What are Dimensional funds?

Markets go up and down, and dimensional funds provide a steady stream of income in your retirement. Dimensional funds aren’t available to the general public. Instead, investors work with dimensional-approved firms like Retirement Plan Consultants.

Benefits of Dimensional Funds in your Retirement Plan

1. Impressive Investment Performance

Dimensional’s investment strategies have delivered impressive investment performance  compared to mutual fund competitors and to relevant market benchmarks.  

2. Evidence Based Investment Approach

Dimensional carefully studies markets in order to develop their investment strategies, and they’ve done so for the past 30 years . Their research discovered that smaller, lower-priced value stocks have higher risks and greater expected returns than larger and higher-priced growth stocks. Dimensional uses this information to its advantage by “tilting” its portfolios toward market segments that offer higher expected returns. 

3. Risk Management Strategies

Dimensional implements strategies to reduce risks that weaken investment performance and collect higher expected returns associated with smaller and value-priced equities. In addition, diversification within each Dimensional fund helps to dodge avoidable risks such as holding too few securities or betting heavily on specific industries or regions. 

4. Efficient Trading

Dimensional’s trading is efficient. It’s spent more than 30 years developing its trading infrastructure, so it has a well-known presence in global financial markets. Dimensional portfolios are unique and aren’t held to traditional benchmarks, so the firm positioned its holdings to maximize negotiating strength.  

5. Low Costs

Dimensional funds have low expense ratios, which are much lower than the industry average. 

Visit Dimensional’s public site at www.dfaus.com if you want to explore Dimensional funds in closer detail. 

Top 10 Takeaways Advisors Need from the SECURE Act

  1. Multiple Employer Plans

    – The newest “buzz word” in our industry, employers can more easily participate in a MEP or a new variant, a “pooled employer plan,” or PEP. This could be a potential solution for plan sponsors depending on plan size and goals. For those looking for a more custom solution, this may not be the best option.
  2. Credits Matter

    – The small employer retirement plan startup tax credit increases from $500 to a maximum of $5,000 per year for first three years. Auto-enrollment for both new and existing plans increases from $0 to $500 for each of first three years.
  3. Deadlines Do Too

    – Employers can establish a qualified plan as late as their business tax filing deadline and non-elective plans can be amended up to 30 days before the end of the year if they make a 3% contribution.
  4. Less Paper for Certain Plan Provisions

    – For plans with a safe harbor non-elective or QACA (Qualified Automatic Contribution Arrangement) provisions, notices to participants are no longer required. This can be seen to alleviate the administrative burden placed on plan sponsors. Note that plans with safe harbor match provisions are still required to disseminate notices to participants as well as other notices (i.e. QDIAs).
  5. The Insurance Industry Had a Say in This

    – Defined contribution plans must provide, at least annually, a projected lifetime income stream that a participant’s accrued benefit could generate. This disclosure does not create employer liability for the amounts projected.
  6. Actually, They Had a Very Big Say in This

    – Annuity contracts within a plan are now portable if a
    participant terminates employment or retires. There are also new Safe Harbor for Guaranteed Income Provider Selection which mitigates fiduciary liability in regards to offering insurance within a retirement plan.
  7. No More Exclusion for All Part-Time Employees

    – Employees who work three-consecutive 12-month periods at 500-hours or more must be allowed to make deferrals into the plan by 2021 and later plan years. These participants are not necessarily required to receive any employer sponsored contributions, including Safe Harbor Contributions
  8. People Live Longer…Stop Making Them Take Out Cash Early

    – There is a new requirement for required minimum distributions (RMDs) and that is age 72 effective for distributions required in 2020 and later years for those who reach age 70.5 in 2020 or a later year.
  9. Speaking of IRA RMD’s Contribution Changes

    – Taxpayers with earned income can make traditional IRA contributions any time at any age effective immediately.
  10. No More Stretch IRAs

    – Most non-spouse beneficiaries of IRAs are used to stretching their Inherited IRA distributions over their lifetime. This is no longer the case. Inherited IRA assets must be distributed within 10 years after the death of the original account holder.

What does this mean in terms of your business?

Generally speaking, Congress has lowered the barrier to entry to adopt an employer sponsored retirement plan which is a WIN for the American worker. More tax credits, more fiduciary protection, and more flexibility for adoption. On the other hand, heavy lobbying from the insurance industry has also introduced additional pitfalls for employers if not properly guided by an independent plan fiduciary advisor. In our opinion, plan advisors are still the most critical piece to the retirement plan puzzle to help plan sponsors navigate the retirement plan landscape that is both more flexible, but also inherently skewed to the interests of its biggest lobbyists.

