A job change can be a stressful, busy time, which is why many people forget about 401(k) funds and simply leave them in a former employer’s plan.

“I can’t emphasize enough that people need to properly educate themselves about their options,” says Robert D. Coode, a principal at Skoda Minotti Financial Services. “Most people we encounter are hesitant to rollover old 401(k) funds because they aren’t aware of their options.”

There also is a tendency to think amounts aren’t significant enough to warrant attention. The average person holds 11 jobs between the ages of 18 and 44, according to the Bureau of Labor Statistics, so each 401(k) account might not be substantial.

“But when you start consolidating plans, they become more meaningful,” says Bob E. Coode, CSA, a partner with Skoda Minotti Financial Services.

Smart Business spoke with Robert and Bob Coode about options available for 401(k) plans when you leave a job.

Why shouldn’t you leave 401(k) funds with a former employer’s plan?

Many people wind up with up to seven retirement accounts during the course of their careers. That poses a problem with record keeping. But the bigger problem is not having anyone to help you manage these accounts. It makes sense to consolidate them into one IRA.

Some people think that having multiple plans makes them diverse. But, if there’s significant overlap among the accounts, it actually defeats the purpose.

When leaving a job, what options are available regarding 401(k) plans?

The options are:

  • Leaving funds in the old plan.

  • Transferring funds to the new employer’s plan.

  • Directly rolling over money into an IRA.

  • Taking a taxable distribution.

Taking a distribution is not recommended; too many people see old 401(k) accounts as found money. While some people don’t have a choice, many will regret taking the money early and having less money set aside for retirement. The distribution could drive up a person’s tax bracket, cost more in federal taxes, and impose a 10 percent penalty if the participant is under 59½ and there is no hardship, such as medical expenses or an impending foreclosure.

Usually, the recommended option is a direct rollover into an IRA, which provides freedom of choice. In employer-based plans, the employer or the company managing the plan makes all the decisions about the number and types of investments. Typical 401(k) plans offer 15 to 20 investment choices. An IRA rollover gives access to a much wider array of investments.

Every IRA account should have a combination of equity, bonds and fixed income, and alternative investments to varying degrees, depending on the person’s age and risk appetite.

What are alternative investments?

Examples are long/short mutual funds, managed futures, real estate, commodities and currencies.

People may be wary of the word ‘alternative,’ but these are simply investments that don’t necessarily correlate with the market. Alternative investments are favored primarily because their returns have a low correlation to the three traditional asset types — stocks, bonds and cash.

These investments have been available to large endowments and high net worth investors for a long time and worked so well that fund companies made them available to retail investors.

With a traditional equity mutual fund, all investments are long term. Managers are required to keep 85 to 95 percent invested in equities at all times. If the market is due for a correction or a bear market is anticipated, they can’t short a stock or move into cash to protect the investor. A long/short mutual fund, which can be considered an alternative investment, has the ability to hold stocks for a long time or short the market if a correction is due.

Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

Robert D. Coode is a prinicipal at Skoda Minotti Financial Services. Reach him at (440) 605-7119 or rdcoode@smcofinancial.com.

Bob E. Coode, CSA, is a partner at Skoda Minotti Financial Services. Reach him at (440) 605-7182 or recoode@smcofinancial.com.

Insights Accounting & Consulting is brought to you by Skoda Minotti

Published in Cleveland

Too many business owners know they should save for retirement but put planning for it on the back burner. Forty percent of small business owners have no retirement savings or pension plan, according to a recent American College study, and some 75 percent have no written plan as to how to fund their retirement.

“Business owners shoulder the most responsibility for their businesses, yet often forget to pay themselves first,” says Jeff Manley, executive vice president, wealth services regional executive – Texas, at Cadence Bank. “But if they’re not taking care of themselves along the way, this can position them poorly for the future.”

Smart Business spoke with Manley about how business owners can plan for retirement.

What 401(k) plans suit business owners?

Small, medium and large businesses can use 401(k)s. These basic retirement plans work well for companies looking for a retirement plan that includes both the owner and employees. Making this more compelling is that the IRS raised contribution limits by $500 for 2013, making them $17,500 and $23,000 if age 50 or older, for the first time since 2008, boosting potential savings.

Individual 401(k)s and Uni-k plans are for sole proprietors, or one employee plus a spouse working for the business. These plans, which are similar yet with important differences, are the highest saving vehicles for individual business owners as they allow them to put money away on a pre-tax or after-tax basis, or a combination thereof. Business owners wear two hats — contributing $17,500 or $23,000 as an employee, and an additional 25 percent of income, up to a $51,000 maximum, as the employer. A trusted financial adviser can help determine which plan is best for you.

What IRA plans are available?

A traditional IRA is a tax-deferred retirement account, while a Roth IRA takes contributions after taxes. There are different theories on which is better for whom, with many business owners doing both. For 2013, both IRA types have maximum contributions of $5,500, $6,500 for those over age 50, so they can’t support a retiree.

