period so employees can enroll as soon as they’re hired, accelerating the employer contribution vesting schedule, or enhancing the automatic enrollment features by increasing the default contribution rate or expanding the employees impacted. Reap the rewards of a financially well workforce Adding a 401(k) plan or improving your existing one can have a dramatic impact on the financial health of your workforce. Benefits include: Lower levels of employee financial stress Happier employees Less employee turnover Improved productivity Potentially lower healthcare costs Better business outcomes Betterment can help At Betterment, our mission is simple: to empower people to do what’s best for their money so they can live better. Our easy-to-use 401(k) platform ensures that employees can get personalized advice on their saving goals—in one place. From saving for a new house to planning for retirement, employees get the support they need to achieve their goals. Plus, our innovative technology: Takes into account employee ages, savings, and goals to create a personalized plan to help them save for the future they want Enables employees to link their outside assets, making it easy for them to see the full picture of their personal finances -
What to Consider When Choosing a 401(k) Plan Recordkeeper
Selecting the right recordkeeper is important to the success of your 401(k) plan.
What to Consider When Choosing a 401(k) Plan Recordkeeper Selecting the right recordkeeper is important to the success of your 401(k) plan. A service provider who understands 401(k) plan administrative requirements and operational compliance can save you time, worry, and money. When you combine quality service with thoughtful plan design, appropriate investment options, and effective employee communications, you can drive strong savings behavior and increase the chances for a financially secure retirement for you and your employees. Prudently selecting a provider to help administer your plan and safeguard your employees’ retirement savings is also part of your fiduciary responsibility as the plan sponsor. Under ERISA, every plan must have at least one “named fiduciary.” The employer is typically the named fiduciary with overall responsibility for the plan. The plan must also designate an ERISA 3(16) plan administrator. This fiduciary has discretion over how the plan is operated and is often responsible for hiring service providers to help administer the plan and ensure that plan notices and disclosures are properly delivered. Most plan documents also name the employer as the ERISA plan administrator. As a fiduciary, you must adhere to high fiduciary standards in carrying out your responsibilities. This includes acting in the best interests of your participants and making sure only reasonable and necessary fees are paid from plan assets. Fortunately, there are skilled recordkeepers and other service providers to help you administer your 401(k) plan and meet your fiduciary responsibilities. 401(k) Plan Services and Who Provides Them So how do you find the 401(k) plan recordkeeper that’s right for you? One of the first steps is to understand what type of services you need and who provides them. A successful 401(k) plan typically requires four types of services: Plan recordkeeping and administrative support Participant services (account access and education) Operational compliance support (plan documents and nondiscrimination testing) Investment selection and monitoring Traditionally, different types of providers offered different types of services for 401(k) plans. Here are general definitions of 401(k) plan service providers: Recordkeeper – A recordkeeper is the bookkeeper for the day-to-day activities of the plan. This includes tracking participant activity such as deferral elections and investment allocations. A recordkeeper also tracks employer contributions and investment gains and losses. Most recordkeepers provide access to a platform of investments that can be selected by the plan fiduciary and made available to plan participants. Providing an easy-to-use and engaging website for participants and employers to access information and transact plan business is a critical element of recordkeeping services. A recordkeeper generally does not assume fiduciary responsibility for the plan but takes direction from the employer sponsoring the plan. Third Party Administrator (TPA) – A TPA provides compliance support to the employer and helps ensure the plan operates in accordance with the rules. This can include drafting and amending plan documents, conducting nondiscrimination testing, and filing an annual Form 5500 on behalf of the plan. In some cases, the role of the TPA and the recordkeeper may be filled by the same entity. Some TPAs also offer investment support services and may derive a portion of their revenue from the sale of investments. Most TPAs perform their administrative services at the direction of the employer and are not considered fiduciaries. However, some TPAs take on the role of the ERISA 3(16) plan fiduciary relieving employers from the fiduciary responsibility for certain plan operations. Trustee – 401(k) plan assets must be held in a trust for the benefit of each participant (unless the assets consist only of insurance contracts). A trustee is typically named in the plan document or a trust agreement. Some employers choose to serve as the plan’s trustee, referred to as a self-trusteed plan. In other cases, a separate entity such as a trust company will be appointed to assume legal title to the plan assets and to provide annual trust or account statements. All trustees are considered to be plan fiduciaries and are subject to strict standards when handling the assets of 401(k) plan participants. Financial Advisor – A financial advisor typically serves as an employer’s investment expert. The financial advisor may also help employers identify their objectives for sponsoring a retirement plan and then help determine the types of services and service model that will meet those objectives. Financial advisors are also typically involved in employee enrollment meetings and providing additional employee education. Those who advise on investments may take on a fiduciary role, serving as either an ERISA 3(21) investment advisor (makes recommendations) or an ERISA 3(38) investment manager (has discretion to select investments for the plan). To Bundle or Unbundle? In today’s market, one entity may fill more than one service provider role for a retirement plan. There are multiple combinations of services possible, depending on the provider and their affiliates. For example, a recordkeeper may also serve as the TPA, or an investment provider may provide recordkeeping services. Some service providers coordinate their services to present a comprehensive solution, known as a bundled service model. For example, a single entity may design a product that includes all facets of retirement plan services – fiduciary investment support, plan documents, recordkeeping, and compliance support. Or a service provider may choose to bundle just a few services such as the recordkeeping and TPA functions. Other providers specialize in just one area of 401(k) plan servicing and don’t affiliate with any other providers. With these types of unbundled providers, the employer is responsible for selecting and engaging independently with each provider and monitoring their performance. A Prudent Process Looking for a 401(k) plan recordkeeper or considering whether you want to change recordkeepers is a fiduciary function, so it’s important to follow a careful process and document your decisions. Consider whether you can manage a group of independent service providers or would benefit from a bundled service model. You may want to start by reviewing a provider’s service agreement to identify the specific services that will be provided, including whether the provider is assuming a fiduciary role as part of those services. Compare multiple providers’ services and fees, so you understand what fees are reasonable in the industry for your plan size and the types of services and features that are most important to you and your participants. Here is a list of elements you may want to consider when evaluating service providers: Types of Services Offered Scope of recordkeeping and administration support Compliance support such as plan documents and nondiscrimination testing Investment advise or support – at the plan level and the participant level Fiduciary services (ERISA 3(16) plan administration, ERISA 3(21) investment advice, or ERISA 3(38) investment management) Employee education programs or employee communication support Online account access and phone/email support services Fees Costs for plan services and investments Transparency of fees Payment structure (e.g., can fees be paid by the business or debited from participant accounts? Are fees paid through a revenue sharing arrangement?) Qualifications of Provider The depth of technical expertise within the organization Experience with plans having similar characteristics Service levels promised, such as turnaround times for common transactions The investment approach or philosophy The sophistication of technology and online tools Referrals or recommendations from other clients Ready for a Better 401(k)? Betterment for Business offers a bundled approach to servicing 401(k) plans, so you don’t need to navigate through multiple providers’ service models and fee structures or worry about gaps in services. We specialize in servicing small businesses for low cost to save you money. And our digital platform makes it easy for you to set up and maintain a 401(k) plan and for your employees to access their account balances and investments. We’re committed to being here for you every step of the way with expert investment and administrative support, including fiduciary 3(16) and 3(38) services. -
SECURE Act: Eligibility Requirement Changes for Part-Timers
The SECURE Act of 2019 seeks to expand retirement plan coverage for U.S. workers. One of ...
SECURE Act: Eligibility Requirement Changes for Part-Timers The SECURE Act of 2019 seeks to expand retirement plan coverage for U.S. workers. One of the Act’s provisions changes 401(k) eligibility requirements for part-time employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 seeks to expand retirement plan coverage for U.S. workers. One of the Act’s provisions changes 401(k) eligibility requirements for part-time employees. IRS Notice 2020-68 provides additional guidance around this rule, including vesting considerations for part-time employees impacted by it. New Eligibility Rule for Elective Deferrals Under the soon to be ‘old’ law, employees that did not meet the maximum statutory requirement (age 21 AND 1,000 hours in a 12-month period) could be excluded from participating in a 401(k) Plan. However, effective with plan years beginning after December 31, 2020, the SECURE Act requires that long-term, part-time, non-union employees must be permitted to make elective 401(k) deferrals after three consecutive 12-month periods with at least 500 hours of service. This rule only applies if the employee is at least 21 years of age at the end of the three consecutive 12-month periods. Important to note: Any service performed prior to January 1, 2021 is not taken into account for purposes of the new eligibility rule for participating in the elective deferral portion of the 401(k) plan. Therefore, the earliest date a long-term, part-time employee can enter the plan to make an elective deferral under the new law is January 1, 2024. Employees who become eligible for the elective deferral portion of the plan solely under the new rule may still be excluded for other types of contributions made to the 401(k) plan (e.g., employer matching contributions, nonelective contributions) until they meet the plan’s eligibility requirements for such contributions. This new rule does not apply to union employees. For purposes of nondiscrimination testing, the employer can still exclude any long-term part-time employee who becomes eligible for the deferral portion of the plan until the employee meets the plan’s eligibility requirements for testing. Special Vesting Rule The eligibility rules relating to employer contributions have not changed, so employers will not be required to make employer contributions for these long-term part-time employees. However, if an employer does voluntarily make employer contributions for long-term part-time employees, and such contributions are subject to a vesting schedule, a special vesting rule must be applied with respect to these employees. Under the new special vesting rule, and for purposes of vesting of employer contributions, a long-term part-time employee must be credited with a year of service ALL 12-month periods during which the employee had at least 500 hours of service. This represents a change for many plans that include a 1,000 hour requirement for their vesting schedule. The notice also clarifies that this special vesting rule applies only to those long-term part-time employees who become eligible to participate in a plan solely on account of this new rule. Finally, this special vesting rule will continue to apply to a long-term, part-time employee even if such employee subsequently becomes a “full-time” employee. In the Notice, the IRS confirmed that all years of service, even those beginning before January 1, 2021, will count under the special vesting rules, unless the plan is subject to certain exceptions (e.g., a plan may provide that years of service before an employee attains age 18 are excluded). Example: Assume Employee X is age 21 and completes 550 hours of service during each 12-month period from January 1, 2016 to December 31, 2023. Employee X becomes eligible to make elective deferrals under her employer’s 401(k) plan in 2024 because she has completed at least 500 hours of service in each of the three consecutive 12-month periods beginning on January 1, 2021. Later in 2024, Employee X becomes a full-time employee, and she then becomes eligible for matching contributions on January 1, 2025. Employee X’s years of service prior to 2021 must be taken into account for purposes of determining her vested interest in any matching contributions made on her behalf. Accordingly, as of January 1, 2025, Employee X would be credited with 9 years of vesting service (not 4 years). What Does This Mean for You? To comply with these new rules, plans that currently require part-time employees to complete a 12-month period with at least 1,000 hours of service to be eligible to make elective deferrals should diligently track service with respect to periods beginning on or after January 1, 2021. In addition, plans that include a vesting schedule for employer contributions should begin assessing their ability to retrieve hours data to determine vesting service for periods beginning before January 1, 2021. -
How Does a Multiple Employer Plan Compare to a Single Employer 401(k) Plan?
Are MEPs and PEPs the new solution for workplace retirement savings or should I pick my ...
How Does a Multiple Employer Plan Compare to a Single Employer 401(k) Plan? Are MEPs and PEPs the new solution for workplace retirement savings or should I pick my own 401(k) plan? Multiple employer plans (MEPs) have been around for many years, but the rules governing these types of retirement plans limit their availability to many employers. In an effort to help more small and mid-sized companies offer retirement savings plans to their employees, the SECURE Act ushered in new changes so that, beginning in 2021, any business can join a new type of MEP, called a Pooled Employer Plan (PEP). Because of this new development, MEPs and PEPs have become buzzwords in the industry and no doubt you’ll see advertisements touting the benefits of these one-size-fits-all type plans. But are they really the magic bullet policymakers are hoping will solve the “retirement savings crisis”? That remains to be determined, but for many employers, sponsoring their own 401(k) plan with the right plan provider is the best way to ensure their goals for a retirement savings plan are met. What is a MEP? A multiple employer plan or MEP is a retirement plan, often structured as a 401(k) plan, that is established and administered by an “MEP organizer.” The MEP organizer makes the plan available to many different employers. If the MEP meets certain requirements set forth in the tax laws and ERISA (Employee Retirement Income Security Act), it will be treated as a single plan managed by the organizer and not as a series of separate plans administered by each participating employer. The MEP organizer serves as plan fiduciary and typically assumes both administrative and investment management responsibilities for all employers participating in the MEP. An MEP is viewed by the Department of Labor (DOL) as a single plan eligible to file one Form 5500 only if the employers participating in the MEP are part of the same trade or association or are located in the same geographical area. There must be some commonality between the participating employers besides just participating in the MEP. A Professional Employer Organization (PEO) may also sponsor an MEP for its employer clients. What is a PEP? The rules limiting the benefits of an MEP to employers with commonality limited the usefulness of MEPs for many small businesses. To allow broader participation in MEPs, the SECURE Act added a new type of MEP, called a Pooled Employer Plan or PEP, effective for plan years beginning in 2021. A PEP is a 401(k) plan that will operate much like a MEP with a plan organizer and multiple participating employers, but there are a few important differences. Any employer can join a PEP; the businesses do not have to have any common link for the PEP to be considered a single plan. But the PEP must be sponsored by a “Pooled Plan Provider” (PPP) that has registered with the DOL and IRS. The Pooled Plan Provider must be designated in the PEP plan document as the named fiduciary and the ERISA 3(16) plan administrator. This service provider is also responsible for ensuring the PEP meets the requirements of ERISA and the tax code, including ensuring participant disclosures are provided and nondiscrimination testing is performed. The PPP must also obtain a fidelity bond and ensure that any other entities acting as fiduciary to the PEP are bonded. What are the benefits of participating in a MEP or PEP? Studies have shown small businesses may refrain from adopting a retirement plan for their employees because of the administrative burdens, fiduciary liability, and cost associated with workplace plans. MEPs have been identified in recent years as a way to address these concerns for employers and potentially increase access to workplace retirement plans for employees of small and mid-size businesses. The MEP structure can alleviate much of the administrative and fiduciary burdens for participating employers, and potentially reduce costs. Reduced fiduciary responsibility – The MEP organizer or the PPP takes on fiduciary responsibility for managing the plan and for selecting and monitoring service providers. This generally includes selecting investments that will be offered in the plan. Reduced administrative responsibility – The MEP organizer or the PPP is responsible for day-to-day administration and complying with all applicable rules and regulations for plan operations. Investment pricing – A MEP/PEP arrangement pools plan assets of all participating employers, which may allow the MEP/PEP to obtain better pricing on investments. Reduced plan expenses – MEPs/PEPs allow small businesses to benefit from economies of scale by sharing the expenses for plan documents, general plan administration, and one Form 5500. Because of these benefits, interest in MEPs has grown over the years, leading to the rule changes that open the MEP opportunity to all employers through a PEP. How do MEPs & PEPs Differ from a Single 401(k) Plan? Many of the responsibilities associated with managing a retirement plan that can challenge plan sponsors are taken on by the MEP organizer or the PPP. This third party is responsible for making almost all the decisions related to managing the plan, hiring and monitoring service providers, and overseeing the plan’s investments and operations. The MEP/PEP entity must perform these services on behalf of all participating employers and will be held to the high fiduciary standards of ERISA for these duties. Once the employer has prudently selected the MEP/PEP entity, the employer is relieved of the day-to-day operational oversight and investment management. However, this transfer of responsibilities also means a transfer of control over key decisions regarding the plan. Conversely, when an employer establishes its own 401(k) plan for its employees, the employer retains many of these operational and investment responsibilities, which the employer typically fulfills with the support of service providers. The employer can design the plan based solely on their goals and objectives for the plan and their employees’ needs. The flexibility retained by an employer adopting a single 401(k) plan includes: Selecting the plan design features that fit their employees’ needs Picking the service provider that will assist them in operating the plan and provide relevant education and guidance to their employees Choosing the menu of investments that will be offered to participants in the plan or engaging an investment advisor to manage or guide investment selection Deciding whether to offer personalized advice to employees When Might a Single 401(k) Plan Might Be Better? While the shared expenses and reduced responsibilities of participating in a MEP/PEP can be attractive to small and midsize employers, sometimes what one employer sees as a benefit, another employer sees as a disadvantage. For example, because the MEP/PEP entity is operating one plan for many employers, the plan may be designed with the features that will be most widely accepted by most employers. There is typically little customization available in order to keep plan operations efficient (and cost effective) for the MEP/PEP entity. Participating employers generally have no control over service providers, plan design, or the participant experience. Additionally, although the structure of a MEP/PEP is meant to reduce administrative and investment expenses for participating employers, it remains to be seen if the cost of these plans will be competitive with the low-cost 401(k) plans available today without compromising on the quality and breadth of services. PEPs will open up the multiple employer plan market to all employers for the first time ever. And there are many financial organizations and service providers preparing to capitalize on this new solution by launching PEP products right away in 2021. But truth be told, the industry is still awaiting guidance from the IRS and DOL on a number of critical elements necessary for building the PEP plan product, including plan documents, acceptable compensation arrangements for service and investment providers, administrative responsibilities for PPPs, and special Form 5500 rules. With so many unknowns yet in the PEP market, it’s difficult to predict whether this new type of multiple employer plan will hit the mark for small business owners. Employers can benefit from the simplicity of a single service provider solution and receive professional fiduciary and administrative support right now with a 401(k) solution designed specifically for small and midsized plans. Ready for the right 401(k) solution? Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Let us help you deliver a 401(k) plan that works for your organization and your employees. -
The Importance and Benefits of Offering Employer Match
Some employees resist saving because they feel retirement is too far away, can’t afford ...
The Importance and Benefits of Offering Employer Match Some employees resist saving because they feel retirement is too far away, can’t afford it, or can’t grasp the benefit. You can help change that mentality by offering a 401(k) employer match. Beyond being an attractive employee benefit, a 401(k) plan can act as a catalyst for employees at all career stages to save for retirement. Some employees, however, will resist saving because they feel retirement is too far away, or can’t afford it, or can’t grasp the benefit to making room in their budget (and current spending levels). However, as a 401(k) plan sponsor, you can help change that mentality by offering a 401(k) employer matching contribution. What is a 401(k) employer matching contribution? With an employer match, a portion or all of an employee’s 401(k) plan contribution will be “matched” by the employer. Common matching formulas include: Dollar-for-Dollar Match: Carla works for ABC Company, which runs payroll on a semi-monthly basis (two times a month = 24 pay periods a year). Her gross pay every period is $2,000. She has decided to defer 4% of her pre-tax pay every pay period, or $80 (4% x $2,000). The ABC Company 401(k) plan generously offers a dollar-for-dollar match up to 4% of compensation deferred. With each payroll, $80 of Carla’s pay goes to her 401(k) account on a pre-tax basis, and ABC Company also makes an $80 matching contribution to Carla’s 401(k) account. At a 4% contribution rate, Carla is maximizing the employer contribution amount. If she reduces her contribution to 3%, her company matching contribution would also drop to 3%; but if she increases her contribution to 6%, the formula dictates that her employer would only contribute 4%. Partial Match (simple): Let’s take the same scenario as above, but ABC Company 401(k) plan matches 50% on the first 6% of compensation deferred. This means that it will match half of the 401(k) contributions. If Carla contributes $80 to the 401(k) plan, ABC Company will contribute $40 on top of her contribution as the match. Tiered Match: By applying different percentages to multiple tiers, employers can encourage employees to contribute to the plan while controlling their costs. For example, ABC Company could match 100% of deferrals up to 3% of compensation and 50% on the next 3% of deferrals. Carla contributes 4% of her pay of $2,000, which is $80 per pay period. Based on their formula, ABC Company will match her dollar-for-dollar on 3% of her contribution ($60 = 3% x $2,000), and 50 cents on the dollar on the last 1% of her contribution for a total matching contribution of $70 or 3.5%. The plan’s matching formula is chosen by the company and specified in the plan document or may be defined as discretionary, in which case the employer may determine not only whether or not to make a matching contribution in any given year, but also what formula to use. Is there a limit to how much an employer can match? The IRS limits annual 401(k) contributions, and these limits change from year to year. For 2020, employee contributions are limited to $19,500 (or $26,000 if you’re 50 or over). While employer contributions do not count towards these employee contribution limits, there is a limit for employee and employer contributions combined to the lesser of 100% of an employee’s gross compensation or $57,000 ($63,000 if you are 50 or over). It’s also important to note that the IRS caps annual compensation that’s eligible to be matched. Potential Benefits of Providing an Employer Match Attract talent: Offering a 401(k) is a great way to set your company apart from the competition, and a matching contribution sweetens the deal! A recent Betterment for Business study found that more than 45 percent of respondents considered a 401(k) match to be a factor when deciding whether to accept a job. Better 401(k) plan participation: Unlike other types of employer contributions, a matching contribution requires employees to contribute their own money to the plan. In other words, the existence of the match drives plan participation up (not contributing is like leaving money on the table), encouraging employee engagement and increasing the likelihood of having your plan pass certain compliance tests. Financial well-being of employees: A matching contribution shows employees that you care about their financial well-being and are willing to make an investment in their future. The additional funds can help employees reach their retirement savings goal. Reduced hidden costs: When evaluating the cost of an employer match, it is important to weigh long-term, less immediate benefits for the company. Without a matching contribution, employees may have to work longer than they otherwise would, which can lead to higher costs in the form of higher healthcare expenses, lower productivity and increased absenteeism, not to mention fewer promotional opportunities for other employees. Improved retention: The match is essentially “free money” that can be considered part of an employee’s compensation, which can be hard to give up. And by applying a vesting schedule to the employer match, you can incentivize employees to stay longer with your company to gain the full benefits of the 401(k) plan. Employer tax deduction: matching contributions are tax deductible, which means you can deduct them from your company’s income so long as they don’t exceed IRS limits. In addition to the combined employee and employer contribution limits mentioned above, there is an additional employer contribution limit which in 2020 was 25% of an employee’s compensation (eligible compensation is limited to $285,000 per participant). Offering a 401(k) plan is already a huge step forward in helping your employees save for their retirement. Providing a 401(k) matching contribution enhances that benefit for both your employees and your organization. Ready for a better 401(k) solution? Whether you’re considering a matching contribution or not, Betterment for Business is here to help. We offer a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
How Do State-Based Plans Stack Up Against 401(k) Plans?
State-mandated retirement plans increase worker access to workplace savings programs, but ...
How Do State-Based Plans Stack Up Against 401(k) Plans? State-mandated retirement plans increase worker access to workplace savings programs, but they may not be the best fit for employees or employers. The most important thing you can do to help your employees prepare for retirement is to offer a workplace savings plan. A recent study from the Employee Retirement Benefit Institute (EBRI) shows that workers who have access to a retirement plan at work are far more likely to save for retirement: 79% of those with access to a plan have retirement savings vs. only 17% of those without access to a plan. Increasing access to a workplace savings plan is an important policy goal in the U.S. Helping more workers save for a financially secure retirement will reduce reliance on government programs for retirees. Policymakers continue to explore new solutions for increasing workers’ access to retirement plans, including incentivizing employers to sponsor a workplace plan, like a 401(k) plan. State governments are also coming up with various strategies to increase workers’ access to workplace savings programs, including requiring employers to participate in a savings plan designed and administered by the state. Since 2012, Georgetown University’s Center for Retirement Initiatives shows that 45 states have taken action to promote access to workplace savings plans, ranging from studying plan options to passing legislation to enrolling employers into a plan. State plans As of September 2020, a dozen states and one city government have passed legislation to help or require employers to offer a savings plan at work in one of the following ways: Voluntary participation in a Payroll Deduction IRA: New York and New Mexico Mandated participation in a Payroll Deduction IRA (if not offering another retirement plan): California, Colorado, Connecticut, Illinois, Maryland, New Jersey, Oregon, and Seattle WA Voluntary participation in a multiple employer defined contribution plan: Massachusetts and Vermont Voluntary use of products from a state-based retirement plan marketplace: Washington and New Mexico The most popular option: Payroll Deduction IRA Plans Of the states that have passed legislation to establish a state-based plan, the majority have chosen to require employers to participate in a Payroll Deduction IRA program, also known as an “Auto IRA” plan. Generally, under an Auto IRA plan, employers who do not offer a retirement plan (for example, a 401(k) plan) must automatically enroll their employees into a state IRA savings program. The employer withholds a certain percentage of an employee’s wages and deposits it into a Roth IRA on behalf of the employee. Employees have control over their individual Roth IRA and can opt out of participating. These programs do not allow employers to supplement employee deferrals with matching or other types of employer contributions. The state administers the Roth IRAs and oversees the investment options. The details of each program vary by state. For example, The OregonSaves program requires any employer that does not offer a qualified retirement plan to enroll employees at a 5% deferral rate, which must be increased by 1% each year up to a maximum of 10%. The Illinois Secure Choice plan requires employers who have been in business for at least two years and have at least 25 employees to automatically enroll employees at a 5% deferral rate. The CalSavers plan requires employers with at least 5 employees to automatically enroll employees at a 5% deferral rate with automatic annual increases up to a maximum of 8%. Pros & Cons of state-based plans States are increasing access to retirement plans by requiring most employers to offer the state-based plan if they don’t offer another type of retirement plan. The automatic enrollment feature encourages savings among workers who otherwise might not take the initiative to do so. And automatic payroll deduction makes disciplined saving easy and convenient for employees. While employers are being forced into these arrangements, there are little to no costs for the employer and few administrative burdens other than processing the payroll withholding and depositing employees’ money into the IRAs. There are, however, some less-than-ideal aspects of state-based plans that should be considered. These plans are not subject to the worker protections under ERISA that apply to other tax-qualified retirement savings plans, such as 401(k) plans. ERISA is a federal law that requires fiduciary oversight of retirement plans and provides some uniformity to plan operations nationwide. Each state-based plan has its own rules and features, which can make it more difficult for employees and employers living and working in different states to comply. Another concern is that workers do not receive a tax benefit for their savings in the year they make contributions because most state-based plans (so far) consist of after-tax contributions to a Roth IRA. Investment earnings within a Roth IRA are tax-deferred until removed from the IRA and may eventually be tax-free. IRAs also have much lower contribution limits than other types of retirement plans. A worker may save up to $6,000 in an IRA in 2020 ($7,000 if they’re age 50 or older), while a worker may save up to $19,500 in a 401(k) plan in 2020 ($26,000 if they’re age 50 or older) and may be eligible for additional employer matching and/or profit sharing contributions. Pros & Cons of 401(k) Plans For many employers – even very small businesses – a 401(k) plan may be a more attractive option than a state-based plan for a variety of reasons. Employer benefits Flexibility and control over plan service providers, investments, and plan features to meet your company’s needs and objectives Tax credit for plan start-up costs for small businesses Tax deduction for plan expenses paid by business owner Option to make tax-deductible contributions to your employees’ accounts Ability as a business owner to save for your own retirement Employee benefits Disciplined savings through automatic payroll deduction Reduced taxable income through pre-tax salary contributions & greater flexibility with respect to timing of taxes, with option to make Roth contributions Tax credits for lower paid employees Higher contribution limits than permitted in most state-based savings arrangements (For 2020, employee and employer contributions can reach 100% of an employee’s income up to $57,000 for employees under age 50 and $63,500 for employees age 50 and older, including business owners) Access to a broad range of investment options and often additional resources, including managed accounts and/or personalized advice Tax-deferred growth on investments while in the 401(k) plan Option to take a loan from retirement savings Benefits of 401(k) Plan vs Payroll Deduction Roth IRA 401(k) Payroll Deduction Roth IRA Employer contributions allowed x Plan design flexibility x Choice of provider x Small business tax credits x Tax deductions for employer contributions x Employee contribution limits (2020) $19,500 under age 50 $26,000 age 50+ $6,000 under age 50 $7,000 age 50+ Combined employee and employer contribution limits (2020) Up to 100% of employee’s income (max $57,000 for employees under age 50 and $63,500 for employees age 50+ and older, including business owners No employer contributions Ability for employees to save on pre-tax basis and reduce current tax liability x Flexibility with respect to employee tax liability x Additional potential plan features Personalized advice, employer contributions, loans, hardship distributions ERISA Protection from creditors x Of course, with all these benefits for the employer and employees come some administrative requirements to ensure the tax laws are met. Employers sponsoring a 401(k) plan are also required by ERISA to act solely in the interest of their employees and ensure that they and any others who have discretionary control over the plan or its assets meet the high standards of a fiduciary. Engaging plan providers for document, recordkeeping, and investment support is an added expense for employers. With the right 401(k) solution, however, employers can offer a robust retirement plan benefit that fits the company’s objectives and employees’ needs, as well as receive expert assistance, while also controlling costs. Ready for the right 401(k) solution? Betterment for Business offers a digital platform that makes it easy for you to set up and maintain a plan, with low cost administration, guided onboarding, and expert investment and administrative support. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional. -
Is a PEO Right for Your Business?
