401k Comparisons

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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 ...
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. -
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 ...
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. -
Pros and Cons of Illinois Secure Choice for Small Businesses
Answers to frequently asked questions about the Illinois Secure Choice retirement program for ...
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.
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Pros and Cons of OregonSaves for Small Businesses
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. -
Retirement Security Case Study from a Cybersecurity Firm
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. -
Evaluating 401(k) Plans? Look for Value and Transparent Pricing
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.