A self-directed IRA is a tax-deferred account that allows creative, nontraditional investing such as private equity and real estate. Normally, IRAs only invest in securities registered with state or federal authorities. However, self-directed IRAs have a lot of regulations and not all investment advisers provide them.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA, working like a traditional IRA, has relatively small contribution limits — $12,000 for 2013, with catch-up contributions of $2,500 for those over 50. Employees can get up to 3 percent company match. Although this doesn’t allow for much annual savings, it’s less expensive to administer than others.

A Simplified Employee Pension (SEP) IRA is a type of traditional IRA. The employer is the sole contributor, and the contribution must be an equivalent percentage for every employee. The 2013 contribution limit is 25 percent of a person’s salary, up to a maximum of $51,000 per employee. This plan works well with family-run businesses.

How much should be saved for retirement?

With the different contribution limits, the amount that can be saved annually varies dramatically — from $5,500 to $51,000 in 2013. Those early in their career should start saving now and try to max out the percentage they put away each year. Getting compounding earnings working early means more money in the future.

The general  rule is to save 10 to 15 percent of annual income in retirement-type savings vehicles. But those earning a good living now who want to continue their lifestyle through retirement may have to save millions. Ask a financial adviser about available options to understand what will work best for you. Retirement planning isn’t something that can be put off. Business owners need to weigh their options. ?

Guidance provided in this article is educational in nature, is not individualized, is not intended to provide legal or tax advice, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. You should consult with an attorney, tax or other qualified professional for specific advice regarding your unique circumstances.

Jeff Manley is executive vice president and wealth services regional executive – Texas at Cadence Bank. Reach him at (713) 871-3931 or jeff.manley@cadencebank.com.

Insights Banking & Finance is brought to you by Cadence Bank


Published in Houston
Monday, 31 December 2012 20:01

Benchmarking your 401(k) plan

Many executives only think of their 401(k) when receiving a plan financial statement. They don’t consider plan operations, potential pitfalls or their basic duties in operating plans. A set of recently released regulations is systematically forcing that mindset to change.

Plan sponsors’ and fiduciaries’ duties to a plan and its participants were clarified by the new regulations. Patrick M. Shelton, GBA, managing member of Benefit Plans Plus, LLC, says, “Legally, plan sponsors are now required to have intimate knowledge of and communicate specific plan information to participants. If they fail to do so, they could face regulatory penalties, legal action from employees or get embroiled in class-action lawsuits.” He says most information must be communicated at least annually to participants, even those who have left the company but still have plan balances.

Smart Business spoke with Shelton about plan regulations and the critical importance of “benchmarking.”

What is the key determination?

Under federal law, plan fiduciaries must act ‘prudently’ and ‘solely in the interest of plan participants and beneficiaries’ to ensure a plan pays covered service providers (CSP) no more than ‘reasonable’ fees. Sponsors must review and understand all plan fees and then formally communicate them. While costs are important, they are not the only consideration. Lowest cost is rarely a determination of a well-run and effective 401(k) plan.

What are the new regulations?

Regulations are under section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) and are designed to help plan fiduciaries ensure that plan service arrangements are ‘reasonable.’

The regulations impose a duty on every plan CSP to provide information to plan fiduciaries necessary for them to assess the reasonableness of CSP compensation, identify potential conflicts of interest, and satisfy reporting and disclosure requirements.

ERISA section 404(a)(5) regulations require fiduciaries — of plans allowing participant directed investments — to provide specific information designed to enable participants to make informed investment decisions. General plan and administrative and individual expense information are required.

What is benchmarking and how can it help determine ‘reasonableness’?

Benchmarking is a process for compiling and comparing plan data to plans with similar design and demographics. Data might include plan design, including its underlying details, eligibility requirements, benefit or contribution formulas; assets; direct and indirect administrative costs; investment choices; compliance; and performance.

Benchmarking simply assists fiduciaries in determining a basis for reasonable fees. If fees are higher than average for similar-sized plans, there should be a clear explanation of why more is being paid.

What are some best practices?

You should benchmark your plan every three to four years, recognizing that the costs of professional reviews vary widely from $1,500 to $25,000. You should use benchmarking services that provide relevant data and rotate service providers to vary the results and avoid biases. You should also ask about the methodology to ensure you get valid information. In addition, you should maintain results in a file where all 401(k)-related information is readily accessible and periodically review the results and form an action plan to bring your plan in line with company philosophy and values.

Most benchmarking providers don’t adjust their comparisons by region and often extract unfiltered data from public sources. Further, while more plan data is becoming available, currently there’s not strong benchmarking data for small plans, or those with fewer than 100 participants.

What happens if you’re out of compliance?

Plan sponsors and fiduciaries are personally liable for any failure to procure the required information from CSPs. However, the regulations contain a ‘safe harbor’ method of complying — shifting responsibility to non-compliant CSPs and notifying authorities. In most cases, CSPs provide disclosures on a quarterly and annual basis that are designed to be compliant with all of the rules.

Patrick M. Shelton, GBA, is managing member at Benefit Plans Plus, LLC Reach him at (314) 824-5252 or pshelton@bpp401k.com

For more information regarding fiduciary responsibilities, visit www.bpp401k.com/fiduciary-health-check.