If managing a wide range of HR tasks has become too much for you to handle, then a PEO ...
Is a PEO Right for Your Business? If managing a wide range of HR tasks has become too much for you to handle, then a PEO may be right for you. Are you buried under a stack of benefits paperwork? Drowning in expense reports and legal notices? As a small business owner, you’re required to keep a lot of balls in the air—and inevitably, one or two may fall. If managing a wide range of human resources tasks has become too much for you to handle, then a Professional Employer Organization (PEO) may be right for you. But what exactly is a PEO—and is it worth it? Read on for answers to the most frequently asked questions. What is a PEO? A PEO—which is sometimes known as a “co-employer”—is a firm that’s empowered to handle your payroll, benefits, and other HR functions. Under this arrangement, you continue to manage your company’s day-to-day operations; however, the PEO acts as the administrative employer. In this capacity, the PEO assumes certain employer rights, responsibilities, and risks. Because a PEO partners with many small businesses, it has the purchasing power to offer your employees potentially higher-quality, lower-cost benefits. According to the National Association of Professional Employer Organizations (NAPEO), there are 907 PEOs in the United States providing services to 175,000 small and mid-sized businesses that employ 3.7 million people. What’s the difference between hiring a PEO and outsourcing your HR services? In a PEO employment model, the PEO assumes liability for your payroll and tax reporting. However, with HR outsourcing, you remain liable for the work that the PEO does on your behalf. What exactly does a PEO offer? Typically, a PEO has expertise across a wide range of areas, from insurance coverage to payroll taxes. The tasks that your PEO manages will be outlined in a contract generally known as a client service agreement (CSA). Under the contract, the PEO becomes your “employer of record” and assumes control of responsibilities such as: Payroll—Your PEO calculates tax contributions, handles tax filings, makes deposits, and manages other payroll processing details. Benefits—Your PEO coordinates medical, dental, vision, and other employee benefits in partnership with benefit providers. Want to offer additional benefits like a 401(k) plan, commuter perks, or flex spending? Your PEO can handle that, too. Personnel matters—From monitoring long-term disability and workers’ compensation to performance management and termination pay, your PEO can manage a wide range of HR-related responsibilities. Compliance—Local, state, and federal labor laws change all the time, but your PEO can help ensure your company stays in compliance with them. What kind of company is best suited for a PEO? Small and mid-size businesses often benefit the most from working with a PEO. That’s because a smaller company may not have the HR expertise, system capabilities, or desire to manage complex HR functions. If you’d prefer to outsource these responsibilities so you can retain a laser focus on your company’s mission, then the PEO model may be appropriate for you. What are the main benefits of a PEO? Did you know that 33% of small businesses get fined every year for making payroll mistakes? By hiring a PEO, you can rest assured that the HR details are being taken care of—and you can return your focus to your company’s mission and growth. According to research from NAPEO, small businesses that use PEOs: Grow 7% - 9% faster Have 10% -14% lower employer turnover Are 50% less likely to go out of business Plus, a PEO can help your employees gain access to a wide range of benefits from 401(k) plans to dental plans that they might not typically enjoy—boosting employee productivity and satisfaction. If you want even more hands-on services, your PEO can also assist in recruiting, interviewing, hiring/firing, and onboarding employees. How much does it cost to hire a PEO? Typically, fees are charged in one of two ways: A flat fee calculated per employee A flat fee calculated as a percentage of your payroll According to Fit Small Business, PEO services range in price from as low as $39 per month per employee to $125 per month per employee, and PEOs with more comprehensive services charge even more. For example, if you hire a PEO that manages benefits and recruiting, you might pay up to 11% of payroll. Fit Small Business reports that the following factors impact the price of services: Setup fees Training and consulting fees Monthly service fees Health insurance premium contributions Workers’ compensation premiums Other company-sponsored benefits Because PEOs are entering into a co-employer relationship with you, some may also take your company’s credit rating, risk level, and health benefits history into consideration when determining the price. What are the most important considerations to think about before hiring a PEO? PEOs can be incredibly helpful, but there are also significant downsides. Ask yourself this list of questions for help deciding if a PEO is right for you. How many employees do you have? Janis Sweeney, owner of National Employee Management Resources, told Entrepreneur magazine that the sweet spot for a PEO is between 17 and 80 people, because “once a company gets very big, then it’s easier to have an in-house HR department.” Can your company afford the PEO fee? As we detailed above, PEOs can be expensive depending upon which services you elect. However, you should take the time to understand the total cost of managing your HR responsibilities internally. If it’s taking hundreds of hours and immeasurable stress, it may be worth it to outsource those functions to a qualified PEO. Do you want to relinquish control of HR responsibilities? When you hire a PEO, you are essentially adding a business partner. So, if you don’t want a third-party weighing in—or signing your employees’ checks—then a PEO may not be appropriate for you. Are you happy with the PEO’s benefit partners? The benefits available through the PEO will be with select partners, and may not be the specific partners if you had complete freedom of choice. Which services are appropriate for your company? Do you want your PEO to only handle payroll and medical benefits? Or do you want more expansive services that encompass recruiting, performance reviews, and more? Think carefully about which services you’d like to outsource—and which services you’d prefer to keep in house. How do the pros and cons measure up for your company? PRO CON Less in-house responsibility—Your PEO will shoulder payroll, benefits administration, and a variety of other tasks. Less control—Your employees will be co-employed by the PEO, which means you will give up control of some aspects of your organization. Lower benefit rates—PEOs manage many small businesses, so they may be able to negotiate lower insurance rates (and potentially better benefit packages). Less benefit customization—You may have less ability to customize your benefits to meet your employees’ unique needs. Potentially lower in-house costs—If you outsource your HR responsibilities, you may be able to save money on staff who would otherwise be handling these tasks. Potentially high fees—If your PEO charges a per employee fee, your solution will become more expensive as your company grows. How can you evaluate the quality and reliability of a PEO? Every PEO is different—and has a different way of doing business. However, one important consideration is whether or not they’re accredited by the Employer Services Assurance Corporation (ESAC), a nonprofit corporation that is the official accreditation and financial assurance organization for the PEO industry. According to the ESAC, only about 5% of PEOs have earned this distinguished accreditation. Wondering if a potential PEO is accredited? Visit the ESAC website to search for accredited PEOs in your state. In addition to checking accreditation, NAPEO recommends that you: Make sure the PEO is capable of meeting your goals—whatever they may be Ask for client and professional references Explore the company’s administrative and management expertise and experience Understand how the employee benefits are funded—that is, whether they are fully insured or partially self-funded (and if they are partially self-funded, make sure the third-party administrator (TPA) is authorized to do business in your state) Review the service agreement carefully to ensure the responsibilities and liabilities are clearly defined Check that the company you’re considering meets all state requirements -
Understanding 401(k) Compensation
Using an incorrect definition of compensation is on the top ten list of mistakes the IRS ...
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 ...
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 ...
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. -
Employee Retention Strategies to Prevent High Turnover
Employees are the lifeblood of our economy—and retaining top talent is, in many cases, ...
Employee Retention Strategies to Prevent High Turnover Employees are the lifeblood of our economy—and retaining top talent is, in many cases, more important than ever. The COVID-19 pandemic has tested businesses in unimaginable ways. Millions of employees are working from home. Companies are shifting gears to make personal protective equipment. Many small businesses and mega corporations have had to close temporarily or even permanently. While the situation continues to evolve, one fact remains: Employees are the lifeblood of our economy—and retaining top talent is, in many cases, more important than ever. In any economy, retention matters U.S. businesses lose a trillion dollars every year due to voluntary turnover. Beyond the financial impact, high turnover can also damage employee morale, negatively affect your relationships with customers, and even shake the foundation of your business. But if team members really want to leave, there’s nothing you can do, right? Not quite. In fact, 52% of employees voluntarily exiting say their organization could have done something to prevent them from leaving. Fact: Gallup estimates that the cost to replace an employee can range from one half to two times the employee’s salary. How does your turnover rate compare? According to PayScale, the Fortune 500 company with the highest average employee tenure is the Eastman Kodak Company, which clocks in at 20 years! However, a few employers at the bottom of the list have an average employee tenure of one year or less—namely, Massachusetts Mutual Life Insurance Company, American Family Life Assurance Company of Columbus (AFLAC), and Amazon.com Inc. Why? Well, a mix of factors contribute to their high turnover including working conditions, pay scales, and industry competition. So, what are the most effective employee retention strategies? While there’s no one “right” way to improve employee retention, we’ve provided 20 suggestions that can boost your employee retention rate, engagement, and morale. 1. Hire right the first time—If you want to retain top talent, start by hiring the right employees. During the interview process, don’t just focus on potential new employees’ educational background and list of talents. Listen closely to how they answer questions and what their references have to say about them. Skills can be acquired through training, but qualities like a positive attitude or sense of loyalty are not easily taught. 2. Be up-front about the tough stuff—Does the job require 75% travel? Or repetitive data entry? Be sure you and your human resources team are upfront about the nitty-gritty job details—including those that potential employees may not love. That way, they will know exactly what they’re getting into before they accept the position. 3. Pay fairly—When it comes to retention, it almost goes without saying that money matters (a lot). Utilize salary benchmarking services or check out websites like glassdoor.com to get an idea of what is considered competitive compensation for each role. Also consider financial incentives like performance bonuses, promotions, pay raises, 401(k) matching contributions, and stock options. Provide awesome benefits—Beyond pay, benefits like an excellent 401(k) plan, a strong health insurance plan, and generous time off can go a long way toward improving job satisfaction and boosting your employee retention. Want to upgrade your benefits? Consider footing a greater share of insurance costs, offer a 401(k) matching contribution, or provide more flexibility around time off (up to and including making it unlimited!). Want to learn more? Read our article on competitive compensation. Show them the money in black and white Many top-performing companies provide total compensation statements to their employees. So, what’s a total compensation statement? Well, it tallies up things like salary, bonuses, paid leave, health benefits, 401(k) contributions, stock options, and other perks—enabling employees to understand the full value of working at your company. Provide high-quality wellness programs—It makes sense that healthier workers are happier workers—and the research proves it. According to a survey from health services company Optum: 48% of employees who frequently participate in health and wellness programs are extremely likely to recommend their employer to others Employees who had access to more than seven wellness programs (like biometric screenings, wellness coaching, fitness challenges, and more) were one-and-a-half times more likely to continue working for their current employer and three times more likely to recommend their employer to others Support employees’ financial wellness, too—Studies show that financial stress can have a damaging impact on business output, lead to higher employee turnover, and increase recruiting costs. Beyond paying fair wages, what can you do to help? Consider partnering with a 401(k) plan provider like Betterment who can help your employees plan for long- and short-term financial goals ranging from retirement to an emergency fund to a new house. Betterment helps employees create a personalized plan to help them save for the retirement they envision. Plus, it enables employees to link their outside assets, making it easy for them to see the full picture of their finances and incorporates automated features to help employees stay on track toward their goals. Our retirement advice and automated tax saving strategies like tax loss harvesting can help them avoid unnecessary taxes and save more for the long term. Provide opportunities to learn and grow—According to LinkedIn, 94% of employees say they would stay at a company longer if it invested in their learning and development. In addition to gaining new skill sets and experience, employees also benefit from knowing their company cares about their success. Beyond sponsoring short professional development courses, consider paying all or part of your employees’ undergraduate or graduate education in exchange for continuing to work at the company for a specified period of time. This kind of tuition reimbursement program is win-win for you and your employees! Be flexible with schedules—As we’ve seen during the COVID-19 pandemic, telecommuting is sometimes necessary—and many employees like it! In fact, according to Global Workplace Analytics, 80% of employees want to work from home at least some of the time.1 So if an employee asks for a flexible or non-traditional schedule—for example, working from home three days—give it serious consideration. Learn more about the benefits of remote work. Make their commute a little easier—In addition to allowing employees to work from home if it’s feasible, consider ways to improve their commute. Let them skip rush hour—If employees have a killer commute, allow them to work 10-6 or 7-3 instead of the typical 9-5. Offer transportation—Whether it’s a company-sponsored shuttle or an organized car-pooling system, brainstorm ways to make their commute less stressful. Provide commuter benefits—With this benefit, your employees can set aside pre-tax money to pay for public transportation and paid parking. Want to sweeten the deal? Kick in some money, too! 10. Encourage a healthy work-life balance—It’s easy to talk about “work-life balance” but it’s another thing to really encourage it. Tell your employees to take their vacation days, don’t text them at midnight on a weekday, and acknowledge that they have a vibrant life away from the office that deserves their attention, too. Formalize a mentorship program—Beyond the onboarding process and initial training, employees often need (or want) ongoing mentorship. The mentor isn’t necessarily the person’s direct manager. In fact, it’s often a senior leader in a different department who can offer a unique perspective on leadership and growth within the company. Concrete guidance and a sympathetic ear could be just what your employees need to stay the course. Show employees their career path—Most employees don’t see themselves toiling away in the same job for the entirety of their career. Be sure they can see the path forward to promotions and pay bumps. By clearly defining the skills they need to acquire and the goals they need to attain, you can help employees stay focused and excited about their career development and future at your company. Give feedback (and ask for it)—Annual performance reviews can help employees understand where they are year over year, but regular check-ins are extremely useful, too. Also, think about asking your employees what you could be doing better. Although sometimes it can be hard to accept negative feedback, it’s critically important to building relationships and developing as a leader. Make sure the coffee is hot (and your company culture is on point)—A hot, fresh cup of coffee, free snacks, an open-door policy, a “hi” from the CEO in the hallway—sometimes it’s the simple things that make employees feel like their employer cares. Creating a positive company culture and employee experience takes work. Ask yourself: What makes our company unique? What are our values? What is our leadership structure? What distinguishes our work environment? Enhance your engagement—Especially during the COVID-19 crisis—when you can’t just chat by the coffeemaker or greet employees in the hallway— engagement is important. A recent Harvard Business Review article recommends nominating one trusted staffer to be responsible for regularly checking in on employees’ wellbeing over the next three to six months. This way, any concerns, fears, and other issues are caught before they escalate (or result in employees looking for an exit). Encourage workplace BFFs—Yup, that’s right—having a co-worker as a best friend can dramatically increase employee engagement. Research shows that women who strongly agree they have a work best friend are more than twice as likely to be engaged. And for both women and men, having a best friend at work leads to better performance. So how do you foster friendships among colleagues? Encourage collaboration, foster team building, and consider hosting happy hours or other social events. 17. Say “thank you”—Giving your employees recognition and showing your sincere appreciation can go a long way toward improving your retention rates. There are many ways to say “thanks, you’re doing a great job”: Publicly recognize employees in group meetings Host a pizza or donut party Give them a shout-out on Facebook, Twitter, or Instagram Send a hand-written thank you note Recognize birthdays and employment anniversaries Focus on diversity and inclusion—Many companies are working to make their workplaces more inclusive—and research shows that it pays off. In fact, a recent survey found that 63% of executives say their diversity and inclusion (D&I) programs help with employee retention. Leave on good terms—Sometimes you do all you can to help retain your top employees, and they still want to leave. That’s okay. But the last thing you want is for great employees to leave your company with a bad taste in their mouth. Not only will they likely never come back, but they may even share their negative opinion with other people in their professional network. Want to develop a positive exit experience? Gallup recommends: Taking the time to make employees feel heard Thanking employees for their contributions to the company Turning past workers into brand ambassadors by staying in touch with company news or referral opportunities Betterment can help you retain great employees Now that you know 20 ways to help retain employees, you may be wondering: “How can Betterment help?” Well, as a leading 401(k) provider, we can help you design a plan that your current employees appreciate (and that bolsters your recruitment efforts). A Betterment 401(k) plan is: Extremely cost-effective—Our fees are a fraction of the cost of most providers. That’s good news because after reading our list of employee retention strategies, you may have a few other investments you want to make. Easy for you to manage—Our intuitive platform works to reduce your administrative burden. Your customized dashboard will keep you informed of what you need to do and when you need to do it—making 401(k) plan administration simple. Designed to make your employees feel valued—This isn’t a one-size-fits-all retirement planning experience. Betterment offers employees a personalized plan to help them strive for their own unique goals. -
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 ...
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. -
Welcome to Betterment 401(k)!
Find out how to make the most of your plan and get your employees to start saving for ...
Welcome to Betterment 401(k)! Find out how to make the most of your plan and get your employees to start saving for their future. We’re excited that you have chosen to help your employees prioritize your financial wellness with us, starting with your 401(k) plan. Betterment’s easy-to-use platform is designed to help you feel confident in administering your plan. Let’s get started. TABLE OF CONTENTS Overview Administration and compliance Investments Employee experience Overseeing your plan (including our 401(k) glossary) Betterment contact information Plan Sponsor dashboard overview Special note for first-time plans Adding new participants (individually and in bulk) Adding multiple employees at once Updating employee information Remitting contributions to Betterment Updating employee contribution (deferral) rate changes Distribution and loan requests Approving distributions Approving loans Reports Important documents Overview By sponsoring a 401(k) plan, you take on important fiduciary responsibilities for the plan, including acting in the best interests of plan participants at all times, following the plan document as written, paying only reasonable fees, depositing contributions in a timely manner and meeting all reporting and disclosure requirements. While you can never fully transfer or eliminate all fiduciary responsibility, Betterment will help with many of these duties. In fact, at no extra cost to you or your employees, Betterment assumes certain fiduciary functions to reduce your liability, serving as both a 3(16) administrative fiduciary and a 3(38) investment fiduciary. Let’s review key areas of your plan and the support that Betterment provides. As always, we provide support via phone and email to both you and your employees. Administration and compliance Our innovative technology and dedicated support make it easy for you to keep your plan running smoothly and remain fully compliant at all times. As your 3(16) fiduciary, we perform a wide range of administrative duties including preparing and filing your Form 5500 As your 3(38) investment manager with full discretion, we will select and monitor plan investments We provide on-going consultative support with respect to plan design, compliance testing and annual audits Investments Betterment uses low-cost ETFs to create globally diversified portfolios across 12 asset classes that are designed to help maximize returns for each level of risk. Employees will be defaulted into a portfolio that corresponds to their years to retirement, but they choose alternative investment strategies if they wish: Flexible Portfolio -- using funds in Betterment Core Portfolio Strategy, employees can customize their portfolio by adjusting fund weights Socially Responsible Portfolio -- for socially-conscious employees who want their investments to reflect their personal values Goldman Sachs Smart Beta Portfolio -- for employees who are willing to take on additional risks in the pursuit of higher returns BlackRock Target Income Portfolio -- for retirees (or employees with non-retirement goals), this approach seeks to provide a steady stream of cash income In addition, our investment approach incorporates sophisticated strategies such as automatic rebalancing, tax coordination, and automatic allocation adjustments as someone gets older. And with personalized advice and an integrated platform, employees can earn better returns at various levels of risk. Employee experience Betterment’s clean design and straightforward tools help your employees get more out of their retirement plan. Our goals-based approach helps employees see all of their financial goals in one place. We help employees establish a Personal Retirement Plan based on their unique situation and preferences. Every time they log in, they can easily see whether they are off-track and take immediate corrective action. We make it easy for employees to sync other accounts so that our advice will propose a total solution that takes everything into consideration. Employees have access to numerous educational resources including: Comprehensive guide to your Betterment 401(k) Webinars and videos Website resources Articles FAQs Tools and calculators In addition, feel free to share the following to promote plan engagement and in response to specific employee questions: One-pagers Why save with a 401(k)? Small increases can make a big difference Employee guides 401(k) Rollovers What to do with your 401(k) account when you leave the company Overseeing your plan In addition to the fiduciary responsibilities mentioned above, plan oversight includes making sure you and those responsible for the plan’s operations are familiar with the plan document. Depending on the size of your organization, it may be appropriate to establish a 401(k) committee that meets periodically to review the plan. Decisions should be fully vetted and documented. On an on-going basis, you and members of your team will also be responsible for: Adding newly eligible employees to the plan Ensuring that Betterment has current and accurate employee information Review and approval of distributions (and loans, if offered by the plan) Sending contributions and contribution rate changes to Betterment (non-integrated plans only Monitoring any vendors you hire You will find more details in the day-to-day operations section below, including the differences between integrated and non-integrated plans. 401(k) glossary of terms Betterment contact information: For employers For employees Monday - Friday 9:00am - 6:00pm EST 1-855-906-5280 plansupport@bettermentforbusiness.com Monday - Friday 9:00am - 6:00pm EST 1-855-906-5281 support@betterment.com Plan sponsor dashboard overview The plan sponsor dashboard is the home for your 401(k) plan, where you can perform all administrative functions and find all plan information. To get started, visit the plan sponsor login page, which is not to be confused with the login page to your personal Betterment account. (Although you may have the same login credentials for both pages, they are two different websites with different login specifications.) The plan sponsor dashboard allows for three levels of access: Administrator access provides full access to the dashboard and allows all actions to be performed. Staff access provides the same access as an administrator but does not allow plan managers to be added or deleted. View only access does not allow items on the dashboard to be edited. In order to gain access to the plan sponsor dashboard, you must either be invited by a member of your Betterment Plan Support Team or a current plan manager who has Administrator access (via Settings>Manage access). The plan sponsor dashboard contains several tabs that you should familiarize yourself with. We will be referencing these tabs throughout this document. Home -- shows you high-level statistics and summary information about your plan, along with notifications that may require your attention and and recent plan activity Employees -- lists all active and inactive employees in your plan, along with information that requires your review Payroll -- location to upload payroll. Also includes notifications and past payroll activity Plan -- in addition to plan statistics, this is where you will go to approve loan and distribution requests. You will also be able to view recent activity as well as upcoming compliance deadlines Resources - source for reports, documents and education information to support you in your role as plan administrator. Under the Documents tab, you will find templates you may need for various uploads; and under the Support tab, you will find FAQs. Special note for first-time plans As a new plan, there are two small but important items to set up your 401(k) plan correctly and avoid complications down the road: Ensure payroll system and Betterment match Before your payroll launch date, make sure that your payroll system is set up to correctly withhold employee contributions. Your Betterment 401(k) offers Traditional and Roth contributions. Typically, these are two separate deduction codes within payroll systems. Make sure that your employee contribution elections from Betterment match your payroll system. You will receive notifications in your plan sponsor dashboard of changes and you can also run a custom report. Definition of compensation Our plan documents usually define compensation as all earned income (think Box 5 of the W2). That means all income reported on the W2 must be included in the calculation of deductions within the payroll system. You want to ensure that your payroll system includes commission and bonus checks as compensation for purposes of 401(k) deductions. Loan Code If your plan offers loans, you will need to set up a loan deduction code in your payroll system so that the loan repayment amount will be deducted from the participant’s paycheck on the first repayment date. Adding new participants (individually and in bulk) If your plan is integrated with one of our preferred payroll providers, new participants are added automatically when created in the payroll system, so this operation does not apply to you. When an employee becomes eligible for the plan, they must be added to the Betterment system. You can add each employee individually through the plan sponsor dashboard using these steps (our bulk upload process is outlined further down): To add a new participant, login to the plan sponsor dashboard. Once in the dashboard, click on the Employees tab, then click on the blue Add Employee button Follow the prompts on each page to successfully add a new employee. You will receive an error message if any data is incomplete or appears incorrect. Uploading multiple employees at once To make it easier and save time, you may want to take advantage of our bulk employee upload process which is detailed in this in-depth tutorial. We have built in a 15-minute buffer between the time you submit employee information to us and the time an employee sees a Betterment 401(k) welcome email. This allows you to correct any mistakes that you might realize right after you hit submit! Clients often ask: What are some common errors when adding a new employee? Answer: Two common errors we see during the “add a new employee” process include: Mismatched information to existing Betterment customer record If someone has previously had a Betterment account before joining your organization, all of the personal information must match the information we have on file. Differences may occur if, for example, the employee may have had a different last name when they signed up for Betterment years ago or their current profile includes a typo. The error “Last name matches existing user” indicates that the employee’s Betterment profile has a different last name. Failed ID check As part of SEC regulations and the US Patriot Act, Betterment must attempt to verify the identity of all our clients. Our system automatically checks new employee information you enter against a database of publicly-available information. Participants who fail the ID check will be alerted via email and should follow the prompts in the email to resolve the issue. It is not uncommon for newly married, recently-relocated or younger participants to fail the ID checks, which is not a cause for concern. Updating employee information It is important that all employee information be kept current on the Betterment system. If your plan is integrated with one of our preferred payroll providers, please make sure all demographic data is correct in your payroll system, as that is the main source of truth and all demographic data on the Betterment system will be overwritten when the next sync with your plan occurs. For plans that do not have payroll integration: Participants can update every piece of personal information themselves within their profile under Settings. Plan administrators can update most employee information, with the exception of the email address linked to a participant account which serves as a login ID. If an email address was changed without an employee’s knowledge, they will be locked out of their account. Please contact the Betterment Plan Support Team for help in changing an email address or direct the employee to make the change themselves. Remitting contributions to Betterment If your plan is integrated with one of our preferred payroll partners, the process to remit contributions to your 401(k) plan couldn’t be easier. All you have to do is ensure the contribution data is accurate and run your payroll as you normally would! Once you run your payroll in your system: the contribution data will be automatically sent to Betterment for processing Betterment will send an ACH request to your bank account on file Upon receipt, Betterment will allocate the funds to the proper accounts and execute any necessary trades. For plans without integrated payroll, data must be uploaded via the Payroll Upload template accessible via the Payroll Upload page of the Plan Sponsor Dashboard. The pre-formatted template includes all of your employees who have an account in your 401(k) plan and can be populated with a report available on most payroll systems. Information required: compensation for the pay period hours worked for the pay period contribution amounts any applicable employer match amounts any applicable loan repayment amounts Once you have the file ready for upload: Login to the Plan Sponsor Dashboard and navigate to the Payroll Upload Page Click Upload Payroll NOTE: You will always get an email confirmation for the payroll upload. If you do not receive that email, your payroll submission was not completed. Upon receipt, Betterment will check for any issues and will send you an email with a summary of the contribution file, along with the amount to be withdrawn from your organization’s bank account. Once you approve the submission, we will send an ACH request to your bank account on file and upon receipt, allocate the funds to the proper accounts and execute any necessary trades. Updating employee contribution (deferral) rate changes If your plan is integrated with one of our preferred payroll providers, Betterment pushes all contribution rate changes directly to your payroll provider, meaning there is nothing for you to do! For plans that do not have payroll integration, some work is needed to make sure contribution rates are correctly passed to Betterment as recordkeeper and to ensure a clean audit trail. There are three ways for you to see contribution rate changes made by employees: View all recent changes by logging into the plan sponsor dashboard and clicking on Payroll>Notifications. View the Weekly Deferral Rate Change email sent by Betterment, which links directly to the reports found on the dashboard. Run a Current Deferral Rate report by logging into the plan sponsor dashboard and navigating to Documents>Reports>Run a Report>Current Deferral Rates. Regardless of which method you use, if any employees have made contribution rate changes, you will need to reflect those changes in your payroll system before you run your next payroll. Clients often ask: Are there regulatory requirements around how quickly I need to make contribution rate changes once I am alerted? Answer: The requirement is “as soon as administratively feasible,” which usually means within 1 to 2 pay periods. It’s very possible for you to miss a contribution rate change that an employee makes shortly before you run payroll. As long as you update your payroll system next time, you are fine. Distribution and loan requests As plan administrator, you are responsible for approving all loans and distributions since assets are leaving the plan. Approving distributions When a participant seeks a distribution online, our system will dynamically present them with available options at that moment in time (based on plan rules and the individual eligibility), with brief explanations regarding the pros and cons of taking a distribution. Once the participant submits a request, you will be alerted via email that a distribution request is pending. You can view any pending distribution request in the dashboard under Plan>Distribution Requests. We suggest you check the distribution request for: Common or obvious spelling mistakes Accuracy of vesting Accuracy of matching contribution amounts if your plan provides a match Please note: Mistakes are easier to fix before the request is approved. Approving loans For the participant, the online loan request flow works similarly as for distributions. Once you receive an email that a loan request is pending, you will need to do the following: Approve the loan Add the loan repayment to your payroll system (regardless of whether your payroll is integrated). Reports You can find a variety of reports within the Plan Sponsor Dashboard to help you analyze, manage, monitor, and evaluate your plan. To run a report, simply go to Resources>Reports> Run a Report. Important documents Many of the important documents related to your plan can be found within Resources>Documents, including participant notices and disclosures (participants may also find this information within their account via disclosures. These disclosures can be found in the plan sponsor dashboard via Documents>401(k) Documents. -
Thinking of Changing 401(k) Providers? Here’s What You Should Know
If you’re considering changing 401(k) providers, be sure to spend some time assessing ...