What to Expect at Year End 2019

In this webinar we will answer common questions that advisors have around year end requirements.

-Annual Notice Requirements

-Completion of Annual Census Request and using this information for the Annual Compliance Testing.

-Key Dates

Cash Balance Plans – What Advisors Should Know

In this webinar we will answer common questions that advisors have around cash balance plans. What is a cash balance plan? Who is a good candidate? How can they be used to improve your clients’ retirement and tax situations? What is the role of the advisor? Presented by Wendy C Frame and Jeremy D Palm from Lurie.
https://youtu.be/jjP4kOeCDb4

The Triple Threat to Employer Sponsored Retirement Plans

One of the most dominating eras in sports history was the Chicago Bulls basketball team from 1991 to 1998. Notably, the ’96, ’97 and ’98 seasons were extraordinary as the Chicago “Triple Threat” was in full effect.

The Chicago Bull’s Triple Threat

Michael Jordan, Scottie Pippen and Dennis Rodman brought a unique blend of talent that was hard to replicate by any other team. Jordan’s ability to score at a high percentage and Pippen and Rodman’s ability to extend plays (rebounds) and create opportunities (assists) to win came together nicely with three straight NBA championships.

Each player had a particular strength and particular role on the team. Their ability to complement each other in terms of their strengths was ultimately what led to their inevitable dynasty.

This isn’t meant to be a lesson on Chicago basketball history, but more about building good teams or strategic partnerships. I happen to work in the retirement plan industry, where our mission is to help Americans save for retirement. If we unpack that statement a little bit more, you will find that there are a lot of moving parts involved in fulfilling that mission.

The Triple Threat to Retirement Plans

Plan Advisors

There are plan advisors who serve as the independent professionals who help plan sponsors choose service providers, assist plan sponsors with fiduciary governance and educate participants on how to best save and invest for the future.

Financial Advisors

You also have financial institutions who put together an array of investment vehicles and products like target-date mutual funds, separately managed accounts (SMAs), collective investment trusts (CITs), and insurance products to act as the conduits for participant investment choices.

Third Party Administrators

There are also service providers like third party administrators (TPAs), recordkeepers, fiduciary service providers (i.e. 3(21), 3(38), 3(16) providers), independent plan auditors and payroll providers who make sure the plan operates smoothly, stays in compliance with Department of Labor and Internal Revenue Service regulations and ensures participant assets are properly accounted for.

Plan Sponsors

Lastly, you have industry associations like the Plan Sponsor Council of America, the American Society of Pension Professionals and Actuaries, Center for Fiduciary Excellence and the National Association of Plan Advisors who all serve as thought leaders on best practices, lobbyists for our industry on Capitol Hill, and provide educational resources for professionals who are looking to make a career in our industry.

For those advisors who serve as fee-only fiduciaries to their private wealth clients, there is a unique opportunity to spread your value proposition to more Americans who need a financial ally to guide them to a successful retirement via advising employer sponsored plans.

There are values inherent in your practice that has already distinguished you from the vast majority of financial professionals:

  1. Clients’ best interests always comes first and foremost
  2. 100% transparency in terms of process and fees
  3. Process rooted in academic evidence and best practices
  4. Independence in terms of who you choose to work with
  5. We are in the business of serving others

As a values-based business, beginning to build your team starts with identifying those who share in those same values. Which financial institutions see eye-to-eye with serving clients and building solutions based on evidence? Which service providers believe in 100% fee transparency, independence, and serving the client’s best interest, not their own?

This is where we have the potential to replicate the Chicago “Triple Threat” in our industry:

  • Fee-Only Fiduciary Advisor (Jordan)
  • Evidence-Based Investment Approach like DFA and Vanguard (Pippen)
  • Independent Service Providers like RPC (Rodman)

By being organizations that share the same values, the strengths that each organization brings to the table can effectively deliver on the ultimate goal….winning 3 straight NBA championships (you get what I’m saying).

Making the Most of Your Practice’s Retirement Plan

Josh Kegley of Retirement Plan Consultants was a guest on the IPWM The Dose podcast hosted by Adam Cmejla. 

Adam and Josh talked about how to utilize a qualified retirement plan like a 401k to maximize the benefit to the practice owner. The podcasts starts out discussing how changing the match to a safe harbor is the easiest way to allow practice owners to maximize their own contributions as well as the nuances of the safe harbor match.

Next, the podcast dives into the details on the other side of the qualified plan, which is the profit sharing plan. We discuss the various different types of profit sharing plans, including:

  • Integrated
  • Cross-tested (new comparability)
  • Age weighted

Characteristics of a practice that would be a good fit for each of the plans mentioned above as well as some of the different questions to consider when determining if, when, and how much of a profit sharing contribution to make.