Insights Accounting is brought to you by Brown Smith Wallace LLC

Published in National

The outlook for traditional bonds and bond funds doesn’t look great with historically low yields today, and perhaps even lower yields and values on the horizon.

“Our concern today is that people are putting a lot of money into traditional bond funds, seeing the income that these bond funds produce,” says Jim Bernard, CFA, senior vice president and director of fixed income portfolio management, as well as an investment advisor representative at Ancora Advisors LLC.

However, that income is already falling and Bernard says it is going to continue to drop significantly.

“On top of that, the net asset values of these funds will be falling as the bonds they hold move closer to maturity because values today, in many cases, are significantly higher than the face value at which the bonds will pay off,” he says.

Smart Business spoke with Bernard about how the bond market works and what that means for investors’ portfolios.

How does the traditional bond market work?

Bonds are continuously traded based on two things: the risk of the investment and the current interest rate environment.  Currently, the likelihood of credit defaults is low for both corporate and government bonds. However, if a company has a history of losing money, you will want to pay a lower price for that bond or demand a higher interest rate in order to offset the risk of not getting your money back at maturity.

Interest rates and bond prices have an inverse relationship — as interest rates go down, bond prices go up. If you own a bond that pays a stated interest rate of 5 percent, due in three years, it would currently be worth more than face value to an investor because bonds maturing in three years are currently only paying 2 percent.

What do low interest rates and falling bond yields mean for investors?

Interest rates are low and have been for almost five years. They will likely stay this way for another two to five years. So the challenge is deciding whether investors should buy bonds that pay low rates of interest or put money in other places — the stock market, commodities, gold, real estate, etc.

If you bought a 15-year bond 10 years ago when interest rates were 5 percent or more, you might be happy. Unfortunately, most people tend to invest in bonds maturing within five years or sooner, and that means their bond holdings are at historically low yields.

What is the difference between owning an individual bond and a bond fund?

With individual bonds, you get the face value of your bonds back at the maturity date or call date, barring a default. In a bond fund, because it is perpetual, you never know what the future value will be.

Most investment advisers would prefer people invest in individual bonds if they have enough money to adequately diversify simply because of the added comfort of knowing what your bonds will be worth at maturity.

If you do not have enough capital to adequately diversify, or are in an instrument such as a 401(k), where individual bonds are unavailable, you may have to invest in bond funds if you want fixed-income exposure. You then must decide whether you are more concerned about the value of your fund or the income it produces.

What can we expect from bond funds in the future, and what should investors in bond funds do now?

Most individuals invest in bond funds in order to receive income, but that income has dropped dramatically as interest rates have fallen. For instance, one intermediate-term corporate bond fund has paid an average dividend yield of 5.4 percent over the past 12 months, but the current yield has already dropped to 3.3 percent. With five-year government bonds currently yielding 0.63 percent, is it not likely that the current 3.3 percent yield will be maintained.

The second reason an investor would buy a bond fund is for the net asset value of the fund. The net asset value of a bond fund typically only goes up when interest rates go down, but can interest rates go much lower, and therefore can bond prices go much higher? And even if interest rates stay flat, the net asset value will decrease as bonds within the bond fund get closer to maturity since the majority of bond prices are currently above face value.

So in general, concerning traditional bonds and bond funds, this is not a great time to be in either. If you have owned bonds or a bond fund for many years, you may be comfortable. However, for new money or money from maturing or called bonds, there are other, more attractive sectors with bond-like returns that are not as tied to interest rates. These include:

• Master limited partnerships, which pay a rate of interest through the infrastructure of the U.S. energy system, pipelines, etc.

• Certain real estate investment trusts, where income is derived from real estate projects.

• Certain sovereign bonds, which are non-U.S. government bonds and offer a way to diversify from the U.S. dollar.

• Merger arbitrage funds, which have bond return characteristics but are invested in equities.

If your bonds are still paying a good rate of interest, there is no need to be too concerned about selling as long as you are confident you are going to get your money back at maturity. However, right now may not be a good time to allocate new investments to the bond market.

Jim Bernard, CFA, is senior vice president and director of fixed income portfolio management as well as an investment advisor representative at Ancora Advisors LLC, an SEC-registered investment adviser. He is also a registered representative and a registered principal at Ancora Securities, Inc., member FINRA/SIPC. Reach him at (216) 593-5063 or jb@ancora.net.

Insights Wealth Management & Investmentsis brought to you by Ancora

Published in Cleveland

Although it’s risky to take money from a fund set aside for retirement, the advantage of using pre-tax cash has led to people taking their 401(k) funds and investing them in their own businesses.

This option is available when someone leaves a job and can rollover a 401(k) plan into a new investment. They don’t have to be the business owner, but that’s often the case.

“That’s the case with 80 percent of my clients who have done this,” says Tim Jochim, chair of the Business Succession & ESOP Group at Kegler, Brown, Hill & Ritter. “They’re in the business with a larger company, they decided they didn’t want to work in the corporate bureaucracy anymore and they can do better than their existing employer. They developed their business plan, left to start their own company and this is how they funded it.”