Thinking of Changing 401(k) Providers? Here’s What You Should Know If you’re considering changing 401(k) providers, be sure to spend some time assessing your current situation and prioritizing your criteria. Perhaps you’re unhappy with the amount or quality of support. Or you’re hearing too many complaints from your employees. Or your employees aren’t receiving the education and communications you had hoped for and engagement in the plan is low. Or you’ve learned you’re paying more than you should be (this is more common than you might think!). Or you're making other changes to your tech stack (payroll provider, etc). Or you’ve simply outgrown the provider you hired when all your organization needed was a bare-bones 401(k) plan. Whatever the reason, it’s not unusual for companies to change their 401(k) provider from time to time. Changing providers does not mean that you are terminating your 401(k) plan (which has legal ramifications including not being able to establish another 401(k) plan for a year). When you change providers the plan itself stays intact, although it is not uncommon to make plan design changes at the same time. Even if there is no specific pain point with your current provider, it’s good practice to periodically review your plan provider in light of the competition to be sure your plan is keeping up with industry best practices and that you and your employees are getting good value for your money. Before you start your search Before you undertake a search for a new provider, you should gather relevant materials on your current 401(k) plan and assess your current situation to help define which criteria are most important to you. It’s also a good time to read through your current agreement to see if it reveals information that you may not have been aware of. Although some of the areas bleed into one another, be sure to consider: Current Fees -- do you know how much you and your employees are paying all-in? 401(k) plan fees can be complicated and often include fees that are embedded within the fund expense ratios. Your fee disclosure documents, required to be provided to you, should give you the information you need to know and allow you to accurately identify all of the fees paid by you or the participants (charged against plan assets). Ongoing fees may include recordkeeping fees, audit fees, compliance fees, investment management fees, legal fees and fund fees. In addition, you’ll want to be sure you capture one-off fees such as amendment fees, termination fees and (for participants) individual service fees such as loan fees and QDRO fees.Fees can vary greatly, especially when it comes to the number of assets in a plan. Smaller plans often pay significantly more than larger plans simply because they lack economies of scale. If your plan has grown substantially and you have not seen a fee reduction, chances are you may be paying too much. Fee comparisons can be hard to come by, but one source is the 401k Averages Book. Fiduciary Responsibilities - be sure you know what level of fiduciary responsibility your current provider assumes and whether you want your new provider to have that same level of responsibility, take on more fiduciary responsibility, or whether you’re comfortable taking on more fiduciary responsibility yourself.With respect to investments, the provider may be an ERISA 3(21) fiduciary, who provides only investment recommendations; an ERISA 3(38) fiduciary, who provides dictionary investment management; or may not be a fiduciary at all. With respect to administration, the provider may or may not provide ERISA 3(16) services; however, there can be a wide range of functions that fall within that, so refer to your agreement to be sure you know exactly which services they are responsible for (and which be default fall to you as plan administrator). Current Investments -- This may be dependent upon the level of investment fiduciary responsibility, but for starters, what is the investment philosophy of your current provider and does that approach align with the needs of your employee demographic. Remember that as a fiduciary, you have an obligation to operate the plan for the benefit of your employees, so this isn’t about what you or a handful of managers want from an investment perspective; it’s about what would serve the best interests of the majority of your employees. You’ll want to be sure you know: What are your current investment options? What kinds of vehicles are used (mutual funds? ETFs?) Are funds passively (i.e., indexed) or actively managed? Are funds reasonably-priced? Is participant investment advice incorporated into the approach? For an additional fee? How personalized is the advice? What is the default investment (used when participants fail to make an investment election and money is deposited into their account), and how personalized is it to each participant? Do participants have investment flexibility? Current Plan Design - what features (automatic enrollment, Safe Harbor, etc) about your current plan do you plan on retaining? Are there features you would like to add/change/remove when you change providers? Now may be a good time to consider these. Current Service -- Although you and other team members may have opinions about the quality and level of service to you as a plan sponsor, be sure you also gather information about the level and quality of service your employees receive from your current provider. Payroll Integration - whether or not your current 401(k) provider is integrated with your payroll provider, how smoothly have things been running? Is payroll integration something that is important in a new provider? Be sure you understand the different levels of payroll integration and which responsibilities you may retain. Compliance and Audit Support - Are you getting the compliance and audit support that you need without any unpleasant surprises? Are documents provided for your review and approval accurate and timely? When you’ve needed to consult on compliance issues, do you receive clear and helpful answers to your questions? Does the provider deliver a comprehensive audit package to you if you need it and collaborate well with your auditor? Participant Education - What kinds of educational resources are available to your employees not only when they first become eligible for the plan, but on an on-going basis as well? Does the platform help employees establish their retirement goal and track their progress toward it? User Interface - How easy is the user interface and how well does it meet the needs of your employees? Is it easy for them to make changes, find information? Financial Wellness - Does your provider help employees beyond the 401(k)? Does the platform allow them to sync outside accounts and track other financial goals? Participant Engagement - Are your participants making good use of the plan, with a healthy majority of employees making contributions at healthy rates? If not, is it because of the plan design or is it more a function of the provider's tools, resources, and approach? For instance, is there enough guidance to help people make decisions or are employees left to their own devices to determine how much to save and which funds to use? Although only larger companies are likely to undertake a full-blown Request for Proposal in the hunt to identify a new 401(k) plan, it’s a good idea to document and rank your criteria. In this way, you can be sure to cover all relevant topics with each provider under consideration and have a record of your decision-making process. The selection of a 401(k) provider is, after all, a fiduciary decision. What to expect when changing providers It may be helpful to understand the framework of the process involved with changing 401(k) providers so that you can manage expectations internally and create reasonable timelines. Typically, changing providers takes at least 90 days, with coordination and testing needed between both providers to reconcile all records and ensure accurate and timely transfer of plan assets, so you’ll want to plan accordingly. Once you have identified your chosen successor provider and have executed the services agreement, the high-level steps involved include: Notify your current provider of your decision (you may hear them refer to this as a “deconversion” process) Establish timeline for asset transfer and go live date with new provider Review your current plan document with the new provider This will give you an opportunity to discuss any potential plan design changes. Be sure to raise any challenges you have faced with your current plan design as well as any organizational developments (planned expansion, layoffs, etc) that may impact your plan Investment selection If your new provider is a 3(38) investment fiduciary, you will likely have nothing to do here since the provider has discretionary investment responsibilities and will make all decisions with respect to fund selection and monitoring. If your new provider is NOT a 3(38) investment fiduciary, then you will have the responsibility for selecting funds for your plan. The plan provider will likely have a menu of options for you to choose from. However, this is an important fiduciary responsibility, and if you (or others at your organization) do not feel qualified to make these decisions, then you should consider hiring an investment expert. Review and approval of revised plan documents Communicate change to employees (including required legal notices), with information on how to set up/access their account with the new provider Blackout period The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period. Transfer of assets and allocation of plan assets to participant accounts at new provider FAQs for Changing Providers What are the most common reasons that companies change 401(k) providers? Common reasons to consider changing 401(k) providers include: High fees Low levels of customer support (for you as plan sponsor and/or your employees), including support with compliance and/or audits Lack of employee guidance, advice, and education that lead to low levels of engagement and/or employee complaints Poor investment performance Lack of features Although one factor may have been the catalyst for your organization to consider changing providers, do not let that overshadow a thorough and fair assessment of other elements that should be taken into account. Remember, choosing a 401(k) provider is a fiduciary act and should be clearly documented and carefully evaluated. What happens during a 401(k) blackout period? The blackout period usually takes about 10 days, giving the prior provider time to ensure all of the records are correct before funds are transferred. During this time, employees cannot make contributions, change investments, make transfers, or take loans or distributions. Plan assets will remain invested during the blackout period. What happens to an employee 401(k) loan if my company changes providers? The outstanding loan will be transferred from the old provider to the new provider. Remember, the plan remains intact, and the loan is from the plan, not the provider. Repayments are made to the employee’s account. -
Pros and Cons of Safe Harbor and Traditional 401(k) Plans
Both types of plans can successfully help employees save for retirement, but each has its ...
Pros and Cons of Safe Harbor and Traditional 401(k) Plans Both types of plans can successfully help employees save for retirement, but each has its pros and cons. Learn which type of plan might be better for your organization. Employers who are considering offering a 401(k) plan must balance how to help employees save for retirement in a cost-effective manner with the critical administrative considerations including how to ensure the plan operates in a compliant manner and retains its tax-qualified status. At a high level, there are two types of 401(k) plans: the Safe Harbor 401(k) Plan and the Traditional 401(k) Plan. Both types of plans can successfully help employees save for retirement, but each has its pros and cons. Learn which type of plan might be better for your organization. Traditional 401(k) Plans Traditional plans can be cost-effective but must pass certain testing mandated by the IRS. Pros: Employee Incentive - A 401(k) plan is one of the most important benefits that employees look for while exploring their career options. And it comes with significant tax advantages in helping employees save for their future. Cost-Effectiveness - Because there are no required employer contributions, traditional plans may be more cost-effective for the company. Discretionary Contribution - Plan sponsors can decide to match employee contributions or make profit sharing contributions on a discretionary basis, which provides significant flexibility. Each year, employers can choose how much they would like to contribute, or whether they want to contribute at all. Cons: Required Annual Testing - Traditional plans are subject to all compliance tests, including the ADP, ACP and top heavy determination. If one or more of these tests fail, the plan sponsor is subject to corrective actions which can include additional contributions on behalf of the employees. Limits of Contributions for Employees - Because of the ADP test, highly-compensated employees (HCEs) may not be able to maximize their 401k contributions. If HCEs do contribute the maximum amount, and the plan fails the ADP test, required refunds may increase taxable income for certain HCEs. Administrative Burden - The required tests and possible failures may lead to uncomfortable conversations with employees who are impacted by such failures. They will need to understand why they are receiving refunds of their contributions and may not be able to maximize their 401(k). Safe Harbor 401(k) Plans Safe Harbor plans may be a better choice for employers looking for ways to bypass certain compliance tests. In return for the “safe harbor” status, employers are required to make employer contributions. Pros: Annual testing exemption — A safe harbor plan will be automatically deemed to pass some of the crucial compliance tests such as the ADP and ACP tests, as well as the top-heavy test. Maximize contributions — Because they can bypass certain compliance tests, everyone in the plan can maximize their contributions to the allowable IRS limits, without having to worry about refunds. Taxable income reduced — Employer contributions made as part of the Safe Harbor plan design are tax-deductible, reducing the employer’s taxable income. Improved employee retention — The required mandatory employer contributions mean the 401(k) plan will be an attractive benefit to employees, which can help attract and retain talent and encourage healthy plan participation. Cons: Cost of annual contributions — Safe Harbor plans require mandatory employer contributions on behalf of employees. The employer must be able to provide these contributions every pay period or at the end of the plan year. Failure to do so may result in the plan losing its tax-qualified status. Immediate vesting requirement — Safe harbor contributions must be immediately vested. Once an employer contribution is deposited into an employee’s account, the employee is 100% owner of that money. Annual requirements — A Safe Harbor notice must be delivered to all plan participants every year, at least 30 days prior to the plan year-end. What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year? If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year! Which to choose: Traditional or Safe Harbor 401(k)? The “right” plan for any given organization depends on many factors. The table below provides some insight into which plan design may be more helpful for any given factor, but each organization will need to make its own determination. Betterment is happy to assist with this process. Traditional Safe Harbor Explanation Employee Count 30 + employees Any plan size With few employees, even a small number of HCEs contributing at a relatively high level may make it difficult for plans to pass testing. In addition, the required employer contribution may be more manageable. Employee Demographic Employee base consists largely of full-time employees; Low turnover rate Stable headcount Employee base includes a large number of part-time and/or seasonal employees working <500 hours a year Part-time/seasonal employees are excluded from the plan Safe Harbor plan design is helpful if the employee base is more fluid, which may make it more difficult to ensure the plan will pass testing each year. Participation High (current or expected) participation and contribution rates among the general employee population Owners and officers looking to maximize 401(k) contributions every year With Safe Harbor, owners and offers can maximize contributions without having to worry about potential refunds. Company Cash Flow Less predictable cash flow year over year Consistent and adequate cash flow Since Safe Harbor plans require employer contributions, consistent and adequate cash flow is needed. Previous Compliance Result Passed ADP/ACP Test Deemed not “Top Heavy” Failed ADP/ACP Test Deemed “Top Heavy” Safe Harbor plan design bypasses certain compliance tests, so “failing” them is no longer a concern. Current/Future Plan Design Lenient or no eligibility requirement Automatic enrollment with a high default rate Strict eligibility requirements (i.e. must work 1,000 hours in 12 months to become eligible); No automatic enrollment (or if offered, low default rate) NHCEs contributing at relatively low contribution rates (or not contributing at all) do not cause issues under Safe Harbor plan design. -
All About Vesting of Employer Contributions
Employers have flexibility in defining their plan’s vesting schedule, which can be an ...
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, ...
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 ...
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. -
CARES Act and 401(k)s: Additional IRS Updates
The latest notice from the IRS expands the definition of those qualified to take ...
CARES Act and 401(k)s: Additional IRS Updates The latest notice from the IRS expands the definition of those qualified to take advantage of CARES Act 401(k) distribution and loan relief. IRS Notice 20-50 The IRS continues to release updates to the CARES (Coronavirus Aid, Relief, and Economic Security) Act in response to a growing number of outstanding questions. This latest notice, IRS Notice 20-50, provides further clarification and additional benefits to participants impacted by COVID-19. As a refresher, the CARES Act was signed into law in late March and allows qualified individuals to take coronavirus-related distributions of up to $100,000 from their eligible retirement accounts (including IRAs) until December 30, 2020. These distributions are not subject to the 10% early withdrawal penalty that would typically apply to certain distributions taken prior to age 59-½. The CARES Act also relaxes normal retirement plan loan provisions and repayment terms. For loans taken between March 27, 2020, and September 22, 2020, the maximum loan amount has been increased from $50,000 to $100,000 of the vested balance. Additionally, participants are able to delay their loan repayments for up to one year if they fall between March 27, 2020, and December 31, 2020. With Notice 20-50, the IRS has expanded the definition of “qualified individual.” Specifically, a qualified individual is now considered to be anyone who: Is diagnosed, or whose spouse or dependent is diagnosed with the virus; Experiences adverse financial consequences due to COVID-19 as a result of: the individual, the individual’s spouse, or a member of the individual’s household (that is someone who shares the individual’s principal residence) being quarantined, furloughed or laid off, or having work hours reduced; being unable to work due to lack of childcare; closing or reducing hours of a business that they OWN or operate; having pay or self-employment income reduced; or having a job offer rescinded or start date for a job delayed. The notice also clarifies that qualified individuals can claim the tax benefit of the coronavirus-related distribution rules even if their employer did not implement these COVID-related distribution and loan rules. In this Notice, the IRS also added a “Loan Safe Harbor” to the CARES Act, which permits plan sponsors to delay or suspend loan repayments for up to 1 year if those repayments otherwise would have been made from March 27, 2020, through December 31, 2020. Under this Safe Harbor: Loan repayments will resume when the suspension ends. This means that the repayments will resume as of January 2021 if the suspension goes through December 31; The term of the loan may be extended up to one year after the date the loan was originally due even if it will exceed 5 years; and The loan and the additional interest on the unpaid balance must be re-amortized as of January 1, 2021, to the new date. 401(k) regulations related to COVID-19 continue to evolve. Betterment is actively reviewing updates as they are published and encourages employers and others to refer to the notice for more information. -
Should Your Business Continue to Work Remotely? 7 Benefits to Consider.
Companies that were once uncertain about remote work are now capitalizing on the benefits ...
Should Your Business Continue to Work Remotely? 7 Benefits to Consider. Companies that were once uncertain about remote work are now capitalizing on the benefits of remote work. Around the world, millions of employees are working in the comfort of their homes—not by choice, but by necessity. As the COVID-19 pandemic forces people to shelter in place, companies that were once uncertain about remote work are now seeing the silver lining of benefits. The Brookings Institution estimates that up to half of American workers are currently working from home, more than double the number who worked from home (at least occasionally) in 2017-2018. This large-scale, work-from-home experiment is revealing the pros and cons of telecommuting in real-time. If you’re a business owner or manager, you may be asking yourself: “After the pandemic is over, should we continue working from home?” Making a temporary situation permanent According to a recent survey from Gartner, 74% of Chief Financial Officers intend to shift some employees to remote work permanently after the pandemic is resolved. “CFOs, already under pressure to tightly manage costs, clearly sense an opportunity to realize the cost benefits of a remote workforce. In fact, nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions,” said Alexander Bant, practice vice president, research for the Gartner Finance Practice. Of course, not every job is suited to be done remotely—and there are downsides. Notably, managing remote teams can be more challenging, staff members may feel isolated working at home, and instead of becoming more productive, some employees may become more distracted. Despite these potential disadvantages, more CFOs, business owners, and managers are recognizing that remote work can deliver significant cost savings (and other benefits) in the long run. Let’s delve into the top benefits of telecommuting. Save money First and foremost, telecommuting can save your small business a significant amount of money. With all or some of your employees working from home, you’ll be saving money on: Real estate—Currently, you may be locked into a lease for a period of years. However, if you decide to downsize your office space or forgo it entirely in the future, you’ll save a significant amount of money. Operational costs—From heating and air conditioning to office supplies and copy machines, you’ll likely be able to cut many operational costs. However, you may incur costs associated with setting up your employees’ home offices and implementing telecommuting systems and software. Perks—When employees work at home, they make their own coffee (or swing by a local coffee shop), prepare their own lunches, and pour their own beers for Zoom happy hours with their co-workers. With a remote team, you can switch these office perks to invest in valuable benefits such as starting a 401(k) plan or increasing your company matching contributions. So how much could you save? According to a March 2020 report from Global Workplace Analytics, a typical employer can save an average of $11,000 per half-time telecommuter per year. It’s the net sum of things like increased productivity, lower real estate costs, reduced absenteeism and turnover, and better disaster preparedness. Want to calculate your own savings? Global Workplace Analytics offers a free TeleworkSavings Calculator™. Make employees happy According to Global Workplace Analytics, 80% of employees want to work from home at least some of the time.1 In particular, Millennials appreciate flexibility and remote work opportunities. Telecommuting is such a draw that office workers would even take a pay cut if they could work from home! More than a third of workers would take a pay cut of up to 5% in exchange for the option to work remotely at least some of the time; a quarter would take a 10% pay cut; 20% would take an even greater cut.2 Improve employees’ financial wellbeing Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. However, telecommuting can help your employees cut costs, improve their work-life balance, and boost their financial wellbeing. In fact, employees could save hundreds (or even thousands) of dollars on commuting expenses, take-out lunches, and even business clothes! According to a USA Today interview with FlexJobs, remote workers typically save about $4,000 a year by telecommuting. The money employees save can help them improve their current standard of living, invest for retirement and other long-term goals, and gain an overall sense of financial wellbeing. Increase productivity While the perception is that remote workers work less, the reality is actually quite different. A recent study from Airtasker , a gig economy platform, which surveyed more than 1,000 full-time employees across the United States, 505 of whom worked remotely, found that: Remote workers averaged 27 minutes of unproductive time a day, compared to 37 minutes for in-office workers Remote workers worked an average of 1.4 more days every month (or 16.8 more days every year) Plus, a remote job eliminates many of the typical “time sucks” of the average in-office workday like lengthy commute times, chats by the water bubbler, and unnecessary meetings. Minimize workforce turnover If you ask someone what they don’t like about their job, you’ll get a lot of different answers. “I hate my commute!” “My schedule isn’t flexible!” “I work so hard, but I don’t earn enough money.” “My boss micromanages me!” Many of these common reasons why people are dissatisfied at their job can be solved through remote work. By trusting your employees to telecommute, you give them the flexibility, free time, and money they need to be happy enough to stick around. Hire the best talent (regardless of location) Relocation expenses ranging from moving services to temporary housing can cost your company thousands of dollars per employee. Instead, consider hiring the best talent from around the world, allowing them to work remotely. You’ll save significant upfront costs and be able to draw from a larger pool of talented potential staff members (who may also strongly prefer to work from home). Plus, if your company is based in a city with a high cost of living and you hire a remote worker in a rural, lower cost of living area, you may be able to pay them a lower rate that’s still competitive for their location. Keep your business on track in the best (and worst) of times As we’ve witnessed over the last several weeks, companies that had already invested in telecommuting software—and had a corporate culture conducive to remote work—were able to more smoothly transition their workforce. While we hope that COVID-19 is the last pandemic that the world ever faces, the fact of the matter is that business disruptions happen. Whether it’s a major tropical storm or a health crisis, it helps to have a contingency in place that allows your employees to work remotely on a full-time or part-time basis. Capitalizing on the benefits of remote work If you decide to reap the benefits of telecommuting, you may be wondering: “What should I do with all the money my company saves?” Well, it’s a perfect opportunity to invest in your company’s future by starting a 401(k) plan or adding a company match. According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was important in their evaluation of a job offer. By providing this valuable benefit, you’ll improve your company’s ability to recruit and retain top talent. Plus, living and working through a pandemic is challenging for everyone. Reward your employees and show how much you appreciate them by investing in their futures with a 401(k) plan. There’s never been a better time to start a 401(k) plan than right now. With the recent passage of the SECURE Act, you can now receive up to $15,000 in tax credits to help defray the start-up costs of your 401(k) plan. Also, if you add an eligible automatic enrollment feature, you could earn an additional $1,500 in tax credits. See how. Betterment makes it easy for you to offer your employees a better 401(k)—at a fraction of the cost of most providers. Want to learn more? Let’s talk. https://globalworkplaceanalytics.com/telecommuting-statistics(State of the American Workforce, Gallup, 2016) https://globalworkplaceanalytics.com/telecommuting-statistics(State of Remote Work 2019, Owl Labs) -
What is a 401(k) Plan Audit?
If an audit of your 401(k) plan is required, Betterment can help you understand what to ...
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 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, ...
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. -
Want to Boost Your 401(k) Plan’s Participation Rate? Here’s How.
Offering employees a 401(k) is a great first step toward helping them build a better ...