The podcast touches on the impact that profit sharing contributions have on qualifying for the new Section 199A deduction (commonly called the “QBI deduction”).

Converting Your SIMPLE Plan to a 401(k) Plan: Things to Consider

Congratulations! You have decided to take the next step in your retirement evolution and convert your SIMPLE Plan to a full fledged 401(k) plan. While it may seem like a relatively straight forward process, here are some key things to review before pulling the trigger.

Is Moving to a 401(k) Really in My Best Interest?

Let’s review the pros & cons of each:

401(k) Plan:

  • Pros
    • Higher Contribution Limits: $19,000 per year or $25,000 for those age 50 and older.
    • Ability to Add Profit Sharing Contributions: Up to $56,000 per participant per year or $62,000 for those age 50 or older.
    • Ability to Add Profit Sharing Contributions: Up to $56,000 per participant per year or $62,000 for those age 50 or older.
    • Loans: Borrow from yourself up to $50,000 per year with a competitive interest rate (careful, loans are paid back with after tax money…i.e. you are taxed twice).
    • Hardship Withdrawals: Access your money when facing financial hardship (early withdrawal and tax penalties still apply).
    • Forego Required Minimum Distributions: Participants with a 5% ownership or less can forego taking RMDs from their 401(k) until they officially retire.
    • Flexible Plan Design: Custom matching formulas and profit-sharing allocations (i.e. new comparability, integrated, etc.).
    • Vesting Schedules: You have more flexibility in terms of when participants are fully vested in their employer contributions (match, profit sharing, etc.).
    • Easy Compatibility for Advanced Plan Designs: Combining a 401(k) profit sharing with a defined benefit plan can dramatically increase contribution limits for key employees and ownership.
  • Cons
    • More Expensive: You can run a SIMPLE Plan at virtually no cost. A good starting point for thinking about 401(k) expenses is somewhere between $1,500 to $4,000 per year.
    • Increased Administration: Year-end compliance testing and filing of IRS forms on an annual basis. It is important to make sure your third-party administrator (TPA) is on top of it. There are also loan and hardship distribution approval when applicable.

SIMPLE Plans:

  • Pros
    • Cheap: Most custodians offer a SIMPLE Plan at little to no cost.
    • Minimal Administration: Only requirement is that employers distribute safe harbor disclosures before November 1 of each calendar year.
  • Cons
    • Lower Contribution Limits: $13,000 per year or $16,000 if age 50 and older.
    • Inflexible Plan Design Options: Straight forward safe-harbor plan where all employer contributions are 100% vested for employees. No vesting schedule are allowed.
    • No Loans
    • No Hardship Withdrawals: Basic IRA distribution rules apply.
    • Pre-Tax Contributions Only: Inability for Roth or after-tax contributions.

Summary

For those employers who are looking to save more and have more flexibility in the plan design, a 401(k) is a better way to go. For those looking to just dip their toes in the re-tirement plan world and have an easy, cheap, “off the shelf” solution, then a SIMPLE Plan may be a better option.

What Do I Need to Know When I Have Decided to Convert to a 401(k)?

You are not allowed to terminate your SIMPLE Plan mid-year, so it is important to make sure you have started the discussion with your trusted advisor well before the November 1st deadline for notifying participants that you are ending your SIMPLE Plan at year-end. This includes having a plan design set and communicating with your service providers so that the process can run as smoothly as possible. We recommend starting the discussion at least 3 months ahead of the November 1st deadline.

Can Plan Participants Roll Their Money From the SIMPLE Plan into the 401(k)?

YES! Plan participants have 4 different options:

  • Keep the money in the SIMPLE IRA account
  • Roll the money over into a Rollover IRA account
  • Roll their money over into a newly established 401(k) plan
  • Take a distribution in cash where penalties and taxes may apply

There is one potential catch. There is a 2-year rollover rule that applies to SIMPLE Plans. In other words, assets cannot be rolled over into another account until the SIMPLE Plan is at least 2 years old (i.e. when first contributions are made).

Plan Advisor Guide to Fiduciary Oversight

One of the biggest parts of a retirement plan advisor’s value proposition is to facilitate fiduciary oversight for a plan sponsor. While most advisors would naturally like to talk about investment lineups and participant education, facilitating fiduciary oversight is going to protect your client from fiduciary liability as well as improve the overall plan
experience.

What is fiduciary oversight and how can advisors implement one as part of their service offering?