Smart Business spoke with Jochim about what’s  involved in rolling over a 401(k) plan into a new or existing business.

How can you use your 401(k) plan to start or invest in a business?

When you terminate employment, you’re eligible for a distribution from your 401(k) plan. You do a direct rollover into the 401(k) plan, profit-sharing plan or employee stock ownership plan (ESOP) of your new company.

For example, an executive decides he wants to leave his job to start a new company and there are assets he wants to buy. He does a direct rollover of the $5 million in his 401(k) into the 401(k) of the new company. The trustee of the 401(k) plan is then directed to purchase $5 million of newly issued stock of the new company. Now the company has $5 million in cash, which it uses to buy the target business. In effect, he’s used his 401(k) plan from a prior employer to start his own business.

What are the tax advantages?

Pre-tax dollars are used to buy a business. That’s saving somewhere between 30 percent and 40 percent when you count federal, state and local income taxes. So instead of $5 million to buy this business, he would have had only $3 million because the other $2 million he would have paid in taxes.

Theoretically you could do it with any amount of money, but with the cost of documentation and the risk of compliance to make this pay, you really need a minimum of $1 million to work with in your 401(k) plan.

Why is setting up an ESOP the best option in most cases?

The company can be a C Corporation or an S Corporation. If it’s a C Corporation, the corporation pays taxes on its profits. If it’s an S Corporation, the owner pays the taxes on the profits, because it’s a pass-through entity. However, the individual is not the owner — the 401(k) is the owner and the 401(k) must pay the taxes. But if it’s an ESOP, those profits are exempt from federal and most state income taxes. That’s the advantage of an ESOP.

Can you set up an ESOP as an individual?

If your new company has other employees, they must be given the same opportunity to direct their assets into company stock. Usually that’s only a temporary window to get it started. The Employee Retirement Income Security Act (ERISA) prudence rules limit investment in sponsor company stock, and certain IRS rules require that the benefits, features and rights be nondiscriminatory. If the owner can do this, then you have to provide that opportunity to everyone else who is a participant in the 401(k) plan, subject to the prudence rules. Because of the prudence rules, employee elective deferrals are usually not invested in company stock.

Considering the tax advantages with ESOPs, why would you take another route with investing your 401(k) rollover?

If you have an S Corporation ESOP, there is an ESOP anti-abuse test — in order to pass, the company should have at least 10 employees because the test prohibits concentration of stock ownership in a few people. That is sometimes called the ‘Seinfeld rule.’ This is hearsay, but the story is that TV’s Seinfeld family had discovered this magic thing called S Corporation ESOPs. They had their own entertainment company and only a few family members who were shareholders. They set up an ESOP, sold all of their stock to the ESOP and were the only participants. So they got all of their stock back and didn’t have to pay any federal income taxes. There was an uproar in Congress about this type of transaction and the S Corporation Anti-Abuse Act was passed.

What risks are involved in having a 401(k) fund a business?

Under the ERISA prudence rules, qualified plans are supposed to be diversified. They are not supposed to be primarily invested in employer securities, such as their own company stock. Only an ESOP has statutory exemption from the diversification requirement. You can amend a profit-sharing plan or a 401(k) plan to allow that, but you’re taking a greater risk under pension law because they don’t have the statutory exemptions that ESOPs have. The risk is that, as a fiduciary of the plan, you’re acting imprudently by permitting investment exclusively or primarily in company stock, and therefore you’ve breached your fiduciary duty and are subject to sanctions from the U.S. Department of Labor.

Do you need to hire an attorney to fund a business with a 401(k) rollover?

There are consulting firms that sell this concept, but they don’t draft the documents, they just sell the concept. A client who did this a couple of years ago had a group that was going to charge $30,000 just for the concept and wasn’t actually going to do the work. The problem is finding qualified attorneys. There are only a handful nationally that do this well. It’s high benefit, but it’s also high risk.

Tim Jochim is chair of the Business Succession & ESOP Group at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5443 or TJochim@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

Business owners have many choices when it comes to how to pay their employees.

Some handle the payroll process internally, and spend a great deal of time managing all the paperwork of federal and state taxes, Social Security, Medicare, union dues, 401(k) contributions and more. Some use payroll software, which allows accurate record keeping but often has a long learning curve. Some hire a local accountant or a professional tax lawyer/CPA.

Others outsource these tasks to companies that provide automated payroll services.

Smart Business spoke with Michael Cheravitch, director of Business Banking at FirstMerit Bank, about what services to expect from payroll providers and how to ensure you choose the right one for your company.

Why is it important for a business to choose the right payroll provider?

Payroll appears to be pretty simple on the surface. Employers calculate employees’ gross earnings. They deduct the respective payroll taxes and other ancillary deductions such as insurance or 401(k). Then, they send the government its share and produce a payment for the net amount to the employee.

However, payroll is actually more complex than this. There are bonuses, sick time, overtime and other factors that can change from pay period to pay period, affecting compensation. In addition, federal, state and local taxes are always changing and, depending on the complexity of a payroll, the time it takes to keep track of all of these changes can turn it into a daunting task.