Want to Boost Your 401(k) Plan’s Participation Rate? Here’s How. Offering employees a 401(k) is a great first step toward helping them build a better future. The next step is to make sure they’re taking advantage of the plan. Offering employees a 401(k) plan is a great first step toward helping them build a better future. But the next step is to make sure they’re taking advantage of the plan. Wish your 401(k) employee participation rates were higher? You’re not alone. According to the U.S. Bureau of Labor Statistics, in March 2019, 77% of workers in private industry with access to a retirement plan were taking advantage of it. However, this rate varies dramatically by employee characteristics, industry, income level, and company size. In particular, lower wage workers (54%) and companies with fewer than 100 employees (71%) had lower 401(k) participation rates. How do your employee participation rates compare to these average rates? Take a closer look at the data at the U.S. Bureau of Labor Statistics. Why does 401(k) participation matter? For business owners, running a successful 401(k) plan is a significant investment of time and money. But if current (and prospective) employees appreciate the value of their retirement benefits, it’s well worth the investment. In fact, according to a Betterment for Business survey, 67% of plan participants said that a good 401(k) was very important or important when evaluating a job offer. However, if employees aren’t participating in the plan, this great benefit can fall flat. Plus, 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, lead to higher employee turnover, and increase costs associated with hiring and retention. By encouraging employees to make the most of the retirement savings plan, you can help reduce their financial stress and allow them to focus on what matters most. So how do you turn things around and boost employee participation? Consider these 6 simple ways to boost your 401(k) plan participation rates: 1. Take the easy way out—Yup, that’s right—add automatic enrollment to your 401(k) plan and see your participation rates skyrocket! It’s a great way to help your employees save for their future without lifting a finger. (And pick a higher initial deferral rate—such as 5% or 6%—to help employees save more.) There are three different types of auto-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) 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) 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. 2. Try again—If employees opt out of automatic enrollment, 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). Want to learn more about automatic enrollment? Read this article. 3. Give away “free money”—A 401(k) match, safe harbor, or profit sharing contribution offers a way to reward your employees and incentivize them to save for their future through your 401(k) plan. A matching contribution may not only increase your participation rate, but may help employees contribute enough to maximize the match (so think hard about how to structure that match!). 4. Eliminate or reduce the waiting period—Do you require employees to wait six months or longer before they join the 401(k) plan? Consider eliminating or shortening the waiting period. This way, you can promote the 401(k) plan during new employee orientation meetings and offer them the opportunity to sign up right away. 5. Offer employees the advice and guidance they need—The decision to invest in your 401(k) plan is a lot less intimidating if employees know they’re going to have help. Betterment offers personalized guidance to help employees make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. 6. Let employees know they can access their money in an emergency—If your employees are nervous about investing in the plan because they won’t have access to their money, consider adding loan and hardship withdrawal provisions. While taxes and penalties will hopefully discourage employees from using the funds unless they really have to, just knowing these features exist may provide the comfort some individuals need to participate. 7. Make the 401(k) plan participation rate known—Make the 401(k) plan participation rate part of your internal reports to help promote engagement. Consider assigning goals to encourage management (including those beyond human resources) to assist in boosting those numbers. 8. Communicate (and communicate some more)—Get the word out about your 401(k) plan. By promoting the benefits of the plan, you’ll likely be able to boost your plan participation rates (and even increase contributions). Consider showing the impact of plan contributions with compelling savings rate charts like this one: When it comes to selling the benefits of the plan, be sure to highlight things like contribution limits, the impact on income taxes (and how they’ll likely pay fewer tax dollars), and more. And find creative ways to encourage participation: talk up your own 401(k) plan participation as an example of what to do and what got you started. Consider asking respected and/or more tenured employees to talk about the importance of starting early. Betterment can help If you’re struggling with participation rates, take a hard look at your 401(k) plan. It may be time for a change. A Betterment 401(k) offers: More for your money—Our fees are well below the industry average, and we always tell you what they are so there are no surprises for you or your employees. Plus, lower fees mean that more money is staying invested for your employees. An easy-to-use platform—Our intuitive platform and goals-based approach help employees see their entire financial picture, with the ability to link outside accounts. Personalization for your employees—Our tech-forward solution takes into account employees’ age, savings, and retirement goals to create a personalized plan to help them save for the retirement they envision. A Betterment 401(k) plan can be better for your small business—and better for your employees. -
Why Employee Engagement Matters Now, More Than Ever
Employee engagement is critical to the wellbeing of your workforce and company. Learn ...
Why Employee Engagement Matters Now, More Than Ever Employee engagement is critical to the wellbeing of your workforce and company. Learn what employee engagement really means and how your company can improve. Across the United States and around the world, people are sheltering in place due to the COVID-19 pandemic. It’s far from “business as usual,” yet many employees are managing to stay productive and positive through it all. It’s a testament to people’s resilience—and to businesses’ effective employee engagement strategies. Now more than ever, employee engagement is critical to ensuring the wellbeing of your workforce and company. But what does employee engagement really mean and how can you improve yours? Let’s start with the basics. What is employee engagement? Employee engagement is a measure of employees’ dedication to your company. Gallup defines engaged employees as those who are “involved in, enthusiastic about, and committed to their work and workplace.” Engaged employees have an emotional commitment to the company and are willing to go the extra mile to help it succeed (technically known as “discretionary effort”). What about job satisfaction? Job satisfaction can often be confused with employee engagement. Job satisfaction is the level of happiness employees feel about their position in the company. It’s great if an employee has a high degree of job satisfaction, but it doesn’t necessarily translate to increased productivity or better business outcomes. In fact, some employees might be very happy contributing very little to the company while collecting a fat paycheck! According to the HR Technologist, the factors that affect job satisfaction and employee engagement are different: Job satisfaction is driven by competitive compensation, comprehensive benefits, a good work-life balance, and professional recognition. On the other hand, employee engagement is primarily driven by inspiring leadership, career development, internal communication, and a culture of diversity. Why is employee engagement important? The bottom line is employee engagement drives your firm’s literal bottom line. In fact, organizations in the top quartile of engagement had 21% higher profitability compared with those in the bottom. However, the same study also found that only 15% of employees worldwide and 35% of employees in the United States fall into the “engaged” sector. Having an engaged workforce will help you: Improve profitability Generate new ideas and innovations Reduce turnover Increase retention Improve productivity Boost customer satisfaction Make work a happier and healthier place for all What if employees aren’t engaged? It can take a long time for you or your human resources team to figure out an employee engagement program that resonates with everyone—from new hires and millennials to seasoned staffers and executives. Want a little extra help? Ask your staff for their input by sending out an employee engagement survey quarterly. If you’re able to measure employee engagement, you’ll be better able to figure out what needs to be adjusted. What can you do to improve employee engagement during a pandemic? With employees juggling health concerns, child care responsibilities, and more, it’s easy to see how some workers are having trouble being fully present and engaged in their work. In fact, an employee survey of more than 500 working moms revealed that 81% of respondents said their ability to engage effectively at work has been negatively impacted by the crisis. Both women and men have been feeling the stress and anxiety of trying to juggle it all. So, what can you do to help? If your staff is currently working from home, it can be hard to imagine what you can do to improve employee engagement from afar. But you can. Take a look at these employee engagement ideas: Check in—A recent Harvard Business Review article recommends that you nominate one person to be responsible for regularly checking in on employees’ wellbeing over the next three to six months. This way, any concerns, fears, and other issues related to working during a pandemic are caught before they escalate. Making your employees feel heard and providing assistance when needed can go a long way toward engaging your workforce. Select the right technology—What does your staff need to be able to effectively communicate while away from the office? Help alleviate frustration and facilitate relationship building by having the right instant messaging, video conferencing, and remote technology in place. Schedule a happy hour—Many employees are missing the social aspects of working in an office. So, think about recreating that employee experience virtually with a festive Zoom happy hour, game night, or group fitness class. What are some key employee engagement strategies? Pandemic or no pandemic, some employee engagement initiatives are highly effective in any climate. Here’s a list of the top three: 1. Manage well—When it comes to employee engagement, having good leaders matters a lot. In fact, research finds that 70% of the variance in employee engagement is due to their manager. So how do you inspire your leaders to excel? Consider sending your top managers to leadership training so they can gain the skills they need to motivate, recognize, and empower their staff members. Plus, investing in your employees’ continuing education has been proven to improve engagement and retention. According to LinkedIn, 94% of employees say they would stay at a company longer if it invested in their learning and development. 2. Help employees find deeper meaning—A key component of employee engagement is helping workers connect with their job on a deeper level. You don’t want your employees to just punch a clock, do the bare minimum, and collect a paycheck. It’s better for them—and for the company—if they can find greater purpose. According to the BetterUP Labs “Meaning and Purpose at Work” report, employees who find their work highly meaningful stay at their jobs for an average of 7.4 months longer than employees who don’t. Plus, employees doing meaningful work put in an extra hour per week and take two fewer days of paid leave per year! Here are a few ways to help instill greater meaning: Allow them to excel —Have a one-on-one conversation with employees about the company goals and their personal goals, and then see how they can be aligned for success. Even better, start the discussion during the onboarding process. Show them the results (and recognize them for their contributions)—Toiling away in obscurity isn’t fun for anyone. Let your employees know that their contributions matter to the company’s bottom line and that you appreciate their hard work. Seeing the results can help employees realize that what they do makes a real difference and deepen their connection to the company. Connect to the greater good —If employees know that their work is making the world a better place, it can help deepen their connection to their day-to-day jobs. 3. Improve your company culture—It’s difficult to quantify company culture, but everyone knows it’s important. According to a Deloitte study, 82% of respondents said that culture is a potential competitive advantage. However, only 28% said they understood their culture well and only 19% said they had the “right culture.” Deloitte defines culture as “the way things work around here.” Simply put, it encompasses all the values, actions, and incentives that make an impact on employees’ daily lives. Typically, the tone is set by senior leaders and trickles down throughout the organization. Ideally, your company culture will drive higher levels of engagement. So how do you improve your culture? Well, start by taking a step back and ask yourself: What are the values that make our company special? How do we want employees to feel when they work here? How can we change our performance management or compensation processes to reflect our company culture? Are we experiencing any toxic behaviors like fraud or extreme negativity? Is there an underlying reason why it’s happening? What can we do to attract, engage, and retain exceptional workers? How do benefits amplify our company culture? (Think tangibles like salary, 401(k) plan, and health plans as well as intangibles like flexibility and creative opportunity) Betterment can help Leadership, meaningful work, and company culture are integral to employee engagement. However, another driver of employee engagement and satisfaction is competitive compensation and benefits. Looking to upgrade your employee benefits package? Betterment can help you offer a better 401(k) at a fraction of the cost of most providers. As your full-service 401(k) partner, we: Get your plan up and running fast—and assist with the ongoing administration Select and monitor your investments (We assume the risk and responsibility as a 3(38) investment manager.) Offer your employees personalized guidance to help them save for long- and short-term goals ranging from retirement to debt reduction Want more information? Talk to Betterment today. -
Paycheck Protection Program Flexibility Act of 2020
The Flexibility Act will greatly benefit small business owners who borrowed PPP funds, ...
Paycheck Protection Program Flexibility Act of 2020 The Flexibility Act will greatly benefit small business owners who borrowed PPP funds, increasing their ability to have those loans forgiven. On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act of 2020 (the “Flexibility Act”), which modifies provisions related to the forgiveness of loans made to small businesses under the COVID-19 related Paycheck Protection Program (PPP). The Flexibility Act will greatly benefit business owners who borrowed PPP funds and increase their ability to have those loans forgiven. What is being modified? The time period during which PPP loan proceeds must be spent has been modified from 8 weeks from loan origination to the earlier of 24 weeks from loan origination OR December 31, 2020. The percentage of loan proceeds that may be spent on Eligible Non-Payroll costs has increased from 25% to 40%. The deadline to restore full-time employee headcount and/or wages that were cut or decreased between February 15, 2020 and April 2, 2020, has been extended to December 31, 2020. The loan maturity term date for new loans taken after June 5, 2020, has been extended from 2 years to 5 years. Borrowers and lenders can renegotiate maturity dates of existing PPP loans. The deadline for repaying any portion of loans that are not forgivable has been extended from 6 months to the time when the lender receives the forgiven amounts from the SBA. However, if a borrower fails to apply for forgiveness within 10 months after the end of the covered period, then the borrower must immediately begin making repayments. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
DOL Rules that 401(k) Notices Can Be Sent Electronically
The new “Notice and Access” Rule provides relief to the expense and burden of ...
DOL Rules that 401(k) Notices Can Be Sent Electronically The new “Notice and Access” Rule provides relief to the expense and burden of distributing required 401(k) notices to employees. On May 21, 2020, The U.S. Department of Labor (DOL) announced final rules allowing required 401(k) plan disclosures to be posted online or delivered via email. This new safe harbor rule was much anticipated since prior to the rule required notices could only be delivered electronically if employees satisfied the definition of being “wired at work” (or affirmatively opted to receive notices electronically). Plan participants are required to receive notices and disclosures about their 401(k) plan in a secure and timely manner. The new e-Disclosure Safe Harbor Rule provides some relief from certain administrative expenses in that it will allow new forms of electronic delivery to be the default delivery method, so long as the intended recipient can be reached electronically and receives the appropriate initial notification. The New “Notice and Access” Rule The new rule allows plan sponsors to deliver 401(k) disclosure notices electronically to all employees that are part of the plan, regardless of their employment status. As a safe harbor, this new rule includes several requirements: Initial Paper Notice - Before defaulting an individual into electronic delivery, a plan administrator must first notify the individual by paper: 1) that some or all plan documents will be furnished electronically; 2) that they have the right to request and receive paper copies of some or all of the covered documents (or to opt out of electronic delivery altogether); and 3) of the procedures for exercising such rights. Notice of Internet Availability - A plan administrator is required to send a notice of internet availability to the employee’s email address on file each time a 401(k) plan disclosure is posted to the website. Each notice of internet availability must remind the individual of his or her right to request and receive paper copies and to opt out of electronic delivery altogether, as well as the procedures to exercise such rights. Covered Disclosures and Documents - Documents must be posted online on a timely basis and written in a manner to be understood by an average employee. The 401(k) documents covered by the new rule are: Summary Plan Description (SPD) Summary of Material Modification (SMM) Summary Annual Reports QDIA Notice Annual Notice (Safe Harbor & Automatic Enrollment) Investment-related disclosures (identifying information, performance data, benchmarks, fee information, etc.) Website Standards - Documents posted under the new rule must be maintained on the website until replaced by an updated document. Posted documents must be searchable electronically and protect the confidentiality of personal information. Invalid Electronic Address - Email delivery systems must include invalid electronic address alerts. Once an invalid address has been identified (e.g., email is returned as undeliverable), the problem must be fixed by sending the notice to a secondary email address on file (work email vs. personal email). If this issue is not able to be resolved, the individual must be treated as if they had opted out of electronic delivery and be sent a paper version of the documents as soon as possible, until a new valid email address has been obtained. -
Wondering If You Should Start a 401(k)?
Now more than ever, your employees need help making well-informed decisions today to ...
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. -
Small Business Paycheck Protection Program and 401(k)s
Understanding rules surrounding Paycheck Protection Program funds with respect to ...
Small Business Paycheck Protection Program and 401(k)s Understanding rules surrounding Paycheck Protection Program funds with respect to employer contributions can help ensure they qualify for loan forgiveness. The Paycheck Protection Program (“PPP”) is a $660 billion aid program of the CARES (Coronavirus Aid, Relief, and Economic Security) Act to provide loans to companies with 500 or fewer employees. The loans may potentially be forgiven as long as the business utilizes the funds in accordance with PPP provisions. Eligible Costs that Qualify for PPP Loan Forgiveness Your business will need to repay PPP funds if the loan is used for anything other than payroll costs, mortgage interest, rent, and utilities payment. You may also owe money if you do not maintain certain staffing and payroll levels as follows: Staffing: Loan forgiveness will decrease as the full-time employee headcount decreases Payroll: Loan forgiveness will decrease if salaries and wages are decreased by 25% for any employee who made less than $100,000 in 2019 If you did make staffing or payroll decreases between February 15, 2020 and April 2, 2020, you have until December 31, 2020 to restore full-time employees and/or salaries. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll Costs include Retirement Plan Contributions PPP funds can be used for payroll costs, including benefits such as health and retirement, until the earlier of 24 weeks from loan origination OR December 31, 2020. (NOTE: the original time frame was updated as part of the Flexibility Act.) Payroll costs may include 401(k) employer contributions such as match and profit sharing. In addition, in its Interim FAQ Guidance, the Treasury Department clarified that these employer contributions are not counted towards the $100,000 employee compensation cap within the CARES Act definition of payroll costs. Considerations regarding 401(k) Contributions made with PPP Funds Although 401(k) plan contributions qualify as PPP payroll costs, employers should be aware that the timing of contribution allocations is important. Employee Elective Contributions made through paycheck deductions are eligible PPP payroll costs since they are compensation. Employer Matching Contributions are eligible PPP payroll costs. In addition, it’s possible (but not yet confirmed) that matching contributions that should have been allocated before the covered period but not paid out until during the covered period may be considered as (forgivable) payroll costs. However, it remains unclear as to whether matching contributions made after the covered period (including matching contributions typically made at the end of the plan year) will qualify under PPP. Employers may, therefore, want to consider ‘front-loading’ matching contributions by paying them out during the covered period to ensure that they are included as payroll costs and forgivable. (NOTE: The Flexibility Act extended the covered period from the earlier of 24 weeks from loan origination OR December 31, 2020.) We are waiting on additional guidance from the Treasury Department regarding employer contribution allocations. Employer Profit Sharing Contributions are often allocated at the end of the year. However, as noted with employer matching contributions, waiting until the end of the plan year to allocate may result in the contribution not being included as PPP payroll costs. In summary, any businesses receiving a PPP loan should be proactive in making employer contributions during the covered period. While uncertainties remain, the benefits of making employer contributions are clear: Increase in eligible (forgivable) payroll costs Meeting employer contribution obligations of the plan (per plan document) Providing additional retirement benefits to employees Are 401(k) Employer Contributions Made with PPP Funds Tax Deductible? IRS Notice 2020-32 states that PPP funds used for eligible expenses that would otherwise be deductible are not tax deductible if the payment of the expense results in loan forgiveness. In other words, if the company uses the funds to provide 401(k) employer contributions as an eligible expense and the loan is forgiven, those employer contributions would not be considered a deductible expense for the business because doing so would count as ‘double dipping’ on tax deductions. However, on May 5, 2020, the Senate introduced legislation (the Small Business Expenses Protection Act of 2020, S. 3612) that would overrule this notice to clarify that the expenses funded by the PPP are deductible. Betterment is keeping a very close eye on this and all legislation related to COVID-19 to provide our clients with the latest information. Betterment is not a tax advisor, nor should any information in this article be considered tax advice. Please consult a tax professional. -
What is a 401(k) QDIA?
A QDIA (Qualified Default Investment Alternative) is the plan’s default investment. When ...
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 ...
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. -
CARES Act FAQs for Employees
More details about the special distributions and loan provisions that were made possible ...
CARES Act FAQs for Employees More details about the special distributions and loan provisions that were made possible by the CARES Act. CARES Act FAQs for Employees Q: What is a Coronavirus-Related Distribution (CRD)? A: This is a new type of distribution available to 401(k) and other retirement plans that was created in 2020 to provide relief to those financially impacted by COVID-19. CRDs enabled eligible individuals to: Take a distribution of up to $100,000 in aggregate from 1/1/2020 - 12/30/2020; Avoid the usual 10% early withdrawal penalty; Elect to repay the distribution within 3 years from receipt of the distribution to avoid owing any taxes on the distribution. Q: Who was eligible to take this distribution? A: Individuals needed to meet one of the following criteria: Had been diagnosed with COVID-19 Spouse or dependent had been diagnosed with COVID-19 Had been experiencing financial hardship as a result COVID-19 including being quarantined, furloughed, laid-off, having to work reduced hours, or having lost childcare. Q: What was the maximum amount available to be taken as a CRD? A: Eligible individuals could take up to the lesser of 100% of their vested balance (amount owned outright) or $100,000 in aggregate across all tax-qualified defined contribution plans. This could be taken as a one-time distribution up to $100,000 or multiple distributions until 12/30/2020, as long as the aggregate amount does not exceed $100,000. Q: What are the tax implications of the CRD? A: Generally, any distributions taken prior to age 59½ are subject to a 10% early withdrawal penalty. The IRS has waived this 10% penalty for CRDs. Additionally, distributions are normally also subject to 20% federal tax withholding. You may have waived this withholding if you had elected to opt out on the CRD form. The distribution will be counted as taxable income unless you choose to repay the amount in full within three years from the date you receive the funds. Q: What are the tax implications if my CRD included any Roth funds? A: Roth 401(k)s distributions are not subject to any tax withholding if you are at least age 59½ and have contributed to your Roth account for at least 5 years. If you do not meet these criteria, the distribution is considered “unqualified,” and the earnings portion of the Roth 401(k) is subject to taxation. Q: How do I make repayments on the CRD and what happens if I don’t make the repayments in the given 3-year period? A: Here are two resources you may find useful: IRS Questions and Answers on CRDs The actual CARES Act bill, which includes a section on CRD repayments If you took a CRD and would like to repay it, you have the option to make an indirect rollover to an Individual Retirement Account (IRA)—at Betterment or elsewhere. (Note that Betterment does not accept indirect rollovers into 401(k) plans. However, if you make an indirect rollover to an IRA first, you can then rollover the funds to your 401(k) account if you wish.) To proceed with an indirect rollover at Betterment: Deposit the funds in a personal bank account linked to Betterment If you do not have an IRA with Betterment, you can start by creating an IRA account here. Log into your Betterment account and indicate the amount you’d like to rollover repay to a Betterment IRA via Deposit > Traditional IRA/Roth IRA > Indirect IRA Rollover. (Note: although Betterment only permits one indirect rollover per year, you have until 12/31/2023 to repay your CRD in full, so you need not pay the entire amount at once). You are responsible for documenting the CRD and its repayment when you file your taxes. If you decide to make an indirect rollover to an IRA, you will need to note this rollover of your employer-sponsored plan on Form 1040. If you took the CRD from a 401(k) with Betterment, we will provide you with a 1099-R. If you decide to complete an indirect rollover to a Betterment IRA, we will also provide a Form 5498 documenting the indirect rollover into the IRA. These two forms can be used as documentation that you took a CRD and made a repayment to an eligible retirement account. We will continue this practice while we wait on guidance from the IRS as it relates to whether individuals should also make this note with respect to CRDs. Q: Are CRDs eligible for rollover? A: No, CRDs were not able to be rolled over to another qualified account. However, if you decide to repay your CRD, it will go back into your 401(k) account and will be treated as a distribution eligible for rollover (direct trustee-to-trustee transfer). Q: Can I take a loan against my 401(k) Plan? A: If your 401(k) plan includes a loan provision, the usual available loan amount is the lesser of $50,000 or 50% of your vested account balance. Relaxed loan provisions that your plan may have adopted as part of the CARES Act expired in September 2020. Q: What was the maximum loan amount I could take under the relaxed loan provisions of the CARES Act? A: The CARES Act allows employees to take up to the lesser of 100% of the vested balance or $100,000. This is a temporary increase over the usual 50% of vested balance or $50,000. The increased loan limit is only applicable to loans initiated from March 27, 2020 to September 23, 2020 (180-day period). Q: What are the repayment rules? A: Employees with 401(k) loan repayments on new or existing loans that were due between March 27, 2020 and December 31, 2020 could have elected to delay them for one year. Interest (that you effectively pay back to yourself) continued to accrue and the term of the loan will be adjusted accordingly. Q: Was a different interest rate applied to my loan if I delayed my repayments for a year? A: The same interest rate continued to apply to any delayed repayments, but interest continued to accrue during this period which may increase the total loan repayment amount. To help ease the financial impact, the maturity date of the loan was able to be extended for up to one year. Q: How long were CRDs and relaxed loans available for? A: CRDs were available from January 1, 2020 to December 30, 2020. The relaxed loans were available until September 23, 2020. The one-year postponement of loan repayments was only applicable for repayments due between March 27, 2020 and December 31, 2020. Note that these provisions were not automatically available to all 401(k) plans; your employer had to decide to adopt them. This article is being provided solely for marketing and educational purposes. It does not address the details of your personal situation and is not intended to be an individualized recommendation that you take any particular action, including rolling over an existing account. When deciding whether to roll over a retirement account, you should carefully consider your personal situation and preferences. Specific factors that may be relevant to you include: available investment options, fees and expenses, services, withdrawal penalties, protections from creditors and legal judgments, required minimum distributions, and treatment of employer stock. Before deciding to roll over, you should research the details of your current retirement account, consult tax and other advisors with any questions about your personal situation, and review our Form CRS relationship summary and other disclosures. If you currently participate in a 401(k) plan administered or advised by Betterment (or its affiliate), please understand that you are receiving this email solicitation as part of a general offering and that neither Betterment nor any of its affiliates are acting as a fiduciary, or providing investment advice or recommendations, with respect to your decision to roll over assets in your 401(k) account or any other retirement account. -
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 ...
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 ...
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 ...
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. -
Guide to Meeting Your 401(k) Fiduciary Responsibilities
To help your business avoid any pitfalls, this guide outlines how you can fulfill your ...
Guide to Meeting Your 401(k) Fiduciary Responsibilities To help your business avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities and manage them properly. If your company has or is considering, a 401(k) plan, you’ve probably heard the term “fiduciary.” But what does it mean to you as a 401(k) plan sponsor? Simply put, being a fiduciary means that you’re obligated to act in the best interests of your 401(k) plan participants. It’s serious business. If fiduciary responsibilities aren’t managed properly, your business could face serious legal and financial ramifications. To help you avoid any pitfalls, this guide outlines how you can fulfill your 401(k) fiduciary responsibilities. A brief history of the 401(k) plan and fiduciary duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Among other responsibilities, fiduciaries must always act in the best interests of employees who save in the plan and avoid conflicts of interest. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor (DOL) provides guidance on ERISA fiduciary requirements and enforcement. As you can imagine, following these rules can sometimes feel like navigating a maze. But the good news is that an experienced 401(k) provider like Betterment can help you understand your fiduciary duties and even shoulder some of the responsibility for you. Key fiduciary responsibilities Even if you’re a business owner with a small 401(k) plan, you still have fiduciary duties. By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities: You are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. 401(k) fiduciary responsibility checklist As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when making decisions about plan operations. As a 401(k) fiduciary, you must follow five cornerstone rules: Act in employees’ best interests—Every decision you make about your plan must be solely based on what is best for your participants and their beneficiaries. Act prudently—Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of these responsibilities, you will need to engage the services of those who do, such as investment managers or recordkeepers. Diversify plan investments—You must diversify investments to help reduce the risk of large losses to plan assets. Follow the plan documents—You must follow the terms of the plan document when operating your plan (unless they are inconsistent with ERISA). Pay only reasonable plan fees—Fees from plan assets must be reasonable and for services that are necessary for your plan. Detailed DOL rules outline the steps you must take to fulfill this fiduciary responsibility, including collecting fee disclosures for investments and service providers, and comparing (or benchmarking) fees to ensure they are reasonable. You don’t have to pay a lot to get a quality 401(k) plan Betterment’s fees are well below industry average, and we always tell you what they are so there are no surprises for you—and more money working harder for your employees. Plus, since we serve as both a 3(16) administrative fiduciary and 3(38) investment fiduciary, we can help limit your risk exposure so you can focus on running your business--not managing your plan. Why it’s important to fulfill your fiduciary duties Put simply, it’s incredibly important that you meet your 401(k) fiduciary responsibilities. Not only are your actions critical to your employees’ futures, but there are also serious consequences if you fail to fulfill your fiduciary duties. In fact, plan participants and other plan fiduciaries have the right to sue to correct any financial wrongdoing. If the plan is mismanaged, you face a two-fold risk: Civil and criminal action (including expensive penalties) from the government and the potentially high price of rectifying the issue. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of fiduciary responsibilities and may be required to: Restore plan losses (including interest) Pay expenses relating to correction of inappropriate actions. While your fiduciary responsibilities can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals like Betterment. How to be the best 401(k) fiduciary you can be Now that you understand what a 401(k) fiduciary is, you may be wondering how to best fulfill your fiduciary responsibilities. Here are some tips: Pay reasonable fees—As you know, fees can really chip away at your participants’ account balances—and have a detrimental impact on their futures. So take care to ensure that the services you’re paying for are necessary for the plan and that the fees paid from plan assets are reasonable. To determine what’s reasonable you may need to benchmark the fees against those of other similar retirement plans. Your 401(k) provider should be able to assist you with the benchmarking process. Deposit participant contributions in a timely manner —This may seem simple, but it’s extremely important to do it quickly and accurately. Specifically, you must deposit participants’ contributions to your plan’s trust account on the earliest date they can be reasonably segregated from general corporate assets. The timelines differ depending on your plan size: Small plan—If your plan has fewer than 100 participants, a deposit is considered timely if it’s made within seven business days from the date the contributions are withheld from employees’ wages. Large plan— If your plan has 100 participants or more, you must deposit contributions as soon as possible after you withhold the money from employees’ wages. It must be “timely,” which means typically within a few days.For all businesses, the deposit should never occur later than the 15th business day of the month after the contributions were withheld from employee wages. However, contributions should be deposited well before then. Fulfill your reporting and disclosure requirements—Under ERISA, you are required to fulfill specific reporting requirements. While the paperwork can be complicated, an experienced 401(k) provider like Betterment should be able to guide you through the process.It’s important to note that if required government reports—such as Form 5500—aren’t filed in a timely manner, you may be assessed financial penalties. Plus, when required disclosures—such as safe harbor notices—aren’t provided to participants in a timely manner, the consequences can also be severe including civil penalties, plan disqualification by the IRS, or participant lawsuits. Follow the plan document—It’s important to know your plan document. In fact, the IRS mandates that 401(k) plans operate in accordance with the terms of its written document to maintain its tax-favored status and prevent a breach of fiduciary duty.Make a mistake? The IRS considers the issue an “operational defect,” and your 401(k) plan can be disqualified for not fixing the problem in a timely manner. However, the IRS offers a handy 401(k) Plan Fix-It Guide to help you resolve any issues that crop up. Select prudent investments—Unfortunately, there can be many hidden fees buried in plan investments, so it’s critical to be vigilant about those you select. In addition to fee considerations, you must also think about whether they meet your plan’s investment objectives. Wondering which investments you should choose? Betterment can help.In fact, most companies hire one or more outside experts (such as an investment advisor, investment manager, or third party administrator) to help them manage their fiduciary responsibilities. Get help shouldering your fiduciary responsibilities When it comes to managing your fiduciary responsibilities, you don’t have to go it alone. However, the act of hiring 401(k) experts is a fiduciary decision! Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring your plan’s investment professionals and administrators. How much support is right for you? For most employers, day-to-day business responsibilities leave little time for extensive investment research, analysis, and fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties or even plan administration responsibilities. Take a look at the chart below to see the different fiduciary roles—and the implications they have for you as the employer: Defined in ERISA section Outside expert Employer No Fiduciary Status Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary authority for assets and investments Relieves employer of investment fiduciary responsibility 3(16) Has discretionary responsibility for certain administrative aspects of the plan Relieves employer of certain plan administration responsibility Betterment can help When you appoint an ERISA 3(38) investment manager like Betterment, you fully delegate responsibility for selecting and monitoring plan investments to the investment manager. That means less work for you and your staff, so you can focus on your business. In addition to assuming fiduciary responsibility for your investment options, Betterment offers: Consultative plan sponsor support—As a total 401(k) solution, we are your full-service partner providing everything from fiduciary services to plan design consulting to ensure your 401(k) is fully optimized. Personalized employee guidance—Our action-oriented approach to financial wellness enables your employees to make strides toward their long- and short-term goals ranging from paying down debt to saving for retirement. Plus, we link employees’ outside investments, savings accounts, IRAs—even spousal/partner assets—to help them see the big picture. And we do it all for fees that are well below industry average. -
How a Competitive Compensation Package Can Attract Top Talent
As an employer, you know that there’s a lot more to keeping employees happy. Let’s review ...
How a Competitive Compensation Package Can Attract Top Talent As an employer, you know that there’s a lot more to keeping employees happy. Let’s review the five most important aspects of competitive compensation packages. Offering an endless supply of snacks. Giving employees their birthday as a paid holiday. Turning the conference room into a massage room. Every day, there’s a new perk popping up at companies across the United States. As an employer, you know that there’s a lot more to keeping employees happy than beer on tap and dogs at work. But what really matters to employees? How can the right benefits help you attract and retain top talent? And what does a competitive compensation strategy really look like? Let’s start by reviewing the five most important aspects of competitive compensation packages. 1. Money talks, salary matters The million-dollar question every prospective employee wants to ask is: “How much will I get paid?” There’s no question about it—the value of your compensation packages will often determine the caliber of employee you’re able to attract and retain. According to the Society for Human Resource Management (SHRM), salary ranges help employers control their payroll expenses and ensure pay equity among their staff members. Before you decide if you’re going to set salaries at, above, or below the market range, think about your company’s compensation philosophy. For example, if you’re trying to become a market leader, you may want to pay employees more than your competitors. Wondering what your competitive salary ranges are? Some research is in order. Based on geographic location, analyze the salary ranges for all of your company’s jobs. Beyond base pay, you’ll also want to consider bonuses, commissions, and equity. Need a little help? Websites like glassdoor.com can offer a peek inside salaries at other companies, or you could consider hiring a vendor to analyze and assist with pay scales. Want to compete? Pay at or above the market range (or have other generous benefits that make up the difference). 2. A healthy attitude about health insurance An important part of employees’ total compensation is health insurance. While some employers offer coverage to employees only, most employers extend the option of coverage to employees’ immediate family members. In addition, some employers also offer dental insurance, vision insurance, short-term and long-term disability, life insurance, and pet insurance. According to research by the Kaiser Family Foundation, the average cost of employer-sponsored health insurance in terms of annual premiums was $7,188 for single coverage and $20,576 for family coverage. Typically, the employee and the employer each pay a portion of the premium. However, very generous employers may cover 100% of the premium cost of a basic plan and give employees the option to select a higher-level plan (and just pay the cost difference). Want to compete? At a minimum, provide employees with health care, vision, and dental insurance and cover some or all of the premium. 3. Time to rest, recharge, and recover After asking about salary, most employees want to know about paid time off (PTO). Typically, companies handle PTO in one of three ways: Single PTO balance—A total number of days (for example, 14 days) that employees can use at their discretion when they’re sick, want to take a vacation, or just want time for themselves. If employees don’t take all their time off, some companies allow them to roll over days to the next year and even cash them out when they leave the company. Separate PTO balances for sick, vacation, and personal—Separate buckets of PTO (for example, 5 sick days, 10 vacation days, and 2 personal days) that employees can use for that specific purpose. Like with the single PTO balance, you’ll need to figure out your roll-over and cash-out policy. Unlimited PTO—The newest trend in PTO, many companies are allowing employees to take as many days off as they want (and for whatever reason) as long as they’re meeting their performance goals. In addition, many employers provide the typical paid holidays such as Thanksgiving, Memorial Day, and Labor Day. When it comes to managing PTO benefits, you’ll also need to comply with federal, state, and local laws (including regulations on family and medical leave (FMLA), hourly wage minimums, and military leave). However, just offering the basics may not be enough to entice prospective employees. For example, FMLA allows eligible employees to take unpaid, job-protected maternity leave for 12 weeks. To better serve their employees, many companies go above and beyond this standard by offering paid maternity leave (and increasingly, paid paternity leave) for several weeks or even months. Want to compete? Do a market analysis to ensure you offer a competitive leave policy—and then sweeten the pot with an extra perk such as a floating holiday. 4. Future focused, retirement ready After their day-to-day needs are met, employees start looking to the future. As an employer, you can help them achieve the retirement they envision by offering a retirement plan. The most popular type of workplace retirement program today is the 401(k) plan. On the fence about offering a 401(k) plan as part of your benefits package? Consider these top three reasons to start one today: Attract (and retain) employees—In the battle for top talent, a competitive 401(k) plan with perks like matching contributions can entice jobseekers to join your company. (Plus, a company match may cost less than you think.) Help your employees build a brighter future—Studies show that financial stress can have a damaging impact on business output, lead to higher employee turnover, and increase recruiting costs. Help mitigate that stress by offering a 401(k) plan that allows your employees to save for their future with confidence. Enjoy valuable tax advantages—Employer matching, profit sharing, and safe harbor contributions are tax deductible and bypass payroll taxes! Plus, small businesses can receive valuable tax credits to help offset the costs of your 401(k) plan. Want to compete? Offer a 401(k) plan with a company matching contribution. 67% of employees surveyed by Betterment said that a good 401(k) was an important factor when evaluating a job offer. 5. Take stock of employee stock options For start-ups and other emerging companies, employee stock options are also a popular form of compensation. Employees may even join the company for a lower-than-usual salary in exchange for a generous package of stock options. So what exactly is a stock option? Well, it’s a contract that gives employees the right to buy (or “exercise”) a set number of shares of the company’s stock at a pre-set price. However, employees must buy the shares within a certain time period—and after it expires, they no longer have the option to do so. If the company prospers, employees who have exercised their stock options could become very wealthy. By giving employees stock options, you also give them a good reason to be invested (literally) in their company’s success. Perks, perks and more perks So what about the free beer and nap rooms dreamed up by HR professionals? According to Forbes Magazine’s Forbes Coaches Council some of those benefit offerings are nothing more than a gimmick. In fact, they may be perceived negatively by employees. For example, free food, booze, and places to crash could be seen as a contrived way to hurt employees’ work-life balance by incentivizing them to work longer hours. However, there may be some extra perks—like remote working arrangements or student loan repayments—that could resonate well with your employees. Wondering which extra compensation and benefits perks could work? Start the conversation with your staff. From one-on-one meetings to employee surveys, there are many ways to take the pulse of your workforce. So, what will it all cost? As you can imagine, total compensation varies dramatically across geographic location, industry, and role. You can dig deeper into employee benefit benchmarking data by partnering with a compensation company to develop a better understanding of your local and regional competition. With this data, you can examine compensation at a more granular level to understand if your company is on target—or may need a compensation adjustment. After all, more competitive compensation means more qualified employees—and potentially more business success. Betterment can help In the competition for top talent, every single benefit matters. For jobseekers, a strong 401(k) plan can make all the difference. So if you want to enhance your total compensation package, consider offering a 401(k) plan or adding a company match to your existing plan. While some employee benefits are very costly, the good news is that offering your employees a quality 401(k) plan may cost less than you think. At Betterment, our fees are a fraction of the cost of most providers. As your full-service partner, we can help design your ideal 401(k) plan with employee-friendly benefits like company matching contributions and automatic enrollment. -
Saver’s Credit: Understanding the Retirement Savings Contribution Credit
The Saver’s Credit is an excellent incentive for your employees to contribute to your ...
Saver’s Credit: Understanding the Retirement Savings Contribution Credit The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan. Here’s how to answer the most frequently asked questions. What if your employees could receive a tax credit just for saving for retirement? It sounds too good to be true, but it actually is real! It’s called the Retirement Savings Contribution Credit, more commonly known as the Saver’s Credit. The Saver’s Credit is an excellent incentive for your employees to contribute to your retirement plan; however, they may not even know about it! In fact, only about 12% of eligible taxpayers claim this credit! Want to get the word out about the Saver’s Credit? Here’s how to answer your employees’ most frequently asked questions. 1. What is the Retirement Savings Contribution Credit or Saver’s Credit? The Saver’s Credit gives a tax break to low- and moderate-income taxpayers who are saving for retirement. If you qualify for this special credit, it could reduce (or even eliminate) your income tax bill. That’s because it’s not a tax deduction, it’s a tax credit. Wondering what the difference is between the two? Here’s how it works: A tax deduction reduces your taxable income, and you pay taxes on the remaining taxable income. A tax credit directly reduces the amount of taxes you owe. That means it’s far more valuable than simply a tax deduction! The Saver’s Credit is non-refundable, which means it can only be subtracted from your tax liability—and potentially zero out your income tax bill—but it can’t provide you with extra money from the US Treasury. So if you owe $900 but you have a $1,000 Saver’s Credit, you won’t have to pay a dime to Uncle Sam (but the other $100 tax credit is lost). Plus, this special credit is above and beyond any tax deductions you may receive by making a 401(k) or Traditional IRA contribution! 2. Am I eligible for the credit? You're eligible for the credit if you: Are age 18 or older Are not a full-time student Are not claimed as a dependent on another person’s return Made before-tax or after-tax retirement contributions to an eligible plan Met the Saver’s Credit adjusted gross income (AGI) qualifications (For the 2020 tax year, it’s less than $65,000 if you file “married filing jointly,” less than $48,750 if you file “head of household,” and less than $32,500 if you file “single,” “married filing separately,” or “qualifying widow(er).”) 3. Which retirement accounts are eligible for the Saver’s Credit? You can potentially claim a Saver’s Credit for your eligible contributions if you contribute to one (or more) of the following popular plans: 401(k) IRA (Traditional IRA or Roth IRA) SIMPLE IRA 403(b) 457 plan For additional details on eligible account types, refer to the IRS website. What’s not eligible? If you received any employer contributions (such as a company match), you can’t claim those contributions for the credit. Rollover contributions (money that you transferred from another retirement plan) also aren’t eligible for the Saver’s Credit. 4. How much is the credit worth? The credit amount is calculated on a sliding scale. Depending upon your income (as reported on your Form 1040 series return), you’ll receive a tax credit of 50%, 20% or 10% of your qualified retirement savings contributions. The maximum contribution amount that may qualify for the credit is $2,000 ($4,000 if married filing jointly), which means your maximum credit is $1,000 ($2,000 if married filing jointly). As you’ll see in the chart below, the income brackets vary depending upon your tax filing status: Married filing jointly, head of household, single, married filing separately, or qualifying widow(er). Review the following charts for information on the specific income brackets and credits for tax year 2019 and 2020. 2019 Savers Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution AGI not more than $38,500 AGI not more than $28,875 AGI not more than $19,250 20% of your contribution $38,501 - $41,500 $28,876 - $31,125 $19,251 - $20,750 10% of your contribution $41,501 - $64,000 $31,126 - $48,000 $20,751 - $32,000 0% of your contribution more than $64,000 more than $48,000 more than $32,000 2020 Saver’s Credit Credit Rate Married Filing Jointly Head of Household All Other Filers* 50% of your contribution AGI not more than $39,000 AGI not more than $29,250 AGI not more than $19,500 20% of your contribution $39,001 - $42,500 $29,250 - $31,875 $19,501 - $21,250 10% of your contribution $42,501 - $65,000 $31,876 - $48,750 $21,251 - $32,500 0% of your contribution more than $65,000 more than $48,750 more than $32,500 *Single, married filing separately, or qualifying widow(er) 5. Can you give me an example of how the Saver’s Credit works in the real world? Take these scenarios for example: Sam and Jil Sam and Jill have been married for 10 years. Sam was unemployed in 2020, and Jill earned $57,000 from her job at the bank. Jill contributed $2,000 to her 401(k) plan in 2020. After deducting her 401(k) contribution, their AGI on their joint return was $55,000. According to the 2020 Saver’s Credit chart, couples who file as “married filing jointly” and have an AGI between $42,501 and $65,000, may claim a tax credit, which is equal to 10% of their retirement contribution. Therefore, Sam and Jill may claim a 10% Saver’s Credit—$200—for Jill’s $2,000 401(k) plan contribution. Monica A recent college grad, Monica earned $32,000 in 2020. To help save for her future, she contributed $2,000 to her 401(k). After deducting her contribution, her AGI on her tax return was $30,000. According to the 2020 Saver’s Credit chart, a person who files as “single” and has an AGI between $21,251 and $32,500 may claim a tax credit that is equal to 10% of their retirement contribution. Therefore, Monica may claim a 10% Saver’s Credit—$200—for her $2,000 401(k) contribution. 6. I think I’m eligible for the Saver’s Credit. How do I claim it? To claim the credit, use tax Form 8880, “Credit for Qualified Retirement Savings Contributions.” If you have any questions about how to claim this credit, talk to your tax accountant. Subhead: Betterment offers the support your employees need As an employer, you can help your employees pursue their retirement goals—and Betterment can help. As a full-service plan provider, Betterment will do the heavy lifting for you from onboarding to ongoing administration. We’re also here for your employees every step of the way. Whether they’re wondering if they’re eligible for the Saver’s Credit or debating how to invest, we offer personalized advice to help them make smarter decisions. Plus, we do it all for a fraction of the cost of most providers. -
CARES Act Overview for 401(k) Plans
The CARES Act provides some temporary relief for 401(k) plan sponsors and their ...
CARES Act Overview for 401(k) Plans The CARES Act provides some temporary relief for 401(k) plan sponsors and their participants. Here's everything you need to know about provisions specific to plans. The CARES Act, a $2 trillion economic stimulus package signed into law on March 27 after unusually speedy Congressional approval, provides some temporary relief for retirement plan sponsors and their participants. Below is a summary of provisions specific to 401(k) plans, although there are many details yet to be worked through. Eligibility: In order to be eligible for the Coronavirus Related Distributions (CRDs) and relaxed loan provisions, participants will be required to certify that they meet one of the following criteria: They have contracted COVID19 themselves Their spouse or dependent has contracted COVID19 They have lost a job, been furloughed or otherwise suffered a heavy financial burden because of COVID19 (including loss of childcare) CRDs and the relaxed loan provisions are optional plan features. Plan sponsors who decide to make these features available to their participants should inform their providers, who can offer guidance, additional details and assistance in communicating changes to your employees. Although plans will need to be amended to include these special features, you have until the end of 2022 to do so. Betterment for Business has been in touch with clients regarding the CARES Act and is waiving any related plan amendment fees. Coronavirus Related Distribution (CRD) Eligible participants (see above) can take up to $100,000 from employer-sponsored retirement plans and IRAs without being subject to the normal 10% early distribution penalty or the 20% mandatory tax withholding. In addition, although the CRD will be treated as regular income, it can be spread over three years for tax purposes, and the distribution can be repaid---without being subject to the regular contribution cap---within three years to avoid taxation. CRDs are available for the entire 2020 calendar year, so even 2020 distributions made prior to the enactment of the CARES Act may be treated as a CRD. Relaxed Loan Provisions The available 401(k) loan amount has been increased to the lesser of 100% of the vested balance (up from 50%) or $100,000 (up from $50,000). In addition, participants with loan repayments due between 3/27/2020 and 12/31/2020 can elect to delay them for 1 year. Interest will continue to accrue, but the term of the loan will be extended accordingly. Required Minimum Distribution (RMD) Waiver By law, participants turning 72 are required to start taking RMDs based on previous calendar year-end market values. (The RMD age was increased in 2020 from 70 ½.) So 2019/2020 RMDs based on 12/31/18 and 12/31/2019 market values would have forced individuals to sell investments at drastically reduced prices. The CARES Act waives all RMDs for 2020, including first-time 2019 RMDs, which individuals may have been waiting until April 1, 2020 to make. Any RMDs already taken in 2020 (including 2019 RMDs paid in 2020) are eligible for a 60-day indirect rollover (or 3 year repayment under CRD rules) and won’t be considered to have been taken as a distribution. If you have more questions about COVID-19 and the CARES Act, please see our FAQs. -
401(k) Plans for Small Businesses
When deciding on employee benefits, more employers are recognizing the importance of ...
401(k) Plans for Small Businesses When deciding on employee benefits, more employers are recognizing the importance of financial wellness and how it attracts and retains top talent. Health insurance. Bonuses. Cold brew on tap. Retirement plans. Free lunch Fridays. Ping pong tables. Nap pods. When it comes to employee benefits, there’s a lot to consider. Some perks clearly outrank others, but when deciding what to offer, it can be hard to determine which are right for your small business. But these days, more employers are recognizing the importance of helping their employees save for their future. Not only does having a savings plan make a company more attractive to candidates in today’s tight market, but there is a larger societal issue at play. Approximately 40% of Americans do not have access to a workplace savings plan, meaning they will likely not have enough to retire comfortably. In light of this, many states have passed legislation mandating that employers offer a retirement savings plan such as a 401k plan. (See more later in this article about the state plans.) And don’t forget about your own future! As a small business owner, you may believe that the profits you earn will help you live comfortably in retirement. However, you know that life can change in an instant. Setting aside money in a convenient, tax-advantaged 401(k) plan, can help ensure you’ll live the life you envision. So you may be asking yourself: “Should my small business offer a 401(k) plan?” Many times small business owners believe a 401(k) is too expensive and time-consuming, but that couldn’t be further from the truth. 5 Common Myths about 401(k)s for Small Businesses Let’s take a moment to dispel some of the most common misconceptions about small business 401(k) plans: “It’s Too Expensive!” Traditionally, the price for a 401(k) plan could be quite high and complex. However, times have changed. Innovative providers like Betterment now offer comprehensive plan solutions at costs that are well below the industry average. Plus, small businesses may be eligible for up to $16,500 in valuable tax credits (see more below). “It’s Too Time-Consuming!” Managing every detail of your 401(k) plan by yourself could be extremely onerous, but choosing an experienced partner who can handle everything from plan design to compliance testing means that you can focus on running your business—not worrying about your 401(k) plan. “I’m Afraid of the Legal Ramifications!” The legal responsibilities are real, but many providers assume various levels of investment and/or administrative fiduciary responsibility that dramatically limit your risk exposure. “I’m Not Sure My Employees Will Participate!” Participation is more popular than you may think! In fact, according to the latest survey from the Plan Sponsor Council of America, more than 84.9% of employees are contributing to their 401(k)s. Plus, plan enhancements like automatic enrollment have helped drive participation by combating employee inertia.1 And lower-salaried employees may be entitled to as much as $2,000 thanks to the little-known Saver’s Credit. “We Can’t Afford to Offer a Match!” Matching and profit-sharing contributions are totally optional. Even if your company can’t afford to kick in extra contributions, you can still offer your employees the convenience and tax savings of a 401(k) plan. And if you do decide to offer an employer match in the future, you can deduct those contributions on your taxes! Three Benefits Employers Get From Offering a 401(k) You probably know a 401(k) plan is great for employees, but did you know it’s great for employers, too? Here are the top three ways small businesses benefit by offering a 401(k) plan: Attract and retain talented employees: According to a Betterment for Business survey, 67% of plan participants said that a good 401(k) plan was very important or important in their evaluation of a job offer. Plus, you can consider perks like an employer match to make the plan even more compelling for current and prospective employees. Improve employee satisfaction (and productivity): Many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus—all of which can lead to higher employee turnover. But a 401(k) combined with financial guidance can go a long way toward helping your employees reduce their financial stress. Enjoy valuable tax advantages: To help motivate employers with fewer than 100 employees to offer a retirement plan, the IRS grants some valuable tax benefits. Some of these were added or increased as part of the recent passage of the SECURE Act in December 2019. A tax credit of up to $15,000 over three years to help defray 401(k) start-up costs A tax credit of up to $1,500 over three years for adding automatic enrollment Tax deductions for employer matching or profit-sharing contributions Want to know more about these tax advantages? Talk to your tax advisor or 401(k) plan provider. The 401(k) Costs to Consider Historically, 401(k)s fee structures have been notoriously complex, often with embedded fees to compensate the many players involved. With renewed focus on fees and the entrance of newer 401(k) providers, fees today can be lower and more transparent. Fees are usually shared between employees and employers, so it’s important to look at how fees are assessed and their impact. Fees typically include an annual administrative fee, a per employee fee, and investment management and/or fund fees, usually expressed as a percentage of assets and deducted from employee accounts. Although it can be tempting to choose the provider with the lowest fee, it’s important to understand and evaluate the value provided to you and your employees. Making a wrong decision could mean you will be looking for a new 401(k) provider again in the very near future, which is a distraction to your business. What About the State Programs? Several states, including California, Illinois, Oregon, and others, have passed legislation mandating that employers offer a savings program to their employees. States differ in terms of the size of companies impacted by the mandate, but this trend reflects a growing concern among state governments that more needs to be done to address the issue. The state programs represent potential alternatives to a 401(k); however, they differ from 401(k)s in several important ways: Lower Contribution Limits Because the state programs are Roth IRAs, the maximum allowable contribution limits are much lower than for 401(k)s. For instance, annual contribution limits for those under 50 are just $6,000 for the state programs versus $19,500 for 401(k)s). For those 50 and over, the limits are $7,000 and $25,000 respectively. Lower Income Limits Because Roth IRAs are governed by federal guidelines on income limits, business owners and highly compensated may be restricted from how much they can save (or be prohibited from saving anything at all). To be eligible, married filers can have a joint income of no more than $206,000 and single filers can have an income of no more than $139,000. No Flexibility in Terms of Features and Investment Options A 401(k) can be designed to address the unique needs of a given employee demographic or industry, thereby enabling employers to differentiate their benefits package to attract and retain talent. This flexibility includes plan features like loans and employer contributions, neither of which is part of the state IRA programs. No Employer Tax Credits the recently-passed SECURE Act increased the attractiveness of 401(k)s, thanks to increased tax credits available to small employers. The maximum tax credit is $16,500 over 3 years. No such tax credit is available for companies that adopt the state-mandated plans. State-mandated Roth IRA programs are a step in the right direction, but you should consider all of your options when it comes to offering your employees a benefit that will make a real difference for their future. Given their added flexibility and the ability for employees (and business owners) to save more, 401(k)s have the potential to bring greater value to both your employees and your organization. 3 Steps to Getting your 401(k) Up and Running If you’re considering offering a 401(k) plan to your employees, you may be wondering how to get started. Well, the process is relatively simple: First, select your 401(k) plan provider. How do you figure out who to choose? Be sure to ask detailed questions about their onboarding process, fees, investments, customer support, employee experience and more. Second, set up your plan. If you elect an experienced 401(k) provider, the onboarding process should be easy. You’ll likely have to fill out some paperwork, connect your payroll, and complete a few other straightforward tasks. Third, encourage your employees to start saving as soon and as much as they can. By communicating with your employees, you can help them understand the benefits of having a retirement account. Plus, if you elect automatic enrollment, it’s even easier to help your employees save for their financial future. Deciding to offer a 401(k) plan is an important decision and one that has the potential to impact the lives of your employees in a significant way. We encourage all small business owners to understand the benefits of starting up a 401(k) for their employees and to be a part of helping more Americans save for their future. 1.PSCA: 401(k) participation up, as well as contributions The information provided is education only and is not investment or tax advice. -
Betterment 401(k) – Bulk Upload Tutorial for Plan Sponsors
Betterment’s bulk upload tool allows you to add multiple employees to your plan quickly. ...