If employers aren’t up to date on payroll tax requirements, such as rates or frequency of payments and filings, and they miss a deadline or pay an incorrect amount, they can be fined. Additionally, these errors can lead to an inaccurate payroll and, ultimately, unhappy employees. That’s why it is so important to do it correctly.

How can an outsourced payroll provider benefit a business?

With payroll being a much more complicated task than it appears, businesses need someone they can count on for more than just paycheck calculations. Entering all the data and pushing out a check is the easy part. It is everything else after the fact that becomes difficult.

A bank’s business online payroll, for example, could provide payroll tax payments and filings as well as 100 percent guarantee that payroll taxes will be paid and filed accurately and on time. With online payroll, you can offer direct deposit, which saves time and money for the employer and employee. There are no checks or check stubs to print, and the employees don’t have to make an extra trip to the bank on payday, so their time is spent focusing on business productivity.

How does this compare with attempting to do this work in house?

With most in-house accounting products there are additional costs for keeping the technology up to date and tax tables current. With an outsourced payroll provider, there is no software to purchase, no need to have personnel maintain it and no ongoing fees to keep it current.

Having an employee do in-house payroll presents a risk of knowledge walking out the door if that employee leaves the company. There is no need to have an ‘expert’ in-house with an automated payroll service.

How can business owners determine which payroll provider would be the right fit for their company?

There are many factors that go into determining the best solution when it comes to payroll. The five most important factors are reputation, customer service, ease of use, ability to grow with the company and, of course, cost.

Businesses need to look at the complete picture when deciding on a payroll provider. Working with a small, local payroll provider can present issues with out-of-state calculations and few, if any, offer any liability or guarantee with their service. However, working with a payroll provider that has a proven track record of success and growth offers peace of mind to the business owner.

Businesses should look for a payroll provider that has been recognized and awarded for the customer care it provides and can answer questions and provide solutions to problems. Also, look for a payroll service that provides live support available at one number, eliminating all the shuffling around and waiting for a call back.

With the many options available for payroll services, ease of use is one of the most important factors for business owners. For example, employers can look for an award-winning online product that allows business owners to run their payroll from any Internet-capable device. Employers simply log in to their online account, enter hours and other specific payroll information, preview the payroll to ensure data is correct and press ‘approve’ — everything else is taken care of. Processing payroll this way takes about five minutes.

Another important factor to look at is whether the provider can grow with the business’s future needs.

Finally, businesses should consider the cost of working with a payroll provider. One of the major advantages of working with an all-inclusive provider is that there are no hidden costs for direct deposit, reports, and payroll tax payments and filings. Online technology significantly cuts operational costs, and those savings are passed on to customers. For example, some customers could pay half the cost charged by larger companies, accountants and CPAs, and most local providers.

Michael Cheravitch is director of Business Banking at FirstMerit Bank. Reach him at (330) 849-8699 or michael.cheravitch@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

Employer-sponsored 401(k) plan fees can cut retirement savings by 30 percent over a lifetime, according to Demos, a public policy research group. However, recently enacted disclosure requirements will shine a light on the hidden fees for plan sponsors and participants.

For employers that sponsor retirement plans, there is a fiduciary responsibility.

“You, as a plan sponsor, might be overwhelmed due to lack of expertise and wish to avoid extra time spent thinking about and understanding retirement plan fees,” says Kimberly Flett, CPA, QKA, QPA, director of retirement plan design and administration for SS&G. “However, you are ultimately responsible for adequate disclosures if you are the owner of a company that maintains a qualified plan.”

Smart Business spoke with Flett about how employers can take responsibility as retirement plan sponsors beyond passing along a stack of papers or website addresses to participants.

What are the new fee disclosure requirements for plans?

The Department of Labor was concerned that 401(k) plans with underlying investments of different types and the related providers — investment managers, brokerage houses — that maintain the investment accounts take out revenue from the various funds to pay fees without sharing or disclosing the information to plan participants. The disclosure requirements hold the investment managers accountable and educate participants about the costs in the underlying investments within the retirement plans.

The new fee disclosure requirements have been established for a while, with additional retirement expenses being reported on many retirement plans’ Schedule C as part of Form 5500 reporting to the DOL. They were brought to the forefront more expeditiously because of how the economy plummeted a few years ago. Several interim regulations were passed, with final regulations taking place in 2012.

What does disclosing these fees entail?

There are two parts to the disclosure. Under the first part, the covered service provider that manages your retirement funds was required to begin disclosing to you, as plan sponsor, all the plan costs as of July 1, 2012. These included items such as name and type of investment, performance data, benchmarks, ratios used in calculating expenses and the allocation of all fees — to a third-party administrator, the adviser or licensed dealer, or the company that maintains the fund. The formulas used with those amounts also had to be disclosed.

As of Aug. 30, 2012, the plan sponsors of qualified plans had to start disclosing this information to participants in the plan, explaining what the fees are and how they work. The plan’s statements had to be updated to comply with the regulation.

How much do plan sponsors and their accountants need to understand about the disclosures?