Betterment 401(k) – Bulk Upload Tutorial for Plan Sponsors Betterment’s bulk upload tool allows you to add multiple employees to your plan quickly. This tutorial outlines best practices and shares helpful tips for using our bulk upload tool effectively. Step-by-step Tutorial Log in to the employee Dashboard Navigate to: employees → add employees → add multiple employees Download the CSV template Open the CSV template using a program like Microsoft Excel, Apple Numbers, or Google Sheets Fill out one row for each employee you want to upload. Use the table below to understand the columns in the template: Column Description First Name The employee’s legal first name No special characters accepted Last Name The employee’s legal last name No special characters accepted Middle Initial Leave blank if the employee doesn’t have a legal middle name Social Security Number The employee’s government-issued Social Security Number If the employee is not a US Citizen, a Social Security Number still needs to be provided Social Security Numbers should be formatted as 123-45-6789 Email Betterment uses email to complete the employee sign-up process and to send employees important plan notifications and updates Date of Birth Date should be formatted as MM/DD/YYYY Employment Status This field accepts the following inputs: active (currently employed) terminated (formerly employed) deceased (deceased) disabled (on disability leave) unpaid_leave (unpaid leave) retired (retired former employee) Date of Hire Date of hire can be up to one year in the future Date should be formatted as MM/DD/YYYY Date of Termination This field is required if Employment Status is terminated, deceased, disabled or retired This field can be left blank for employees who are active or who are on unpaid leave Date of termination can be up to one year in the future Date should be formatted as MM/DD/YYYY Date of Rehire This field is required if Employment Status is active and Date of Termination is set Address Line 1 This field is required for all employees The employee’s residential address cannot be a PO Box If the employee’s address includes a comma, you must put that address within quotation marks Address Line 2 This field can be left blank if the employee’s residential address is only one line City Part of the employee’s residential address State Part of the employee’s residential address State should be written using the official two-letter postal abbreviation Examples: NY, FL, CA, TX 5 Digit ZIP Code Part of the employee’s residential address Eligible This field accepts an input of Y or N If an employee will be hired in the future, you must enter N for Eligible, and enter a date in the Entry on column. This indicates that the employee will become eligible for the plan on the future date you’ve specified. Entry on This field defines the date on which an employee will become eligible for the 401(k) plan This date can be in the past or the future Date should be formatted as MM/DD/YYYY Electronic Access This field accepts an input of Y or N Can this employee receive emails and access Betterment’s website at a computer they use regularly as part of their job? Union Member This field accepts an input of Y or N Is this employee a member of a union? Date Joined Union Required if the employee is a member of a union Date should be formatted as MM/DD/YYYY Can be left blank for non-union employees Participant Type This field accepts the following inputs: primary (all participants who are currently in the plan, whether active, terminated, deceased, disabled, retired, or on leave) beneficiary (beneficiary of a deceased participant) alternate_payee (a person who will be the payee of a divorce or other legal settlement) Deferral Rate If an employee was participating in a 401(k) plan you had with a previous provider, please indicate their contribution rate from that provider. This will be used as their new default rate at Betterment. The employee will be able to log into their account to change this prior to their first contribution with Betterment. Traditional deferral amount and percent cannot both be present. Roth deferral amount and percent cannot both be present. If you’re not switching to Betterment from a previous provider, you can leave this field blank. After you’re done filling out the document, export the file as a CSV. Upload your CSV file to Betterment. If you receive any errors after uploading your file, review the errors and make changes to your CSV file. Re-upload the file to Betterment after making changes. Once your file is accepted without any errors, you’ll be asked to review the names of the newly created employees. This helps ensure that you’re uploading the correct file to your plan. When you’re done reviewing, click the ‘add employees’ button. Next, the upload process will begin. Once your employees have been uploaded, they’ll receive an email inviting them to complete the sign-up process. Finally, check the employees page to make sure there are no outstanding errors that occurred during the employee creation process. Address any errors that may have occurred. You’re all set! All new participant profiles will be visible on the employees page. You can return to the employees page to make changes to an employee’s profile at any time. Frequently Asked Questions Do I have to do anything else? Nope! You’re all set. Betterment will email all required disclosures to your new plan participants. Do I have to send any notices to my employees? No, Betterment will send all notices to your employees automatically via email. When will my employees be alerted? Employees will be notified by email as soon as their account is created. How can my employees join the plan after I upload their information to Betterment? Employees can check their email for an invite from Betterment to complete the sign-up process. My employee has a P.O. Box as their address. Can I use that address with Betterment? No– to comply with regulations for opening accounts, we require a physical address to verify an employee's identity. Betterment will not send physical mail to an employee’s address (unless they opt into paper statements, which is rare); we will only use the address for account verification. Questions? Contact us. -
Help Employees Avoid Early 401(k) Withdrawal Penalties
As an employer, you'll need to explain the risks of early 401(k) withdrawals to your ...
Help Employees Avoid Early 401(k) Withdrawal Penalties As an employer, you'll need to explain the risks of early 401(k) withdrawals to your employees. Here’s a guide with answers to common withdrawal questions. In an ideal world, employees would diligently save through their 401(k) plan and only withdraw their money in retirement. In reality, financial needs—like paying for college or buying a new home—may tempt employees to raid their retirement savings. As an employer, you can clearly explain the risks of early withdrawals so your employees can make educated decisions about their future. Here’s a quick guide with answers to frequently asked questions about 401(k) withdrawals. Frequently Asked Questions Can I withdraw money from my 401(k) plan before retirement? If you’re still at your job, you typically may not withdraw money from your 401(k) account unless your plan allows hardship withdrawals to pay for immediate and serious financial needs. (Some plans do allow for other in-service distributions, but these are typically restricted to employees over age 59-½. In any case, the point is clear: retirement savings are meant for, well, retirement). However, if you leave your job, you can withdraw money from your 401(k) account, but it may cost you. That’s because your 401(k) plan is designed to help you save for a more comfortable retirement, and if you use it for another purpose, the IRS will penalize you. In fact, you’ll typically pay a 10% early withdrawal penalty if you withdraw money before reaching age 59½. Plus, you’ll pay income taxes on the distribution. If you invested in a Traditional 401(k), you’ll pay taxes on the full amount, and if you invested in a Roth 401(k), you’ll pay taxes on any earnings. Here’s how it works. Let’s imagine that you contributed $5,000 to your 401(k) account, and when it grows to $7,500, you decide to withdraw the full amount to pay a hospital bill. If you invested in a Traditional 401(k)… Your entire $7,500 withdrawal will be subject to taxes in addition to a $750 (10%) 401(k) withdrawal penalty if you’re younger than age 59 ½. If you invested in a Roth 401(k)… You would only pay taxes on the $2,500 in earnings—not on the $5,000 in contributions—however, you would still need to pay the $750 penalty if you’re younger than age 59 ½. Because an early withdrawal from your 401(k) plan could severely derail your retirement, you should only consider it as your absolute last resort. What are the long-term financial consequences of an early 401(k) withdrawal? Consider this: If you were in the 24% tax bracket, a $7,500 early withdrawal from a Traditional 401(k) will cost you $1,800 in taxes and $750 in penalties for a total of $2,550, leaving you with just $4,950. But that’s just the beginning of the price you may pay because when you withdraw funds early, you also miss out on the power of compounding, which is when your earnings accumulate to generate even more earnings over time. In this case, if you kept that $7,500 invested for 35 years, you could see it grow to $56,218!* *Projected balances estimated using Betterment's goal projection methodology. If you leave your company and are tempted to “cash out” your 401(k) plan, consider rolling it into an IRA or your new employer’s 401(k) plan instead. By doing so, you’ll benefit from tax-deferred or tax-exempt compounding and set yourself up for a brighter future. Are there any exceptions to the 10% early 401(k) withdrawal penalty? Yes, the IRS does allow some exceptions to the 10% early withdrawal penalty. These penalty-free withdrawals include: Rollover—If you roll over your money to another eligible retirement plan within 60 days. (Beware the “indirect” rollover, which may complicate issues and result in additional penalties if you’re not careful.) Death—If your beneficiaries receive a distribution from your 401(k) plan after your death Disability—If you become severely disabled and can show documentation of that fact from a physician Medical expenses—If your early 401(k) withdrawal is to pay for medical expenses not reimbursed by health insurance that exceed 10% of your adjusted gross income Qualified Domestic Relations Order (QDRO)—If distributions are to an alternate payee such as a child or former spouse following a divorce or separation Active duty military—If you are a reservist who is called to active duty for a period longer than 179 days or for an indefinite time Separation from service—If you are laid off, fired, or quit between age 55 and 59 ½ (However, this 10% penalty exemption only applies to assets in your most recent employer’s 401(k), or any other employer you left at/after age 55. If you withdraw assets from old 401(k)s with former employers, you’ll still have to pay the penalty.) Substantially Equal Periodic Payments (SEPP)—If you plan your withdrawals to meet SEPP requirements for a period of five years or until you turn 59½, whichever comes later What is a hardship withdrawal? If you need to take a withdrawal from your 401(k) plan account while you’re still with your employer, you may be eligible to take a hardship withdrawal if your plan offers it. The amount of money you can withdraw must be limited to the size of the need, and you will need to document and maintain proof of the need (even if you aren’t asked to provide proof when you request the withdrawal). For example, some plans offer hardship withdrawals to pay for: Qualified medical expenses Costs related to purchase of principal residence (for employee only, excludes mortgage payments) Tuition and education expenses Funeral expenses Costs to repair damage to principal house Costs to prevent eviction or foreclosure of primary residence Disaster relief Like any early withdrawal, you will be taxed, and IRS rules will govern whether you pay the 10% 401(k) withdrawal penalty. Consult your 401(k) plan’s rules for guidance on whether hardship withdrawals are available. How do 401(k) loans work? Some plans allow you to take a loan from your 401(k) account, but before you do, think about these important considerations: Most companies only allow loans to current employees. That means it’s unlikely that you’ll be able to take a loan from an old plan; however, you can roll your old balance into your current 401(k) plan and then take a loan. You may only borrow up to $50,000 or 50% of your vested account balance (the amount that belongs to you, which does not include any company matching contributions that have not yet vested). You must repay the loan through after-tax payroll deductions. Typically, the repayment term is five years or less. However, if you are using the money to purchase your principal residence, the repayment period may be longer. You pay yourself interest. Your 401(k) plan’s rules will determine the formula (for example, one point above prime). However, the interest may not be enough to make up for earnings you would have generated if you didn’t take a loan. Many plans limit you to having only one loan at a time, in which case you must repay your outstanding loan in full before taking another. If you leave your job while you have an outstanding loan, you likely need to repay it immediately. If you don’t, it will be categorized as an early distribution and you’ll owe income taxes and the 10% 401(k) withdrawal penalty. What are some good alternatives to taking a withdrawal or loan from my 401(k) plan account? Before you take an early withdrawal from your 401(k) plan account—and potentially do something you might regret—consider another option, for example: Alter your lifestyle—Whether you cut the cord on your cable subscription or transfer your credit card balance to a lower interest card, simple changes can save you money. Work a side hustle—Consider turning a hobby like baking or coaching tennis into a paying gig or think about subletting an extra room in your home. Look at other loan sources—If you have a significant amount of equity in your home, a home equity loan may be a cost-effective way to free up the money you need. However, be sure you understand the closing costs and other fees and are comfortable with the idea of putting your home at risk. Also know that certain early withdrawal penalties, like those for principal residence purchase or higher education expenses, are waived when withdrawn from an IRA, but not when withdrawn from a 401(k). If you need to dip into retirement accounts, a financial advisor will be able to help you understand which accounts to draw from and in which order to help you avoid or minimize unwanted taxes and penalties. Are there any other withdrawal penalties I should know about? In addition to the early withdrawal penalty, the IRS also assesses a penalty if you begin taking distributions too late. Specifically, the IRS requires that you begin taking withdrawals—known as required minimum distributions—from your 401(k), IRA, and other qualified retirement accounts once you reach age 72 (prior to January 1, 2020, these distributions were required once you reached age 70-½). This requirement exists because the government wants to ensure they receive the income tax owed on the money you have saved tax-free. It’s important to note that if you've invested in a Roth 401(k), you must take required minimum distributions; however, if you roll your money into a Roth IRA, you can avoid this requirement. How You Can Help Now that you have a better idea of how to answer your employees’ questions about 401(k) withdrawals, it’s time to be proactive. Instead of waiting for employees to come to you, consider hosting a meeting or sending an email to remind your employees of the ramifications of taking a plan loan or withdrawal. Wondering how to educate your employees about the plan? Betterment can help. As a full-service partner, we provide everything from compliance testing to communication support to ensure your 401(k) is effective as possible—and your employees have the support they need to succeed. Better for your employees. Better for your business. Betterment for Business. -
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, ...
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 ...
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. -
Retirement Security Case Study from a Cybersecurity Firm
Learn how WatchGuard, a cutting-edge cybersecurity company, created over $55 million in ...
Retirement Security Case Study from a Cybersecurity Firm Learn how WatchGuard, a cutting-edge cybersecurity company, created over $55 million in potential retirement wealth for its employees with a Betterment 401(k). For over 20 years, WatchGuard has been a pioneer in developing cutting-edge cybersecurity technology for small to mid-sized businesses around the globe and delivering it as an easy-to-deploy and easy-to-manage solution. So it was no coincidence that the company sought to deliver retirement security to its employees packaged in a user-friendly solution. WatchGuard first introduced a 401(k) plan in 1998, and prior to choosing a new provider, the company had more than 355 employees and over $27 million in plan assets. The head of HR felt it was imperative to turn the 19-year old plan into an effective part of WatchGuard’s employee benefits package. Not only did the head of HR want to make the plan easier to participate in, but he also wanted to encourage better investing behavior for his employees. The company’s internal evaluation revealed three major opportunities: WatchGuard could encourage more employees to save: The plan participation rate of 64%1 was suboptimal, especially given that the employee base is comprised of well-educated technologists. Participants could stand to save more: Of those participating in the plan, the median deferral rate was 7.5%, which only marginally exceeds the national average of 6-7%.2 More importantly, the head of HR wanted WatchGuard to aim higher than the national average. Participants could likely reach better investing behavior: Navigating a 22 fund line-up with little to no financial advice, 60.3% of employee accounts were invested at improper risk levels given their personal demographics.3 As you’ll see in this case study, WatchGuard effectively improved on all three fronts, leading to better retirement security for its employees. After searching for a 401(k) provider offering managed accounts that operate as a qualified diversified investment alternative (QDIA), re-enrolling all non-participating employees, and adding automatic enrollment for new hires, the head of HR supervised the following results for WatchGuard’s new 401(k) plan. The new 401(k) plan started on February 28, 2017, and the results were analyzed on August 23, 2017. The numbers below were provided by the plan based on their transition. More employees saving: A 51.4% increase in the number of employees saving for retirement, resulting in a 92.9% participation rate and $42,199,741 in potential retirement wealth created within the plan. Employees saving more: An increase in median deferral rate to 10% among employees who were already contributing and $8,193,044 in potential retirement wealth created. Better investing behavior: An increase from 40% to 91% of employees with appropriate risk levels4—helping participants improve their investing behavior and generating $5,287,892 more in potential retirement wealth created. In the following sections, we’ll describe in detail how WatchGuard’s new 401(k) plan achieved such positive results. Re-enrollment helped more employees save Behavioral nudges are effective in encouraging employees to take advantage of the financial benefits of a 401(k).5 Prior to developing the new plan, Watchguard reported that only 64% of employees contributed to their 401(k) plan. As part of the transition to a new provider in 2017, the company re-enrolled all non-participating employees and added automatic enrollment for new hires, ensuring that all employees were equipped to contribute to their 401(k) account (unless they intentionally chose to opt out). After re-enrollment, 92.9% of employees were contributing to the plan, a 51.4% increase in participation across the well-educated, technologist employee base. This meant that 89 employees who were not previously saving for retirement using their 401(k) were now making regular contributions to their plan. Forward-looking analysis6 of these 89 employees’ savings predicted that a total of $42,199,741 of new potential wealth would be created in aggregate within the plan. Re-enrollment and a company match encouraged employees to save more WatchGuard saw a significant opportunity to increase the average employee deferral rate, meaning that more of each employee’s paycheck would be allocated to the 401(k) plan. Since WatchGuard’s plan offered a generous company match, the head of HR felt strongly that some employees were losing out on the full benefit of having a 401(k) plan. Out of 179 employees who were saving before the plan switch and also saving after, 32 participants elected a higher contribution rate. Among this group, the median deferral rate was 7.5% prior to implementing the new plan, and afterward, the median rate increased by 33.3% to a rate of 10%. What drove this group of people to increase their deferral rate? Watchguard expected that the aggressive company match of 25% on contributions up to $10,000 was one motivator, but since the company match pre-dated the new plan, the other likely factor was the company’s choice to implement re-enrollment for all employees saving less than 6% in the previous plan. When participants face re-enrollment, they are primed to reconsider their current retirement savings and can make a positive choice to defer more to their 401(k). We can also show the impact of higher deferral rates on the aggregate effect on WatchGuard’s plan. Across all 32 employees who increased their deferral rate after re-enrolling in the new plan, a total of $8,193,044 million in potential wealth was expected to be generated.6 Using a managed account as a QDIA developed better investing behavior When evaluating 401(k) providers, the head of HR was particularly concerned about the confusion new participants face when navigating a conventional 22-fund line-up within a 401(k) plan.7 In his view, there was already enough stress in just starting a new job; employees should not have to make important investing selections without guidance. In consulting financial experts, WatchGuard’s head of HR learned that more than 60% of participant accounts were improperly allocated across the funds available,8 given their age and the remainder of time until retirement—assuming a retirement age of 65. When transitioning to a new provider, WatchGuard introduced a managed account for each employee that qualifies as a QDIA. This approach defaults each employee into an age-appropriate, globally diversified portfolio. After implementation, WatchGuard saw that the vast majority of employees seemed to welcome and adhere to personalized portfolio advice over selecting their own investments. Prior to the new plan, only 40% of participants had their savings allocated with appropriate exposure to risk. After introducing a QDIA in the form of managed accounts, 91% of WatchGuard’s participants relied on investment advice that properly allocated their savings to an appropriate level of risk. Before: Employee 401(k) Account Deviation from Target Allocation3 After: Employee 401(k) Account Deviation from Target Allocation3 Companies with an authentic concern for employee retirement success and a desire to clearly position their 401(k) plan as a valuable benefit to employees should aim to execute a 401(k) plan with as much as thoughtfulness as WatchGuard did. The key to WatchGuard’s positive results was the head of HR’s leadership in HR and his focus on developing a truly employee-centric 401(k) plan. His approach to identifying three areas of focus enabled the company to set clear criteria for envisioning a future 401(k) plan. As seen above, the results are impressive. More employees started saving. The rate of savings increased, and with QDIA in the form of a managed account, each employee had the advice they needed to help maximize their money. With a clear focus on employees and decisive execution, WatchGuard made its employees’ retirement future more secure and the company’s plan a differentiating benefit. Citations 1 Based on a common sample of individuals employed by WatchGuard before and after implementation. Out of 282 employees at WatchGuard prior to February 28, 2017, 179 employees were participating in the 401(k) plan. 2 Based on the Deloitte 2017 Defined Contribution Benchmarking Survey. www2.deloitte.com/us/en/pages/human-capital/articles/annual-defined-contribution-benchmarking-survey.html 3 Analysis is reflective of employee accounts, not individual participants. Some participants could have multiple accounts, and some accounts may be left in the plan from past employees. Improper risk levels defined as ±7% from Betterment’s stock allocation advice specific to the individual’s age. 4 Appropriate risk is based upon Betterment’s stock allocation advice for the employees’ individual ages, with the assumed retirement age of 65. 5 Published examples include Save for Tomorrow: www.ted.com/talks/shlomo_benartzi_saving_more_tomorrow 6 Forward-looking analysis for expected returns and total wealth created in WatchGuard’s plan is based on a Betterment-generated return projection. This assumes actual stock allocations by participant as of Aug. 28, 2017, with annual return and volatility assumptions. The analysis includes reinvestment of dividends. The impact of trading and other income is not considered. Actual results may differ significantly from the value shown. The analysis is hypothetical in nature, does not represent actual returns attained, and does not take into account any possible economic or market conditions. This hypothetical illustration does not reflect the potential for loss or gain. This comparison uses WatchGuard’s specific fees paid to Betterment for Business. 7 WatchGuard’s previous 401(k) plan had 22 funds for employees to choose from. Other plans may have more or less funds, but fund selection is a convention of most non-QDIA plans. 8 88 accounts in the plan had stock allocations that fell below Betterment for Business’ stock allocation advice range (underinvested in stocks). Seven plan participants who were near or at retirement (64-67 years of age) had 90% stock allocations or higher, 34 to 45% higher than Betterment for Business’ stock allocation advice. In total 205 accounts (60.3%) were considered improperly allocated according to the advisor. Disclaimer This study was analyzed based on results in 2017 and may not apply to all clients, as past performance is not indicative of future performance. -
Employee Retirement Preparedness: Millennials And Gen Z
Unlike their predecessors, millennials and Gen Z-ers are facing changing economic, social ...
Employee Retirement Preparedness: Millennials And Gen Z Unlike their predecessors, millennials and Gen Z-ers are facing changing economic, social and demographic trends that raise worrisome questions about retirement security. Millennials now make up the largest portion of the U.S. labor force, with Gen Z rapidly entering the workforce as well. Unlike their predecessors, these generations are facing changing economic, social and demographic trends that raise worrisome questions about retirement security. However, despite substantial focus on retirement products and services from the financial services industry, a large majority of millennials and Gen Z are still not adequately preparing for retirement. Betterment for Business’ survey “Employee Retirement Preparedness: Millennials and Gen Z,” tracks the financial well-being and retirement preparedness of full-time employed U.S. millennials and Gen Z. The goal is to understand the attitudes and behavioral constraints preventing these generations of workers from taking better control of their retirement and financial wellness. These insights can then be used to help financial institutions and advisers provide better advice and solutions to these customers. We also want to uncover just how knowledgeable this cohort is about basic 401(k) and retirement plans. With the decline of pensions and workers becoming increasingly responsible for saving for retirement on their own, that knowledge is more essential than ever before. The Good, The Bad And The Ugly: Millennial And Gen Z Finances Every generation is shaped by its circumstances — millennials and Gen Z are no exception. How are these two younger generations faring when it comes to finances? The bad news: There’s no doubt about it — younger generations are stressed about finances. 77% say that thinking about finances causes them stress. 20% are saving less than $100 monthly—including their 401(k) and other retirement savings accounts. Cash flow and debt challenges continue to inhibit responsible savings practices. 28% also receive some type of financial assistance from parents and/or family — no surprise for a generation coming of age during the 2008 recession and dealing with record high costs of housing and healthcare. The good news: Despite the challenges they face (or maybe because of them), these two generations are still trying to save for retirement as early as possible. They know they should be saving, but they still need help prioritizing, due to so many other financial stressors. 71% of Gen Z and 82% of millennials say they do not feel too young to start saving for retirement. 88% are actively saving some money on a monthly basis (including their retirement savings plan). 73% are contributing at least 3% of their monthly salary to their retirement savings plan. 23% are saving over 8% of their monthly salary for retirement savings. Figure 1: How much are Millennials and Gen Z saving each month? On average, how much money do you save on a monthly basis including your 401(k) retirement account? Challenges Of Unprecedented Debt Unprecedented debt is dragging down both generations, delaying financial priorities and negatively impacting attitudes toward retirement. Credit card debt makes up the largest debt segment — 75% of respondents said they owe some credit card debt and almost one in three owes more than $5000. To add to that, almost half (47%) of respondents currently owe some level of student debt. Those with high levels of debt may need to significantly reduce their current spending rates, or face substantial lifestyle changes down the line — perhaps even having to work beyond their traditional retirement age or sacrificing desired spending in retirement. Figure 2: Here's how student loan debt impacts financial decisions and behavior Conflicting Priorities While it seems as though most millennials and Gen Z understand the importance of saving for retirement, many have short-term concerns that take precedent over long-term planning. Each month, immediate financial demands and desires leave little left for long term savings — from rent and utilities to minimum debt payments and health insurance; from groceries and children or pets to vacations and local events. Behaviorally, it’s unsurprising: day-to-day life and needs are a visceral experience, more easily felt and understood than an account to prepare for life in 30+ years. Figure 3: Financial priorities: Millennials vs. Gen Z Percent indicating the following was one of their top financial priorities. 1 in 3 respondents are dipping into retirement funds early. One of our more concerning findings is that one in three respondents has dipped into their retirement funds early. Life doesn’t always go according to plan — 38% of respondents had to dip into their retirement savings account because of unexpected expenses such as medical debt. Individuals can often tap their 401(k) early via hardship withdrawal, but this comes with risks and consequences and should only be considered as a last resort. However, what is most alarming is that almost a quarter (23%) said they dipped into their accounts to fund travel / leisure activities. Not only are they putting their ability to retire at risk and losing out on compounding investment growth, but early cash outs of retirement savings (whether cashing out a 401(k) from a former employer or dipping into an IRA) often means a 10% tax penalty on top of income taxes for the withdrawal. Dipping into retirement savings for vacation impedes on future success. In essence, employees are starting in the right direction by putting away money for retirement but they’re not staying on track by preserving it for retirement as they should. Instead, they see it as another pool of money to be tapped into if and when ‘needs’ arise. Employers need to do more to help people recognize the benefits of keeping this money for retirement and letting it stay invested to work harder for them. We should note that while it’s easy to point to vacations as frivolous use of intended long-term savings, a greater portion of respondents tapped savings for medical expenses and debt payments; employers looking to address poor usage of retirement savings should blend education with broader wellness measures. Figure 4: Why Millennials and Gen Z are dipping into retirement savings early 1 in 3 respondents have dipped into their retirement funds early. Reasons why: Finally, many millennials and Gen Z may be falling behind on their retirement savings for a number of reasons: the decision making process (how much to save, how to invest, which accounts to use) can cause action paralysis; they may have been auto-enrolled at low, insufficient rates; or the compounding value of taking action today didn’t resonate or translate to action. Almost half (44%) of respondents have a retirement savings goal of under $1 million. The reality is that the right level of savings varies by person based on a number of factors; everything from what you earn today, where you live and how you spend, where and when you intend to retire, and how you plan to invest now and through retirement. That’s a lot to sink into one number. Betterment for Business suggests using tools that have clear assumptions for those factors and allows you to adjust as you see fit. Such tools help you understand how actions you take today help you meet your goals — not solely focused on an arbitrary-seeming number, but rather on a projected income level you can create in retirement. Saving and investing decisions have a more visceral feeling if you can compare it to your lifestyle in today’s dollars. Respondents know they need to save, but need help getting over the initial hurdles — deciding how much and where to save — and how to preserve the hard work they’ve put into savings, by investing well for the long term and avoiding cash outs and drains on future income for today’s needs. The new face of retirement. Once upon a time, when earlier generations had to walk to school in the snow uphill both ways, traditional pensions were the predominant form of retirement security. In 1980, 38% of workers in the U.S. had a pension plan. With these traditional pension plans, employers were responsible for managing the investments, and employees, once retired, could expect set monthly payments for as long as they lived. Yet by 2017, only 18% of private-sector workers had access to a pension; many surviving plans are also frozen, meaning they do not cover new employees. Instead, the majority of today’s workers participate in defined contribution plans — primarily 401(k)s. The shift away from traditional pensions has left many workers unprepared and unaware of how much they should be saving for retirement. Helping workers understand how to start investing, managing debt, and save for retirement has never been more important, especially given that younger generations are increasingly pessimistic about their retirement. Figure 5: Millennials and Gen Z expect to retire later, or never at all What benefits are employers offering now? 72% say their employers offer a retirement savings plan. (80% of these respondents say their company matches their contributions to the retirement savings plan). 48% say employers are also offering financial wellness benefits, such as workplace programs and resources that support the financial wellness of employees. More good news: The majority of surveyed employees leveraging employer retirement benefits are using them to their advantage: 75% are maximizing their company’s match. 90%are contributing some money to their plan. Almost half (48%) are contributing 5% or more to their retirement savings plan monthly. 50% have increased their monthly contribution over the last 12 months. Are women less prepared for retirement? We found that overall, men are more engaged than women when it comes to workplace retirement savings plans. A number of societal factors could be behind this: there still exists a significant disparity in how men and women are paid, with women earning on average 79 cents for every dollar earned by men; women are more likely to pause work to raise families or care for elder family members; and women often don’t invest with the same confidence as men. On the flip side, it’s even more critical for women to save and invest for retirement early and often — not only do they need to make up for lower wages and fewer years in the workforce, but they need to plan for a longer retirement, given their longer average lifespans than men. When evaluating retirement savings plan utilization, employers should pay attention to gender disparity and consider ways to reach all employees. Figure 6: Where women are falling behind on retirement preparation Even employers who are committed to gender equality may not realize the size of this disparity in utilization and preparedness. To correct it, they will have to take intentional and proactive measures, like understanding their employee’s needs and helping them more conservatively manage longevity risk — to ensure women are taking full advantage of benefits and preparing properly for retirement. Gig Workers And Benefits The future of work continues to shift towards part-time/gig work, and we’re beginning to see debates around offering benefits to this segment of the workforce. California recently signed a law forcing gig companies like Uber and Lyft to reclassify their workers as employees, which would make them eligible for benefits. Gig employers to date have been hesitant to classify workers as employees and offer them benefits, but popular sentiment is against them: over three- quarters of our respondents think that companies employing gig workers should offer them retirement plan benefits. Regardless of where the law lands on the treatment of the growing number of gig workers as contractors or employees, respondents felt strongly that companies should think more broadly about how to make it easier for all workers to save through retirement. Education, access to financial advice, and introduction to providers that make saving easy are just starting points for companies to consider. Figure 7: Should companies employing gig-workers offer them retirement benefits? Helping employees get a better handle on their retirement savings. 39% of respondents indicated they have funds in one or more former retirement savings plan (from a previous job, etc). Of these respondents, nearly a quarter (23%) indicated the reason is because they don’t know how to roll over these funds. Consolidating retirement accounts, or at least being able to see information about each in one place, makes planning and execution of decisions far easier. Having separate accounts scattered across past plans also makes it difficult to invest well, assess fees, and make decisions about how to manage those assets, nevermind increasing the likelihood of losing track of savings. Plus, past employers can force out smaller balances, sometimes cashing out those benefits (further reducing savings kept for retirement use). The above is a good problem to have — employees that are engaged and have savings in former plans are on the right path. Employers should help them make the most of their traction by: Making it easy to consolidate their retirement savings (via rollovers into the 401(k) plan, or choosing a provider that can help employees handle rollovers and see outside accounts in one place). Setting appropriate default savings rate for their plans, to keep the momentum going. Providing tools that make it easy for employees to understand where on their savings journey they are, and their next best steps toward a successful retirement. Conclusion The economic outlook is relatively positive, salaries and bonuses at an all-time high and interest rates at historical lows; yet burdened by debt and additional financial stressors, our survey finds younger generations of employees are still struggling with their long-term financial goals. Retirement plans continue to serve as a backup plan for many who don’t have money set aside for an emergency or unexpected expenses. The U.S. retirement landscape has changed dramatically over the past few decades. Health care costs are increasing, and so is longevity — which means workers today don’t just have more responsibility for saving for their own retirements, they also have to make those savings last, on average, for longer periods of time. Planning for retirement is now significantly more challenging. The future of retirement will look very different for these next generations and more will be looking to employers for help navigating the personal financial issues that are part of their changing environment. Employers should help employees save more. This report shows where employees are struggling and actions employers can take: Help employees manage financial stressors by providing education and tools that look at their whole financial picture, not disjointed, piecemeal information. Help them understand the benefits of starting to save early and increase their contribution rates over time, showing the impact of small changes on future incomes they can create. Target additional educational and support efforts at women so they don’t lag in their contributions. Help employees understand the benefits of consolidating assets into their current plan. Educate employees about the dangers of using retirement savings to fund other goals/needs/wants. Saving for retirement is about far more than picking funds and what to save that year; it’s about looking at employees’ broader financial pictures and how to best plan for their whole financial lives. Methodology An online survey was conducted with a panel of potential respondents. The recruitment period was September 27- October 1, 2019. A total of 1,001 respondents born between 1981-2001, living in the United States, who hold full-time jobs completed the survey. Of these a total of 695 millennials (born between 1981-1994) responded, and 306 Gen Z-ers (born between 1995-2001) responded. The sample was provided by Market Cube, are search panel company. Panel respondents were invited to take the survey via an email invitation and were incentivized to participate via the panel’s established points program. -
Betterment for Business Coronavirus Update
Learn about the measures we have taken to ensure our team will be available as usual for ...
Betterment for Business Coronavirus Update Learn about the measures we have taken to ensure our team will be available as usual for you and your employees. In light of the growing concerns about COVID-19, also known as the coronavirus, we’d like to make you aware of the steps we have taken to ensure that our team will be available as usual for you and your employees. Operational Continuity: We have always had a flexible work environment at Betterment where employees can work remotely. In addition, we have opened two new offices (Philadelphia and Denver) in the past year which provide additional geographic diversity. In the event that we need to employ a mandatory work from home policy for our team, we are well-equipped to continue with business as usual and have implemented protocols and tools to minimize potential adverse impacts and maintain continuity of our operations. Market Volatility: We know that market volatility can be stressful. Your employees will see a message about market volatility when they log into their account. We encourage you to reinforce that message by directing employees to Betterment articles and remind them that 401(k)s are long-term investments meant for retirement. The best path to long-term investing success is for investors to be sure they are taking the right amount of risk for their goals, saving, and sticking to their plan. Rollover Checks: Effective immediately, all rollover checks should be sent to our lockbox at: If regular mail: Betterment 401(k) PO Box 208435 Dallas, TX 75320-8435 If overnighting by special courier: Lockbox Services 208435 (include above in Reference Section) Betterment 401(k) 2975 Regent Blvd, Suite 100 Irving, TX 75063 Kindly update your internal guidance to provide employees with this information. Checks that are already on their way to our NYC office will be forwarded to the lockbox; however, there may be some short delays as a result. Distributions: As a reminder, termination distributions can be done online, and all other paper distributions should be sent to Betterment via our secure upload site. We know that this can be a stressful time. If you need anything from us or have any questions, please let us know. -
401(k) Plan Fiduciary: How You Can Mitigate Your Risk
Fiduciary responsibilities can seem daunting and time-consuming. Learn the ins and outs ...
401(k) Plan Fiduciary: How You Can Mitigate Your Risk Fiduciary responsibilities can seem daunting and time-consuming. Learn the ins and outs of your responsibilities and which ones you can delegate. You probably know that to compete in attracting new talent and retaining your best employees, a 401(k) plan has become a “must-have” benefit. Sponsoring a 401(k) plan, however, comes with both administrative and investment responsibilities. If not managed properly, these duties can be a distraction that not only takes precious time away from building your business, but can also create legal risks for you and your company. If you are just starting a 401(k) plan, make certain you understand which services will be performed by whomever you hire to administer your plan and which retirement plan tasks fall to you. A Brief History of the 401(k) Plan and Fiduciary Duties When Congress passed the Revenue Act of 1978, it included the little-known provision that eventually (and somewhat accidentally) led to the 401(k) plan. The Employee Retirement Income Security Act of 1974, referred to as ERISA, is a companion federal law that contains rules designed to protect employee savings by requiring individuals and entities that manage a retirement plan, referred to as “fiduciaries,” to follow strict standards of conduct. Fiduciaries must always act in the best interests of employees who save in the plan. When you adopt a 401(k) plan for your employees, you become an ERISA fiduciary. And in exchange for helping employees build retirement savings, you and your employees receive special tax benefits, as outlined in the Internal Revenue Code. The IRS oversees the tax rules, and the Department of Labor is the government agency responsible for providing guidance regarding ERISA fiduciary requirements and for enforcing these rules. Just like the laws and regulations that you must follow in operating your business, the tax laws and ERISA can feel like navigating a maze, with lots of twists and turns. But engaging skilled 401(k) service providers will help reduce the confusion and the burden of your retirement plan duties. Even 401(k)s of Small Businesses Come with Fiduciary Responsibilities By sponsoring a retirement plan, you take on two sets of fiduciary responsibilities. First, you are considered the “named fiduciary” with overall responsibility for the plan, including selecting and monitoring plan investments. You are also considered the “plan administrator” with fiduciary authority and discretion over how the plan is operated. Most companies hire one or more outside experts (such as an investment advisor, investment manager or third party administrator) to help them manage their fiduciary responsibilities. 5 Cornerstone Rules You Must Follow As a fiduciary, you must follow the high standards of conduct required by ERISA both when managing your plan’s investments and when you are making decisions regarding plan operations. There are five cornerstone rules you must follow as an ERISA fiduciary. Each decision you make regarding your plan must be based solely on what is best for your employees who participate in the plan, and their beneficiaries. You must act prudently. Prudence requires that you be knowledgeable about retirement plan investments and administration. If you do not have the expertise to handle all of your responsibilities, you will need to engage professionals who have that expertise such as investment managers or recordkeepers. You must diversify investments to the extent needed to reduce the risk of large losses to plan assets. You must follow the terms of the plan document when operating your plan. Fees from plan assets must be reasonable and for services that are necessary for your plan. There are detailed DOL rules that outline the steps you must take to fulfill this fiduciary responsibility including collecting fee disclosures for investments and service providers and comparing (or benchmarking) the fees to make certain they are reasonable. Fiduciary Responsibilities are Serious Business Fiduciary responsibilities should not be taken lightly. Employees who participate in the plan, as well as other plan fiduciaries, have the right to bring a lawsuit to correct fiduciary wrongdoing. The DOL also has the authority to enforce the rules through civil and criminal actions. Not only can the cost of governmental penalties associated with enforcement be high, but the costs associated with fixing the problem can also be significant. These normally involve legal, accounting, and other fees. Under ERISA, fiduciaries are personally liable for plan losses caused by a breach of their fiduciary responsibilities and may be required to: restore plan losses (including interest), and pay the expenses relating to the correction of inappropriate actions. While the list of fiduciary responsibilities from above can seem daunting, the good news is that ERISA also allows you to delegate many of your fiduciary responsibilities to 401(k) professionals. Hiring 401(k) experts to manage your plan investments and operations can be a fiduciary decision. This means you should make the decision carefully. Even though you can appoint others to carry out most of your fiduciary responsibilities, you can never fully transfer or eliminate your role as an ERISA fiduciary. You will always retain the fiduciary responsibility for selecting and monitoring the investment professionals and administrators for your plan. How much responsibility you retain and how much will be handled by the outside expert will vary depending upon the level of fiduciary responsibility provided by the entities you select. This is especially true when selecting investment professionals to support the 401(k) plan. For purposes of this article, we will focus primarily on investment support services since that is often the most challenging aspect of 401(k) plan oversight for employers. This also typically poses the greatest regulatory and legal risk. Different Levels of Investment Support In most 401(k) products, you, as the plan fiduciary, are responsible for selecting and monitoring the investments that will be available to your employees through the plan. A growing number of employers have become the target of lawsuits alleging violations of fiduciary duty by selecting poor- performing or more expensive investments compared to comparable investments. For most employers, day-to-day business responsibilities leave little time for extensive investment research and analysis, including fee benchmarking. Many companies hire outside experts to take on the fiduciary investment duties. As outlined in the table below, the degree of investment fiduciary responsibility assumed by the outside experts can vary greatly, which has implications for you as an employer. Defined in ERISA Section Outside Expert Employer n/a Disclaims any fiduciary investment responsibility Retains sole fiduciary responsibility and liability 3(21) Shares fiduciary investment responsibility in the form of investment recommendations Retains responsibility for final investment discretion 3(38) Assumes full discretionary responsibility Relieves employer of investment fiduciary responsibility Delegating All of Your Investment Responsibilities The decision to hire an investment manager is a fiduciary function. However, once appointed, a 3(38) investment manager will take on the following duties below, moving them off your to-do list. Development of an investment policy statement (IPS) that defines the strategic objectives for the plan's investments and the criteria that will be used to evaluate investments. Creation of the due diligence process for selecting and monitoring investments for your 401(k) plan. Monitor investment performance against the criteria outlined in the IPS and replace investments when an investment does not perform well or when comparable investments with lower fees become available. When you appoint an ERISA 3(38) investment manager, you have fully delegated responsibility for selecting and monitoring plan investments to the investment manager. Your obligation is to prudently select the investment manager—ensuring they have the credentials and track record to support your plan—and to make certain they are meeting their duties. Responsibilities You Can’t Delegate Because selecting an ERISA 3(38) investment manager and delegating your investment responsibilities provides a significant reduction in your fiduciary responsibilities, ERISA requires that you monitor their work. On a regular basis, carefully review the reports provided by any outside investment experts you hire. In addition to reviewing your plan’s investment performance and fees, you should also identify any issues that arose with respect to investment support. For example: Were there any participant complaints or concerns regarding investment services? If so, were all issues addressed timely and appropriately? Were there any interruptions in participants’ access to investment tools or resources? A more formal and in-depth review of the plan’s outside experts should be conducted periodically to ensure that they are meeting your organization’s needs. Items to consider include: Business Structure: Have there been any changes in business structure or licensing that impact the investment management services being delivered to your plan? Litigation or Regulatory Enforcement: Have there been any recent litigation or regulatory enforcement actions that have been taken against the firm? Modifications in Services: Evaluate notices received from the service provider or changes in practices that have occurred since they were retained. Do these changes impact the level of service you were seeking from the service provider? Staffing Changes: Have there been changes in the staff assigned to support your plan or in the team that manages your plan’s investments? Could the changes have a negative impact on the services provided to your plan? Reasonable Fees: Review the investment fees during the plan year to ensure they were reasonable. Did the actual fees charged match the fees set forth in the service agreement? Do the fees still benchmark favorably against fees charged by other service providers for similar services? Employee Engagement: How many employees have set both short-term and long-term savings goals? How many have provided sufficient demographic information to personalize their savings goals? The Bottom Line on Being a 401(K) Fiduciary Sponsoring a 401(k) plan comes with a complex set of responsibilities, but prudently selecting the right team of outside experts, especially when it comes to investments, can help you manage your responsibilities and potential liability. -
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? ...
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. -
The SECURE Act is Changing the Retirement Landscape
The SECURE Act improves access to tax-advantaged retirement accounts, allows people to ...
The SECURE Act is Changing the Retirement Landscape The SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) into law. An extensive piece of bipartisan legislation, the SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans. What Does the SECURE Act Mean to You and Your Employees? As an employer, you’re tasked with working with your retirement plan provider to implement the provisions of the SECURE Act that impact your employees. One of the most exciting benefits of the SECURE Act is valuable tax credits for small businesses, but there are many other important considerations you should know about. Read on for details about these new rules (and how they can impact you). 1. Tax credit for new plans Thanks to these new rules, substantial tax credits will be available for employers with 100 or fewer employees. That’s great news for small businesses who’ve been on the fence about starting a defined contribution plan because of cost concerns. Prior to the passage of the SECURE Act, the Retirement Plans Startup Costs Tax Credit was $500. However, effective January 1, 2020, you may now be able to claim tax credits of 50% of the cost to establish and administer a plan, up to the greater of: $500; or the lesser of: $250 per eligible non-highly compensated employee eligible for the plan; and $5,000 Plus, the new rules state that you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits! And remember, unlike tax deductions that reduce your company’s taxable income, tax credits actually reduce the amount of tax you owe dollar for dollar. It’s important to note that this tax credit is only available when you’re establishing a new retirement plan, such as a 401(k) plan. Ready to learn more about starting your own retirement plan? Betterment can help. 2. Tax credit for adding eligible automatic enrollment Small businesses can now earn an additional $500 tax credit for adding an eligible automatic enrollment feature to their new or existing plan. This tax credit—known formally as the Small Employer Automatic Enrollment Credit—is available for each of the first three years the feature is active, for a total of $1,500 in tax credits. Beyond the tax credit, automatic enrollment correlates with higher plan participation rates—and helps employees save for a more comfortable future. In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! Learn how your small business can benefit from a 401(k) plan with automatic enrollment now. Does your small business qualify for these valuable tax credits? Your small business 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 so, you could enjoy valuable tax credits—and help your employees save for retirement in the process. Want to learn more? Talk to Betterment. 3. More flexible safe harbor rules A safe harbor 401(k) plan offers a great way to avoid the stress of annual nondiscrimination testing while helping your employees build a more comfortable future. The SECURE Act modifies a few of the safe harbor provisions to give you more flexibility—and your employees the opportunity for increased lifetime income. Here’s what changed: More relaxed nonelective employer contribution requirements Before—Your plan document had to include the 3% nonelective safe harbor provision—and participants had to be provided with the safe harbor status notice—before the beginning of the plan year. After—The SECURE Act eliminated the participant notice requirement for nonelective contributions. Plus, you can amend the 401(k) plan as late as 30 days before the end of a plan year to provide for a 3% nonelective safe harbor contribution. Alternatively, a 401(k) plan may be amended as late as the end of the following plan year, if a 4% nonelective safe harbor contribution is provided. (Note that these changes don’t apply to safe harbor matching contributions.) Increase in the automatic deferral rate for qualified automatic contribution arrangements (QACA) Before—A QACA safe harbor was permitted to automatically increase a participant’s deferral election up to 10% of eligible compensation. After—The SECURE Act increased the cap from 10% of eligible compensation to 15% of eligible compensation. That means that you have an even greater opportunity to help employees save the lifetime income they need to thrive in retirement. Need help with your safe harbor 401(k) plan? These new SECURE Act changes have many implications, including revisions to your policies, procedures, participant notices, plan documents, and more. Betterment can help. 4. Expanded eligibility for long-term, part-time employees Currently, 401(k) plans can limit access for employees who work under 1,000 hours per year, which averages out to about 20 hours per week. However, the SECURE Act changes that rule—helping part-time workers get a jumpstart on retirement saving. 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. This change is a great opportunity for large and small companies alike to improve retirement access for all individuals in their workforce. Plus, offering part-time workers a 401(k) plan is an effective way to boost your recruiting efforts. 5. Bigger penalties for late filing To improve deadline compliance, the new rules increase the penalties for late retirement plan document filings: Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. (Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.) Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000. (Before the SECURE Act, the daily penalty was $1 per participant, not to exceed $5,000.) Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year. (Before the SECURE Act, the penalty was $10 for each failure, not to exceed $5,000.) So, what do these new rules mean to you? Well, it’s more important than ever to file your forms in a timely manner—or face significant financial repercussions. To make it easier for you, Betterment helps you prepare your Form 5500—and offers the support you need throughout the process. 6. Higher required minimum distribution (RMD) age Prior to the passage of the SECURE Act, employees needed to take RMDs from their IRAs and qualified employer-sponsored retirement plans (like 401(k)s) at age 70 ½. Now, they can take them beginning at age 72—allowing extra time for earnings to potentially accumulate. This is great news for retirement savers who now have more opportunity to accumulate the lifetime income they need. It’s important to note that unlike Traditional IRAs and 401(k) plans, there are no RMDs for Roth IRAs during the account owners’ lifetime. So if employees have a Roth 401(k) account, they can roll it into a Roth IRA, avoid taking RMDs, and continue building lifetime income. 7. Penalty-free withdrawals for birth/adoption expenses and student loan payments Offering a welcome financial respite, the SECURE Act provides provisions for two brand-new penalty-free distributions: Birth or adoption—Now people can withdraw up to $5,000 from their qualified retirement accounts—without paying the usual 10% early withdrawal penalty—to cover expenses related to a birth or adoption. However, account owners will still be liable for the applicable income taxes, including those for any capital gains. Student loan payment using 529 plan—Now, people can use their 529 plan to pay the costs of apprenticeship and student loan payments. Specifically, account owners can withdraw up to $10,000 during the beneficiary and their siblings’ lifetimes. For example, a family with three children can take a $10,000 distribution to pay student loans for each child—for a total of $30,000. However, it’s important to note that any student loan interest that’s paid with tax-free 529 plan earnings can’t also be claimed as a tax deduction. Both of these new penalty-free distributions offer more flexibility to pay for important lifetime expenses. With this newfound freedom, individuals have greater opportunity to pay down debt and gain more secure financial footing. 8. Required retirement projections for employees Rather than just reporting a lump sum of what employees have saved, retirement plans will now be required to project expected income at retirement. With this retirement income projection, employees will have a better idea of what their future will look like (and whether they’re on—or off—track for retirement). While the retirement income projection requirement is a new rule, Betterment for Business already offers this level of insight for current 401(k) plan participants. In fact, our intuitive investment platform ensures that employees can get advice on all of their financial goals in one place. We aim to help employees set a clear, realistic retirement goal and stay on track to achieve that goal. In this way, it is an elaboration on the fundamentals of our goal-based approach to financial planning. We aim to include the following components of retirement planning: Projecting an estimate of desired spending in retirement -- We use several factors to help estimate retirement spending, including how earned income will grow over time, what the local cost of living will be like, and what an individual’s spending habits look like before retirement. Determining the total pre-tax savings amount likely needed to achieve that spending level with high confidence -- we can figure out the total amount an individual should have saved by the time of their desired retirement date to have a 96% chance of success they will not run out of money during retirement. Considerations include expected lifespan, other retirement income sources, and taxes. Calculating how much should be saved during each period prior to retirement -- The savings amount required depends on how much time remains until retirement age, the level of risk someone is willing to bear in order to pursue higher returns, and how much certainty they feel they need to hit that balance. Prioritizing which retirement savings vehicles are likely to be most efficient -- Prioritizing which accounts people save into depends on their specific tax situation and access to retirement accounts. Our recommendation for retirement goals only incorporates the external accounts that an employee has synced and any Betterment accounts within their Retirement goal. As always, we recommend individuals contact a qualified tax advisor to understand their personal situation. 9. New regulations for pooled employer plans Starting in 2021, unrelated companies can join a single Pooled Employer Plan (PEP) in an effort to access greater economies of scale and cost efficiencies. Prior to the new rules, “open” Multiple Employer Plans (MEPs) existed; however, there were concerns about how the DOL viewed them. This new regulation solidifies PEPs as an option for employers who are looking to lower their fees, reduce their fiduciary liability, and offer their employees a higher quality retirement plan. However, Betterment offers the key benefits of a pooled employer plan—lower fees and reduced fiduciary liability—with less complexity and greater personalization. Here’s how: Lower fees: Fees on Betterment plans are some of the lowest available, so there’s no need to compromise on a pooled plan that may not meet all of your needs or provide the flexibility you may want. Reduced fiduciary liability: We serve as a 3(16) administrative fiduciary and 3(38) investment fiduciary to your plan. This limits your risk exposure and allows you to focus more of your time on running your business--not your plan. Greater personalization: We’ll partner with you on your 401(k) plan design so you can tailor it to meet your company’s needs—from adding a safe harbor provision to electing an automatic enrollment feature. Don’t your employees deserve a better 401(k) plan? Get the Betterment 401(k) plan. 10. Deadline filing extension The SECURE Act also impacts the deadline for employers to establish a new 401(k) plan. Specifically, it extends this date from the last day of the tax year (December 31) to the due date of the tax return (April 15 of the next year). That’s good news for employers because you have an extra 3.5 months to set up a plan! Thinking about setting up a plan? Betterment can help tailor the plan that’s right for you. Want to learn more? We can help. The SECURE Act retirement bill contains 30 sections in all, which you can read about in more detail here. However, if you don’t want to sift through these dense regulations on your own, Betterment can help. As a full-service provider, we aim to make life easy for you by assisting with everything from compliance testing to plan design consulting. Not only do we provide highly optimized 401(k) plans, we also offer your employees high-tech retirement planning, a big picture view of their finances, and personalized advice—all at a fraction of the cost of most providers. -
Basics of a 401(k) Plan
Today’s 401(k)s hold more than $5.9 trillion in assets with over 100 million people ...
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.
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. -
Income Portfolios from BlackRock
Learn about BlackRock’s income portfolio strategy, which provides retired employees with ...
Income Portfolios from BlackRock Learn about BlackRock’s income portfolio strategy, which provides retired employees with the opportunity to generate cash income while preserving capital. BlackRock’s income portfolio strategy provides retired employees the opportunity to generate cash income while preserving capital. The BlackRock income portfolio strategy is a diversified 100% bond basket that seeks to provide a steady stream of cash income while minimizing potential loss of capital and stock market volatility. Participants can choose from four risk levels, each with different targeted levels of income yield. The tradeoff for higher expected income is greater risk. Why the Income Portfolio Might be a Good Fit for Your Participants Often, participants value stable income and principal preservation during the later stages of their lives. The income portfolio strategy can help plan participants preserve their nest egg after they retire or if they’re nervous about investing in stocks while they’re still working. Generating Income The chart below shows the expected income yields for each of the four risk levels in the income portfolio strategy and how those levels compare to the Betterment portfolio strategy with similar levels of risk. Disclosure: This chart compares the four BlackRock income portfolios available to Betterment against four allocations of Betterment’s core portfolio strategy with similar relative risk levels. All four of the comparison allocations include both stocks and bonds, while BlackRock’s income portfolios are comprised completely of bonds. The Betterment Portfolio’s income yield is comprised of dividends from equities and coupon income from the underlying bonds in the fixed income ETF. The BlackRock Target Income Portfolios’ income yield is comprised solely of coupon income from the underlying bonds in the fixed income ETF. The expected income yields are expressed in annual terms and are based on the historical dividend yields over the past 1-year period ending August 30, 2017 for the individual funds in each of the portfolios, as reported by Yahoo Finance. These expected yields correspond to the time period referenced above for the funds in the relevant portfolios and will change over time as economic and market conditions change. When an economy is expanding (contracting), for example, interest rates will tend to rise (fall) and credit markets will tend to strengthen (weaken) as companies become less (more) vulnerable to defaulting on their debt. These figures do not include the Betterment fee or fund level expenses. The Betterment stock allocations shown here correspond to the Betterment portfolios that have expected volatilities that are closest to the expected volatilities of the four BlackRock income portfolios. The stock-to-bond allocations used for Betterment are: 9% stock to 91% bond, 22% stock to 78% bond, 37% stock to 63% bond and 40% stock to 60% bond. Expected volatilities are estimated based on the historical total returns data for the relevant funds over the past 10 years using the methods of Ledoit and Wolf (2003). This chart is hypothetical and used to illustrate the points discussed in this article. Past performance is not indicative of future results and does not guarantee that any particular result will be achieved. As you can see, BlackRock’s income portfolios have a higher expected income yield than allocations in Betterment’s core portfolio strategy with comparable risk levels. For example, if a participant in your plan had $1,000,000 in savings in their 401(k) account, she could invest it in the 40% stock Betterment portfolio, and the income portion of their return would be about $24,000 per year in gross investment income. (Note that the income portion composes only part of the total potential return generated by a Betterment portfolio allocation.) But remember, investments generate returns in two ways; income and principal growth. We refer to these two forms of growth as the total return of an investment. Bonds can provide steady income but historically have provided lower principal growth than have stocks. For this reason, putting some money in both the income strategy and the Betterment portfolio strategy may be a preferable alternative for some investors. Retirees who are interested in the income portfolio strategy can pair it with Betterment’s automatic withdrawal feature to set their retirement income on autopilot. Less Historical Risk For participants who are nervous about investing their retirement fund in stocks, the income portfolio strategy can be a good approach because the underlying bonds have a lower historical risk than stocks. According to Gallup, 48% of Americans have no money invested in the stock market. And with the best savings accounts paying only slightly above 1% in interest, keeping too much money in cash means your money loses value to inflation every day. Choosing bonds over cash can be a nice middle ground that better balances risk and return. The chart below shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large US companies. Comparing Risk The chart shows the risk (as measured by standard deviation) for various types of bonds over the past 15 years, compared to stocks in large U.S. companies. Click respective categories for data on short-term bonds, intermediate-term bonds, long-term bonds, high-yield bonds and large cap stocks. Short-term bonds were almost six times less risky than US large company stocks. Even high-yield bonds, the most risky type of bonds, were almost two times less risky than stocks. It’s worth noting that investing in bonds is generally more costly than investing in stocks, so plan participants will pay a higher expense ratio on income portfolio funds compared to funds invested in the core Betterment portfolio. The Betterment portfolio strategy, which contains a mix of stocks and bonds, has annual ETF fees of only 0.07% – 0.16%, depending on the portfolio’s allocation. Our income portfolio strategy, while still far lower cost than the industry average, has slightly higher ETF fees of 0.21% – 0.38%, depending on the portfolio’s target income level. Different Income Targets to Meet Participants’ Needs The strength of Betterment for Business’ approach is that all of our portfolio strategies can adjust to your participants’ risk tolerance. The income portfolio strategy is no different. We selected BlackRock’s iShares™ ETFs to invest in different types of US and international bonds including US Treasuries, mortgage-backed securities, corporate, high-yield, and emerging market bonds. We had no incentive to partner with BlackRock other than the strength of their fixed income expertise and the robust construction of the iShares™ ETFs. To align with each participant’s risk preferences, we offer four different risk levels to choose from, each with different targeted levels of income. The income portfolio strategy is actively managed, so the exact allocations of the underlying bonds are subject to change approximately once per quarter (and up to six times per year depending on market volatility). With each rebalance, we allocate to the asset classes that are designed to help investors maximize the income return while limiting overall volatility. Risk and return are connected, so lower-risk bonds pay less income than higher-risk bonds. The income portfolio increases projected income by taking on more risk in two main ways: Investing in longer-term bonds: Long-term bonds are more sensitive to changes in interest rates, and thus carry more risk. To compensate for this risk, long-term bonds pay more interest. Investing in lower-quality bonds: When you lend money to less-established companies, the chances of the company defaulting and not paying you back are higher. To compensate for this risk, low-quality bonds pay more interest. We are proud to offer an income portfolio strategy for Betterment for Business because, with more strategies like this one, 401(k) plan participants can personalize their investments to match their specific retirement timeline, risk tolerances, and viewpoints. To get started, participants can open a new goal account and select the BlackRock income portfolio strategy. -
Evaluating 401(k) Plans? Look for Value and Transparent Pricing
Traditionally, 401(k) fee structures have been complex and it’s nearly impossible to ...