Ultimately, as the plan sponsor, you bear what is called fiduciary responsibility. Therefore, you need to work closely with professionals, advisers and vendors who know how to interpret these disclosures. Take time to read the disclosures and understand how the investment provider is complying. Then make sure your participants are truly being informed and will continue to be so on an ongoing basis.

It’s a good idea, for example, to appoint your HR manager, internal accountant and CFO to an internal 401(k) committee with the responsibility of reviewing the data, educating themselves and then sharing their knowledge with participants. Does this committee have to be experts? No, but they have to make a reasonable effort and know where to go if they don’t have the answers, such as to an attorney familiar with the Employee Retirement Income Security Act of 1974 or a third-party administrator.

Your employees, once they get their third quarter statements, will be coming to you with questions. You need to be able to connect them with the right experts so employees can receive the necessary answers.

If a company’s provider fails to properly disclose its costs, will the company be held accountable?

Failure to comply with the regulation is considered a prohibitive transaction that can be subject to fees and penalty impositions from the DOL. But there are further ramifications beyond the DOL coming after the plan sponsor for improper disclosures.

A participant might leave your company and be unhappy with the funds or platform that you, as the plan sponsor, chose, because he or she lost money. That former employee could seek out the DOL and get an attorney. Then you could have to prove that you took every precaution to ensure the plan ran smoothly and made smart investments. If the plan did not, you might be held accountable.

It’s too soon to say what the short- or long-term ramifications will be, but as a plan sponsor the first thing you need to do is arm yourself with the right expert advisers. Then make inquires to be forearmed; the preparation phase will help curtail a lot of negative fallout that could potentially happen.

How do you think this will affect the retirement planning industry?

Third-party administrators will be needed more than ever for their expert advice. This disclosure law also brings visibility to the industry, which opens doors for discussion that sets up additional chances for education and awareness about retirement plans.

Despite more costs being in the open, employers should still take a comprehensive approach to retirement planning. Looking at service, benchmarking and longevity, as cheap is not always better. A company might have the highest number of new plans each year because of the low costs, but it also could have low retention rates because of service



Kimberly Flett, CPA, QKA, QPA, is the director of retirement plan design and administration for SS&G. Reach her at (330) 668-9696 or KFlett@SSandG.com.

Insights Accounting & Consulting is brought to you by SS&G

Published in Akron/Canton

Many companies sponsoring 401(k) plans may not be aware that they’re facing a critical regulatory deadline on August 30.

That’s the federal deadline for disclosing to employees the amounts of fees that they’re paying for their plans. The overwhelming majority of these investors don’t have the vaguest idea how much they’re paying in fees.  If you’re an employer at a small or mid-sized company, there’s a good chance that you don’t either.

That’s right. Fees, one of the biggest determinants of whether 401(k) plans make or lose money for investors, are a big question mark. For decades, this has been neglected by employers, employees and federal regulators. This state of affairs has been fine for service providers, including the large insurance companies that package up these plans and supply them to employers. After all, less disclosure means less attention paid by investors, and higher fees for lack of comparison shopping.

Because of new federal rules that expand and reinforce existing regulations and reverse years of lax regulatory enforcement, all of this is changing. Employees will soon be informed exactly how much money is being deducted from their 401(k) accounts to pay fees. They’ll learn of these fees this fall in their account statements, as required by the new federal rules.

Previously, these statements merely showed investment account totals after fees were taken out, so employees likely attributed low returns to poor investment performance rather than damage done by fees.

The amounts of these fees shown in the statements will doubtless come as a rude surprise to many employees, sending them streaming into your company’s HR department. They won’t be smiling.

If you’re following federal rules, however, your employees will already know about these fees when they receive their accounts statements. The new rules require employers to send employees a simple document showing fees in an easy-to-understand format by August 30. This way, the fall account statements won’t come as a shock to employees. Employers are also required to determine whether these fees are reasonable relative to the broad market.

By adopting and enforcing the new rules, the U.S. Department of Labor (DOL) is shedding light on not only the fees service providers are charging, but also the quality of these plans.

For example, if plans are paying a service provider substantial fees but employees receive little, if any, education on how to construct and maintain their portfolios within their plans, this makes for the worst of all possible scenarios: high fees and poor service, resulting in low potential for good investment returns.

Without reasonable fees and knowledge of how to use their plans, employees can’t be effective in serving as their own financial planners, which is essentially their role as 401(k) investors.

Employers are required to prepare the disclosures due this month from information that they should have received by now from service providers.

But many employers, doubtless, will be between a rock and a hard place. While employers are on the hook for clear disclosure this month according to a set format, the new rules don’t require service providers to provide this kind of clarity when they supply the fee information to employers.

Regardless of their size, companies that fail to comply with the new rules may be hit with severe fines and other sanctions. This prospect is intimidating, but the sweeping new regulations should be viewed as an opportunity to make your plan work better for workers and management alike, possibly while lowering fees.

After determining what your plan’s fees are and what you’re getting in return, you’re required to determine whether they’re reasonable by benchmarking them against the current national market.

You may well find that you can get better service with lower fees – improving employees’ understanding of plans and increasing net returns after fees are taken out of their accounts.