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. -
Maximize Your 401(k): A Survey for Employers
We asked Betterment 401(k) participants what they thought about employers offering a ...
Maximize Your 401(k): A Survey for Employers We asked Betterment 401(k) participants what they thought about employers offering a 401(k). Find out if it's still earning its place in the HR recruitment arsenal. In the 40 years since their creation, 401(k) plans have become a go-to way for employers to demonstrate their commitment to their employees’ financial wellness both during and after their working lives. But in a competition to see who can offer the trendiest benefits, is this tried-and-true offering still as valuable to employees as plan sponsors hope it is? We asked 845 Betterment for Business plan participants what they thought—and learned that the 401(k) is still earning its place in the human resources recruitment arsenal. 401(k)s are a valuable benefit for job seekers… 67% said that a good 401(k) was very important or important in their evaluation of a job offer 46% said offering a match played a role in the decision whether to take a job …and once they’re enrolled, plan participants care very much about their plan and their retirement outcomes 75% signed up for a 401(k) because they are concerned about and focused on their retirement readiness 64% check their accounts at least once a pay period 85% strongly agree or agree that it’s important that their plans have transparent and low-cost fees The full report details these themes and other takeaways for employers. Download and read The Staying Power of 401(k)s for the full story. -
Betterment for Business: A Better 401(k) for Employers and Employees
Betterment’s 401(k) provides personalized investment advice for all plan participants. ...
Betterment for Business: A Better 401(k) for Employers and Employees Betterment’s 401(k) provides personalized investment advice for all plan participants. The era of expensive, impersonal, unguided retirement saving is over. Since Betterment launched in 2010, our mission has been to improve the way people save and invest through smarter technology. For individual investors, Betterment offers automated investing and personalized advice based on specific goals, such as retirement, college savings, or building wealth. For financial advisors, Betterment for Advisors provides an automated service so that advisors can increase efficiency and spend more time building relationships with their clients. Betterment for Business helps people save and invest in workplace 401(k)s. While the number of U.S. adults enrolled in 401(k) plans has grown quickly, roughly half of Americans don’t work for an employer that sponsors a retirement savings plan. The main reason: The plans are too expensive and too time-consuming for their employers to implement. People who do have employer-sponsored plans don’t always have it much better. No matter how little the funds cost, typical plans often offer little guidance, can be hard to navigate, and may not be personalized to the employee’s circumstances and goals. Meanwhile, employers want to manage the costs, risks and administrative burden of providing a plan. We wanted something better. So we built it. Betterment for Business 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. The era of expensive, impersonal, unguided retirement saving is over. The Traditional 401(k) Landscape: Confusing and Expensive Even before we started Betterment for Business, we knew that the system was broken. But we didn’t realize how bad it was until we were searching for our own plan. High-Cost and Tedious for Employers In 2014, we set out to find the best 401(k) plan for Betterment employees. We wanted to offer this benefit to help our team save for retirement and to help us attract and retain good talent; in a recent survey of Betterment 401(k) participants, 67% said that a good 401(k) was very important or important in their evaluation of a job offer. But as we explored the 401(k) landscape, we were faced with a myriad of confusing options that included mountains of paperwork and ongoing administrative and compliance duties. While we were lucky to be in the business of investing and have experts to rely on, for the average employer, setting up a 401(k) for the first time can be akin to navigating the Wild West. And then there were the fees. As we talked to our fellow employers who were in a similar position, it seemed like not one person could answer what I had at one point thought was a simple question: “How much does your 401(k) cost you and your employees?” As it turns out, it’s not that simple. Why are Most 401(k) Plans So Expensive? Most people might guess that the way 401(k) fee structure works is: The employer pays the fee to a plan provider to administer a 401(k). The employee pays fund fees, which are just the costs of the fund manager. But it turns out that most of the time, 401(k) fees are much more complicated than that. The graphic below from a Deloitte study breaks down the service providers involved in generating plan costs. There are actually quite a few moving parts, most of which are done by hidden third parties, all of whom have to integrate with each other. All that coordination and friction drives up costs, not to mention the potential for errors in plan administration. Why do all these middlemen exist? And what exactly do they do? Most of them exist as a result of the ever-changing workplace retirement landscape that has developed over the past several decades. Similar to the healthcare industry, many providers have legacy processes and technology that would be unlikely to exist if you were designing it from scratch today. It wasn’t all that long ago that 401(k)s didn’t even exist. And in fact, they came about almost by accident in 1978 when Congress passed a provision that allowed employees to avoid being taxed on deferred compensation. In 1980, a benefits consultant relied on this provision to create a retirement plan that enabled employees to save on taxes, and in 1981, the IRS allowed 401(k)s to be funded via payroll deduction, leading to the phenomenal growth in 401(k) plans nationwide. As the 401(k) market grew in the 1990s, competition for services increased. Plan sponsors could bid for the best recordkeeper, the best investment manager, the best participant communications firm, and any other third-party service they wanted. All of this competition led to an increase in the number of financial services companies entering the 401(k) marketplace. Meanwhile, new regulations kept coming: 404(c), the Economic Growth and Tax Relief Reconciliation Act of 2001, Sarbanes-Oxley Act of 2002, and The Pension Protection Act of 2006, among others. With each new regulation came an additional set of compliance requirements, and more companies sought to provide solutions to employers to help meet the increasing demands. But more providers only continued to complicate the picture, adding a web of specialized services, each charging a fee that increases 401(k) costs and results in lower investment returns for the plan participant. Unfortunately, retirement saving isn’t optional for most Americans. And one of the best ways to save is in a tax-deferred account. But with so much compliance regulation and so many players involved in the process, the industry has made most 401(k)s more expensive than they have to be. Hidden Fees These 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 not explicit, thereby making it difficult for employees and employers to know exactly how much they’re paying. In other words, most mutual funds in 401(k) plans contain hidden fees. At Betterment, we believe in transparency. Our use of exchange-traded funds (ETFs) means there are no hidden fees, so you and your employees are able to know how much you’re paying. How Do These Fees Affect Employees? Differences between low-cost and high-cost investments can have a significant impact on an individual’s standard of living in retirement. In fact, according to Nobel Prize winner William Sharpe, “a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.” This means that a 401(k) plan is less of an “employee benefit” if it means employees are paying high fees. In another study, a two-earner household at the median income level and paying typical 401(k) fees loses 30% of their savings, or $154,794, to fees over the course of 40 years of retirement savings. A higher-income household can expect to pay an even steeper price. Employees Need More Guidance Fees are not the only downside of many existing 401(k) plans; even with low-fee funds, the typical experience can still be sub-par and difficult to navigate. When employees enroll in a 401(k) plan, they often ask questions like, “Which funds should I pick?” “Should I roll over previous 401(k) assets to this new plan or an IRA?” “Should I save in a Roth or Traditional account?” And perhaps most importantly, “Am I saving the right amount?” Solid retirement readiness comes from saving in the right types of accounts, at the right rate, across your household, and maximizing employer matches. It can be amplified by embedding tax rate diversification, making the most of how Roth and Traditional accounts are taxed now, versus in retirement. We realized that funds alone, no matter how low cost they were, would not entirely solve the problem that employees were not receiving the guidance and the advice they deserved. Holistic, and Personalized Advice for Every Employee With Betterment for Business, employees can use our built-in retirement planning advice to get personalized guidance on their retirement goals from a completely holistic view. Combining your employees’ 401(k)s—both Roth and Traditional—IRAs, and any taxable retirement savings, our guidance tools tell employees how much they should save to have a comfortable retirement based on a number of factors: Whether they’re married Where they live Where they plan to retire What their income is like What their current savings are with other providers Even their spouse’s holdings. By capturing all of these elements of life to help plan for life’s major goal of retirement, our guidance can help employees get on track with their savings and plan what accounts they may need to do so. Underneath the surface, the advice informs which specific portfolio we recommend to participants and how that portfolio allocation adjusts over time to the appropriate risk level. Remember, the tools are automatically built into every employee’s experience using the Betterment 401(k). CITATIONS 1 https://www.businesswire.com/news/home/20150826005265/en/Schwab-Survey-Finds-People-Prioritize-Wealth-Health#.VeeQyNNVikq 2 https://www.ici.org/pdf/rpt11dc401kfee_study.pdf 3 https://www.ici.org/pdf/ppr15dcplanprofile401k.pdf 4 https://www.demos.org/press-release/new-report-hidden-excessive-401k-fees-cost-retirees-155000 -
Plan Sponsor Spotlight: Jessica Feldman @ Harry’s, Inc.
See what the Director of People Operations, at Harry’s, Inc. had to say about financial ...
Plan Sponsor Spotlight: Jessica Feldman @ Harry’s, Inc. See what the Director of People Operations, at Harry’s, Inc. had to say about financial wellness for her team, why it’s important to offer a 401(k), and more. For our Plan Sponsor Spotlight, we spoke with Jessica Feldman, Director of People Operations at Harry’s, Inc., leading the strategy and implementation of People Operations including Benefits, Equity Admin, Payroll, HRIS, Compliance, Leave of Absence and Immigration. Read on to see what she had to say about what financial wellness means for her team, why it’s important to offer a 401(k), and more. What does financial wellness mean for you and your team? At Harry’s, we think about financial wellness as a key component of overall wellness. If an employee doesn’t feel positive about their financial well-being, it can have ripple effects on their lives both personally and professionally. For me, financial wellness means employees understand their financial situation and have a plan in place to continue to improve that situation for both their short term, medium-term, and longer-term financial goals. This means they can handle not only unexpected bills and expenses right now, but can also retire on a beach (or in the mountains or the city, wherever they want!) when they’re ready. Given this, it’s incredibly important that Harry’s supports employees by providing a holistic benefits package that helps with immediate and future financial needs. What are the most pressing questions your employees ask about their finances? We get a lot of questions from employees about how they can get the most value out of our benefit plans. This past year we made a lot of changes to our benefits, so we held open enrollment education sessions for all employees to have the opportunity to ask questions about the new plans. The number of people who realized they could benefit financially from a Flexible Spending Account (FSA) was quite remarkable. I loved seeing everyone’s minds working during that section of the presentation as they realized the potential tax saving benefits of an FSA! I received great follow up questions from employees wanting to ensure they knew how to best maximize the account before they enrolled. Why is it important to you and your company to offer a 401(k)? Offering a 401(k) plan is the best way to encourage employees to think about their longer-term financial needs and help them begin planning for the kind of financial future they want. Retirement can often seem far off and not like an immediate priority, but because of the benefits of compound interest, we know that the more people can save early in their career, the better off they’ll be 10, 20, 30, or even 40 years down the line. My parents once said, “you can get a loan to buy a house, but no one will loan you money for retirement.” I’ve carried that mantra with me as I’ve tried to personally prioritize saving for the long term, and have always made having a high quality, low cost 401(k) plan available for employees to do the same. How does technology help you manage your 401(k) plan, employee benefits, and HR processes more efficiently? What tools do you use? Prior to moving Harry’s to Betterment, we had a 401(k) provider with pretty outdated technology. It was hard to navigate, and transparency on fees and fund performance was difficult to find and often buried deep in their site. Our participation and engagement were low, with only around 25%-30% of our team enrolled in the plan. One of the key reasons we moved to Betterment was because of how strong and intuitive their technology is, and how transparency is a key value for their plans. I have often found that the higher the bar to enrollment (if it’s too hard to find info or there are too many funds to pick from) the less likely people will enroll, which is counter to the purpose of offering a 401(k) plan for our team. With Betterment’s technology, our participation is now around 90%. What do you think is the biggest opportunity for employers when it comes to overall workplace wellness? We constantly continue to explore this area ourselves, trying to ensure that our benefits are meeting the diverse needs of our population and encouraging wellness in all forms (mental, physical, financial, and more). As our team grows, these needs are bound to change, and we need to keep up to meet them. This past year we partnered with a primary care and insurance navigation company called Eden Health. The partnership offers many perks to our employees, including 24/7/365 primary care via their app, insurance navigation to help employees make sure they understand potential costs upfront, a growing network of private in-person medical offices, and integrated, free behavioral and mental health counseling with their in-house providers (among many other things). Having this partnership through Eden has been huge for our team since it gives our employees the peace of mind to know there is a dedicated team of healthcare providers out there helping them make smart, well informed, and cost-conscious decisions on their physical and mental health care. If you could give one piece of advice to your team, what would it be? I tried to come up with a better answer than “don’t wait,” but seriously, don’t wait. I started maxing out my 401(k) account as soon as I could spare the extra money from my checks. I’m still many years away from retirement, but knowing I’m doing what I can to maximize the ability for my contributions to compound over time makes me feel like I’m making real progress. I know not everyone can max out their account, but start with whatever you can, and slowly increase that each year. You’d be surprised how you learn to live off of what’s remaining. What does your dream retirement look like? I recently visited Isla Mujeres in Mexico where my fiancé and I drove around the island all afternoon on a golf cart. It was transformative! I’ve decided I don’t want to retire if my main mode of transit can’t be commuting via golf cart. -
Understanding 401(k) Nondiscrimination Testing
Discover what nondiscrimination testing is (and how to pass)
Understanding 401(k) Nondiscrimination Testing Discover what nondiscrimination testing is (and how to pass) If your company has a 401(k) plan—or if you’re considering starting one in the future—you’ve probably heard about nondiscrimination testing. But what is it really? And how do you help ensure your plan passes these important compliance tests? Read on for answers to the most frequently asked questions about nondiscrimination testing. What is nondiscrimination testing? Mandated by ERISA, annual nondiscrimination tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners. We’ll dive deeper into nondiscrimination testing, but let’s first discuss an important component of 401(k) compliance: contribution limits. What contribution limits do I need to know about? Because of the tax advantages afforded 401(k) plan contributions, the IRS puts a limit on the amount that employers and employees can contribute. Here’s a quick overview of the important limits: Limit What is it? Notes for 2021 plan year Employee contribution limits (“402g”) Limits the amount a participant may contribute to the 401(k) plan. The personal limit is based on the calendar year.1 Note that traditional (pre-tax) and Roth (post-tax) contributions are added together (there aren’t separate limits for each). $19,500 is the maximum amount participants may contribute to their 401(k) plan for 2021. Participants age 50 or older during the year may defer an additional $6,500 in “catch-up” contributions if permitted by the plan. Total contribution limit (“415”) Limits the total contributions allocated to an eligible participant for the year. This includes employee contributions, all employer contributions and forfeiture allocations. Total employee and employer contributions cannot exceed total employee compensation for the year. $58,000 plus up to $6,500 in catch-up contributions (if permitted by the plan) for 2021. Cannot exceed total compensation. Employer contribution limit Employers’ total contributions (excluding employee deferrals) may not exceed 25% of eligible compensation for the plan year. N/A This limit is an IRS imposed limit based on the calendar year. Plans that use a ‘plan year’ not ending December 31st base their allocation limit on the year in which the plan year ends. This is different from the compensation limits, which are based on the start of the plan year. Adjusted annually; see most recent Cost of Living Adjustments table here. What is nondiscrimination testing designed to achieve? Essentially, nondiscrimination testing has three main goals: To measure employee retirement plan participation levels to ensure that the plan isn’t “discriminating” against lower-income employees (NHCEs) or favoring HCEs. To ensure that people of all income levels have equal access to—and awareness of—the company’s retirement plan. To encourage employers to be good stewards of their employees’ futures by making any necessary adjustments to level the playing field (such as matching employees’ contributions) How do I classify my employees by income level? And what do all these acronyms really mean? Before you embark on nondiscrimination testing, you’ll need to categorize your employees by income level and employee status. Here are the main categories (and acronyms): Highly compensated employee (HCE)—According to the IRS, an employee who meets one or more of the following criteria: Prior (lookback) year compensation—Earned over $130,000 in 2020; some plans may limit this to the top 20% of earners in 2020 (known as the top-paid group election); or Ownership in current or prior year—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation Non-highly compensated employee (NHCE)—Someone who does not meet the above criteria. Key employee—According to the IRS, an employee who meets one or more of the following criteria during the plan year: Ownership over 5%—Owns more than 5% of (1) outstanding corporate stock, (2) voting power across corporate stock, or (3) capital or profits of an entity not considered a corporation. Ownership over 1%—Owns more than 1% of the stock, voting power, capital, or profits, and earned more than $150,000. Officer—An officer of the employer who earned more than $185,000 for 2021; this may be limited to the lesser of 50 officers or the greater of 3 or 10% of the employee count. Non-key employee—Someone who does not meet the above criteria. What are the nondiscrimination tests that need to be performed? Below are the tests typically performed for 401(k) plans. Betterment will perform each of these tests on behalf of your plan and inform you of the results. 1. 410(b) Coverage Tests—These tests determine the ratios of employees eligible for and benefitting from the plan to show that the plan fairly covers your employee base. Specifically, these tests review the ratio of HCEs benefitting from the plan against the ratio of NHCEs benefitting from the plan. Typically, the NHCE percentage benefitting must be at least 70% or 0.7 times the percentage of HCEs considered benefitting for the year, or further testing is required. These annual tests are performed across different contribution types: employee contributions, employer matching contributions, after-tax contributions, and non-elective (employer, non-matching) contributions. 2. Actual deferral percentage (ADP) test—Compares the average salary deferral of HCEs to that of non-highly compensated employees (NHCEs). This test includes pre-tax and Roth deferrals, but not catch-up contributions. Essentially, it measures the level of engagement of HCEs vs. NHCEs to make sure that high income earners aren’t saving at a significantly higher rate than the rest of the employee base. Specifically, two percentages are calculated: HCE ADP—The average deferral rate (ADR) for each HCE is calculated by dividing the employee’s elective deferrals by their salary. The HCE ADP is calculated by averaging the ADR for all eligible HCEs (even those who chose not to defer). NHCE ADP—The average deferral rate (ADR) for each NHCE is calculated by dividing the employee’s elective deferrals by their salary. The NHCE ADP is calculated by averaging the ADR for all eligible NHCEs (even those who chose not to defer). The following table shows how the IRS limits the disparity between HCE and NHCE average contribution rates. For example, if the NHCEs contributed 3%, the HCEs can only defer 5% (or less) on average. NHCE ADP HCE ADP 2% or less → NHCE% x 2 2-8% → NHCE% + 2 more than 8% → NHCE% x 1.25 3. Actual contribution percentage (ACP) test—Compares the average employer contributions received by HCEs and NHCEs. (So this test is only required if you make employer contributions.) Conveniently, the calculations and breakdowns are the same as with the ADP test, but the average contribution rate calculation includes both employer matching contributions and after-tax contributions. 4. Top-heavy determination—Evaluates whether or not the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. Simply put, it analyzes the accrued benefits between two groups: Key employees and non-Key employees. A plan is considered top-heavy when the total value (account balance with adjustments related to rollovers, terminated accounts, and a five-year lookback of distributions) of the Key employees’ plan accounts is greater than 60% of the total value (also adjusted as noted above) of the plan assets, as of the end of the prior plan year. (Exception: The first plan year is determined based on the last day of that year). If the plan is considered top-heavy for the year, employers must make a contribution to non-key employees. The top-heavy minimum contribution is the lesser of 3% of compensation or the highest percentage contributed for key employees. However, this can be reduced or avoided if no key employee makes or receives contributions for the year (including forfeiture allocations). What happens if my plan fails? If your plan fails the ADP and ACP tests, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by making additional employer contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications. Why is it hard for 401(k) plans to pass nondiscrimination testing? It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-sizes businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but non-highly compensated employees (NHCEs) don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing. How can I help my plan pass the tests? It pays to prepare for nondiscrimination testing. Here are a few tips that can make a difference: Make it easy to enroll in your plan—Is your 401(k) plan enrollment process confusing and cumbersome? If so, it might be stopping employees from enrolling. Consider partnering with a tech-savvy provider like Betterment that can help your employees enroll quickly and easily—and support them on every step of their retirement saving journey. Learn more now. Encourage your employees to save—Whether you send emails or host employee meetings, it’s important to get the word out about saving for retirement through the plan. That’s because the more NHCEs that participate, the better chance you have of passing the nondiscrimination tests. (Plus, you’re helping your staff prioritize their future.) Add automatic enrollment —By adding an auto-enrollment feature to your 401(k) plan, you can automatically deduct elective deferrals from your employees’ wages unless they elect not to contribute. It’s a simple way to boost participation rates and help your employees start saving. Add a safe harbor provision to your 401(k) plan—Avoid these time-consuming, headache-inducing compliance tests all together by electing a safe harbor 401(k) plan. What’s a safe harbor 401(k) plan? A safe harbor 401(k) plan is a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on behalf of your employees, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company. To fulfill safe harbor plan requirements, you can elect one of the following contribution formulas: Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation. Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation. Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions. These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement. Interested in adding a safe harbor provision to your 401(k) plan? Find out more now. Did You Know? As a result of the SECURE Act, any 401(k) plan not utilizing a safe harbor match can be amended as late as 30 days before a plan year-end to provide the 3% safe harbor nonelective contribution for the plan year. How can Betterment help? We know that nondiscrimination testing and many other aspects of 401(k) plan administration can be complicated. That’s why we do everything in our power to help make it easier for you as a plan sponsor. In fact, we help with year-end compliance testing, including ADP/ACP testing, top-heavy testing, annual additions testing, deferral limit testing, and coverage testing. With our intuitive online platform, you can better manage your plan and get the support you need along the way. Plus, you can have it all for a fraction of the cost of other 401(k) providers. Any links provided to other websites are offered as a matter of convenience and are not intended to imply that Betterment or its authors endorse, sponsor, promote, and/or are affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. The information contained in this article is meant to be informational only and does not constitute investment or tax advice. -
The True Cost of a 401(k) Employer Match
Many companies are hesitant to start offering a 401(k) match program. Find out the truth ...
The True Cost of a 401(k) Employer Match Many companies are hesitant to start offering a 401(k) match program. Find out the truth behind matching employees’ 401(k) plan contributions. For a startup or a small business, 401(k) matches can seem like a worthy but unattainable benefit. Even larger companies may hesitate to offer a match if they haven’t previously provided one. According to SHRM’s 2017 Employee Benefits report, of the 90 percent of employers who offered a traditional 401(k) plan, 76 percent provided an employer match. So, while some executives may believe that matching employees’ 401(k) contributions is unpopular or will not be appreciated by employees, the evidence signals that neither is necessarily true. Believe it or not, employees tend to appreciate 401(k) matches. Employees often respond differently when they have a 401(k) match. Last year, EBRI and Greenwald & Associates’ found that nearly 73 percent of workers said they were likely to save for retirement if their contributions were matched by their employer. Let’s review the goals for employers offering a 401(k) match. First, matches are an important way employers can help employees stay on track for retirement; they can offer one way to build and extend an employee’s tenure with the company. Second, a match can add value to a 401(k) offering, helping to differentiate a total compensation package for job candidates. And these ideal outcomes aren’t just theory: A recent Betterment for Business study found that, for more than 45 percent of respondents, an employer’s decision to offer a 401(k) match was a factor in whether or not they took the job. That’s a relatively high demand for this type of benefit. Question the value of matches, but ask the right questions. Still, many employers tend to question the costs and benefits of matching 401(k) contributions. They often compare the value of a match to being more aggressive in their base salaries. And while making the right business move is critical, what many companies fail to evaluate effectively is the long-term cost of forgoing a match versus up-front costs of starting a match immediately. What are these long-term costs of forgoing a 401(k) match? Just look toward employee replacement and retention costs. When employers do not help facilitate employee retirement planning, they may be surprised by other costs that could rise, including higher relative salaries (beyond what might have been planned for), higher healthcare costs, or costs associated with loss of productivity. If these claims feel far-fetched, just look toward the research. According to a study from Prudential, every year an employee delays their retirement, it can cost their employer more than $50,000 due to a combination of factors including higher relative salaries, higher health care costs, younger employee retention through promotion, and several other elements. The storyline behind this find may be all too familiar to some employers: An older employee delays retirement due to insufficient savings; their productivity is hampered by health challenges, covered by employer-sponsored health insurance, and all the while, the company adapts to maintain productivity by hiring new people or advancing younger employees faster than anticipated. Eventually, when the older employer does retire, these costs only compound. These additional costs can sneak up on employers, aren’t always planned for effectively, and yet, they have a real business impact. For companies that may be less concerned with an aging employee population, forgoing matches can still contribute to rising retention and replacement costs due to the impact of financial distress on employee performance. In a SHRM survey measuring personal financial stress’s impact on employee performance, 47 percent of HR professionals noticed employees’ struggle with their “ability to focus on work.” Poor productivity not only costs the business in output, but it can inevitably lead to higher employee turnover, which, in turn, can lead to higher costs associated with retention and hiring. 401(k) matches may be your long-term competitive edge. Offering a 401(k) can be a step in the right direction, but whether you’re looking for ways to increase plan participation, design a good 401(k) plan or just help your employees focus on financial wellness, consider looking toward investing in a 401(k)-match program. With the costs that could be awaiting companies who don’t provide a match, maybe you can’t afford not to. -
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 ...
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.