But first, employers face rigors surrounding the disclosures of the coming weeks.

To deal with these challenges:

1. If you haven’t done so already, get to work pronto on the fee disclosures due August 30. The first step is to determine whether your service providers have fulfilled their regulatory obligations by supplying the fee information – including the specific services being provided for each amount – to your company.

2. If you’ve received this information, set to work interpreting these documents. This can be a lot tougher than it sounds, as some plan providers are burying pertinent information in lengthy documents. If, at the outset, this task seems too difficult or time-consuming, consider hiring an independent fiduciary advisor to assist you with this, as well as with benchmarking your fees against the market. Using a fiduciary can significantly reduce your company’s liability.

3. If service providers have failed to supply the required fee information, document this by writing to them and requesting speedy submission. This can insulate you from liability for not disclosing the information to employees on time. If these providers don’t respond immediately (after all, the deadline is fast approaching), protect your company by blowing the whistle on them with the DOL.

4. Prior to making the fee disclosures this month to employees, notify them in meetings and/or in emails of what is coming their way. Tell them this is the first step in a process to review – and, possibly, to lower – fees and to improve service, including the provision of better plan education. Again, an independent advisor can help with this.

5. Throughout this notification/disclosure process, document all questions that employees ask and the answers they receive. This helps manage your legal and regulatory liability, and it helps you develop the best answers to give when the same questions come up again.

If you haven’t started this process or are behind schedule, don’t think about water that’s passed under the bridge. Instead, look upstream. Even the sternest of regulators will acknowledge that well-meaning efforts to comply, however belated, are far better than inaction or ignorance of the new rules.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.

Published in Cincinnati

If you’re the HR director of a small or mid-size company, you’re probably familiar with the list of investments available to employees under your 401(k) plan.

Yet, chances are that no one at your company knows how your plan ended up with its particular selection of investments. That’s because these plans typically aren’t bought, but aggressively sold – by large insurance companies acting as plan providers.

Often, the fees these they charge are far too high, relative to the market, for the services being provided – a widespread reality that the federal government is trying to change by requiring employers to take steps to assure that these fees are reasonable.

This requirement is part of a larger regulatory effort to prompt companies sponsoring 401(k) plans to take a hard look at them. When scrutinizing their plans, many companies will find shortcomings including too few investments and lack of care in their selection. Answering the question of how investments got into their plans opens up a Pandora’s box of issues.

Many companies will realize that they’ve failed to adequately monitor the performance of investments in their plans or to assure that the risk/reward characteristics are fully explained to employees who depend on these plans to provide income during retirement.

When companies sign up for pre-packaged plans that may be deficient, they sincerely believed they were getting a good product. After all, large insurance companies have to be accountable for the integrity of their products because they have substantial legal liability for their suitability, right? Wrong. As plan sponsors, employers – not plan providers -- carry substantial civil and regulatory liability for their 401(k) plans.

Amid the examination of the plans that new federal rules will spur in the coming months, many employers will come to grasp the full extent of their legal responsibility – their fiduciary liability – for the first time.

These employers – as well as those who already have an inkling or even a full awareness of their fiduciary role – will be seeking tools to guide them through the process of evaluating and revamping their plans.

The most critical tool available for this purpose is an investment policy statement (IPS). This document includes a detailed list of a plan’s investments, the selection criteria used for their inclusion, how these criteria pertain to the company’s particular worker population, the monitoring processes used to continuously evaluate investment performance, the performance benchmarks these investments’ must meet to qualify for and remain in the plan, the governance processes the company uses to make substantive changes, provisions for disclosure of information on investments to employees, descriptions of programs for educating employees on investing concepts so they can understand these disclosures, and on and on.

Thus, an IPS is a soup-to-nuts blueprint for the plan, its administration and its ongoing maintenance. But a good IPS doesn’t stop there. It is a living, breathing document that shifts with long-term investment market trends and changes in employee demographics. It should be constantly re-evaluated and slavishly adhered to. If you’re changing any aspect of the plan, do these changes comport with the governance principles and guidelines set down in the IPS? They’d better – or else the company could lose sight of the plan’s goals, jeopardizing its capacity to influence positive retirement outcomes.

Investment policy statements aren’t just used by 401(k) plans. They are widely used by investment advisors, trust administrators and other financial fiduciaries to establish mutually agreed-upon principles and criteria for managing assets according to clients’ goals and risk tolerances.

In a sense, 401(k) plans themselves are financial planners insofar as they include investment options – though ultimately, investment choices are up to employees. An IPS for a 401(k) plan should bridge the gap between the plan and each employee to guide investment choices. And, just as financial advisors with integrity serve their clients in their best interests, communicating clearly about such issues as risk versus reward and allocating assets to achieve sufficient portfolio diversification, an IPS should assure that plans give employees a sufficient variety of choices to meet their goals and empower them to make the best choices.

Drafting an IPS should be the first thing a company does when establishing a 401(k) plan. And in a perfect world, this is what all companies would do. Many large-company 401(k) plans have investment policy statements – or something akin to them. But to HR managers and owners of many smaller companies, “IPS” understandably might sound more like an overnight parcel delivery service than a critical financial document that can determine whether employees have to keep working into their 70s and 80s.

Because of the new rules, many HR people at smaller companies will have to considerably increase their knowledge of how 401(k) plans are supposed to work – or their companies may risk severe regulatory sanctions from the U.S. Department of Labor.

Companies can start by obtaining a clear view of their plans to determine their deficiencies and decide what to change. Those changes should be reflected in an IPS which, if constructed correctly and followed carefully, can help companies exercise a high level of due diligence that can keep regulators and lawsuits away.

If you don’t know what an IPS is, it may be next to impossible to construct one yourself. In this case, it’s probably best to engage the services of an independent advisor who can also X-ray your plan and suggest changes.

If you or anyone at your company can remember the meetings with the broker who sold your company your 401(k) plan, you’ll recall that these sales people didn’t offer to construct an IPS. That’s because this is a service provided by fiduciaries. Plan providers and brokers avoid this status – and its attendant liability – like a bad rash.

To stay ahead of regulators, there’s much work to be done. The benefits of doing this hard work go far beyond staying out of trouble. Assuring that your company provides competitive benefits that help employees retire with dignity isn’t just the right thing to do; it can also aid recruiting and increase employee retention.

And when an employee asks how your plan’s investment selection came to be, you can pull out the IPS and read them the reasons.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.

Published in Cincinnati

If your company has a benefit plan such as a 401(k) with 100 or more eligible participants, each year you are required to have an audit performed on that plan that is filed with the IRS and the Department of Labor (DOL). Failing to do so could mean major penalties for your business, says Danielle B. Gisondo, CPA, a principal with Skoda Minotti.

“What often happens is that a company gets to that 100 employee mark and it is not aware of the requirement,” says Gisondo. “A few weeks before the deadline, the company that is preparing the required Form 5500 for all benefits plans for the company will send the company a letter that says, ‘You need to have an annual audit this year because your participant count has climbed to more than 100, so please forward us your auditor’s information.’ The company may read that and begin the search for an auditor or just ignore it. And ignorance of the requirement is no excuse.”

Smart Business spoke with Gisondo about what you need to know to stay on the right side of the law and avoid stiff penalties.

When is a benefit plan audit required?

ERISA requires that an audit be performed on most benefit plans with more than 100 eligible participants. The auditor is required to be an independent accounting firm, one that is independent not only of the client but of whomever is administering the plan and holding the investments.

Every plan has to come up with a standard plan document that outlines how the plan should operate relating to contributions, distributions and loans. The DOL wants to make sure companies are properly running their plans in accordance with what their plan document says.

What happens if a company does not have a benefit plan audit performed?

If a company fails to have an audit performed, it will be faced with penalties from the DOL and the IRS, which can get very steep. If you fail to file at all, the penalties can be up to $30,000 per year per plan. And a deficient filing can result in penalties of up to $50,000 per year per plan.

How long does the benefit plan audit process take?

If the auditors get everything they need, the process typically takes three to four weeks. If there’s a delay in getting information, either from the client or from one of the third parties involved, it may take six or seven weeks to complete.

The auditors will first compile a comprehensive request list with everything they need copies of and access to. Depending on the size of the plan, the auditors will be on site for one to three days and will typically work with someone in HR or accounting to get the necessary information. The rest of the work is done off site to minimize disruptions to the client’s business.

What are the deadlines?

For a calendar year-end plan, the initial due date for Form 5500 and the audit is July 31. If you can’t meet that deadline, you can file a two and a half month extension, which brings the due date to Oct. 15.

What steps can you take if you realize you should have had an audit performed but you didn’t?

If the IRS/DOL notifies you that you should have had an audit, it’s difficult to get out of paying the penalties by saying that you didn’t realize you needed one.

However, the DOL offers compliance programs that companies can go through if they failed to file. These programs allow you to pay a reduced fee that varies depending on the type of plan and the number of participants. Once you have paid that fee and file the necessary 5500 forms and audits as needed, you can be relieved of the penalties.

If you know you have a problem, don’t wait. Reach out to the IRS/DOL and let them know you have a problem. If they come to you and say, ‘We don’t have your 5500 form and the applicable audit,’ it’s too late to go through the compliance program and you will face major penalties.

What should companies consider when selecting a benefit plan auditor?

Ask if the firm has expertise in performing benefit plan audits. A lot of people assume that any accounting firm can do them, but it is a separate area of expertise and you should make sure the firm has it. Accountants undergo specialized training on an annual basis to ensure they are comfortable with all of the changes that continue to come from the IRS and the DOL.

Make sure the people you are working with are properly trained, that they know what they are doing and that they audit multiple plans, because a firm that audits just one or two plans doesn’t have the experience of a firm that is doing 20 or 30. Also ask about the audit process and ensure that whomever you are working with has the experience necessary to perform the work.






Danielle B. Gisondo, CPA is a principal with Skoda Minotti. Reach her at (440) 449-6800 or dgisondo@skodaminotti.com.

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Published in Cleveland
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