Fiduciary oversight is a periodic review of all aspects of the plan to ensure it is operating in the best interest of participant’s and their beneficiaries. While there are no hard-and-fast rules to proper plan oversight, there are fiduciary best practices that can act as a guide. In short, we are building a case for why decisions are being made on behalf of plan participants. The main categories in a proper fiduciary oversight process include: fees and expenses, investment lineup and performance, participation and
retirement outcomes, plan design, and administrative compliance.

Fees and Expenses

A plan sponsor should have a baseline for which to compare their overall plan fees and expenses. A plan advisor can assist by working with service providers who provide a 100% transparent fee structure in an easy to find fee disclosure. Benchmarking a plan’s overall expenses against national averages once every three years is also a fiduciary best practice. There is no “right” or “wrong” answer when it comes to fees, but more about understanding the services you are receiving and whether or not those are
justified by the fees the plan is being charged.

Investment Lineup and Performance

A plan advisor should provide a process for which investment decisions are being made. Past performance is no guarantee of future results so plan sponsors must look at other metrics such as fees, manager tenure, assets under management, risk-adjusted performance, peer category performance, and style drift, among others. Advisors have a wealth of third-party resources, including 3(38) investment management fiduciaries,
who can provide this process for a fee.

Participation and Retirement Outcomes

There are three main levels plan advisors should look at when it comes to participant success:

  • Overall Participation (bronze level): What percentage of eligible participants are actually participating?
  • Percentage of Participants Receiving Full Match (silver level): What percentage of participants are contributing enough to receive the full employer match (if applicable)?
  • Full Income Replacement (gold level): What percentage of participants are on track in having full income replacement throughout retirement?

Ideally, we want to be having conversations with participants about income replacement, but we might start with increasing participation and increasing savings.

Plan Design

Reviewing eligibility requirements, features like Roth contributions, loans, hardship withdrawals, and automatic enrollment and escalation are all elements of plan design. If something is not working well within the plan and can possibly be remedied through plan design changes, those are conversations that need to be happening.

Administrative Compliance

There are certain day-to-day operations that need to be happening on a consistent basis. This includes enrolling newly eligible participants, approving new loan requests and making sure they are being paid on time, participant notices and disclosures are being disseminated on time, making sure contributions are being submitted on time, and all necessary IRS forms are being filled out and submitted on time. If there are issues with these day-to-day items, a plan advisor should consult on how to create internal processes to address these issues.

Document, Document, and then Document Some More

If you don’t write it down, it never happened. Any discussions or reviews you are having with a plan sponsor needs be officially documented and kept somewhere that is easily accessible. If there are any changes made to service providers, investment lineup, plan design, or internal processes, document what the problem was, why the change was made, and when is the next official review of those changes.

RPC Can Help

Don’t feel like you need to recreate the wheel. RPC provides fiduciary oversight resources such as annual plan review checklists, fee benchmarking reports, investment lineup fiduciary score via fi360, participant reports and income replacement calculators, and a team of experts to help address any plan design or administrative compliance
issues. Your review notes can be uploaded into the plan sponsor’s online fiduciary audit binder so that they are easily accessible if someone needs access.

For more questions on how RPC can help with fiduciary oversight, feel free to contact us at 877-800-1114 or sales@retirementplanconsultants.net.

Offering a 3(38) Investment Manager Fiduciary Service – It’s All About Process

A 3(38) investment manager has an incredibly important responsibility when it comes to qualified retirement plans. They are charged with creating the investment policy statement (IPS) for the plan, choosing the appropriate fund lineup based on the IPS, monitoring and reporting the performance of their investment selections, and ultimately mitigating the legal exposure of the plan sponsor in regards to the investment process.

The Responsibility of a Plan Advisor

For plan advisors who are already working as fiduciaries for their private wealth clients, this may seem like a service that easily compliments what they are currently providing. As an investment advisor representative, you fall under the Investment Advisors Act of 1940 which charges you to act in the best interest of your clients (i.e. fiduciary standard of care). But qualified retirement plans are a completely different animal when it comes to compliance. While the Department of Labor and the U.S. Treasury have laid out the rules and regulations for plan compliance, there is often a lot of “gray area” or “wiggle room” to determine whether or not a fiduciary is lawfully fulfilling their duty. This is where having a great process for fiduciary oversight comes into play in all aspects of the plan.

For example, I happen to be a believer that you are more likely to have a better investment experience by following some basic investment tenants:

  1. Maintaining broad and cost-effective diversification (i.e. don’t put all your eggs in one basket and costs matter)
  2. Having a risk exposure that is in alignment with your risk tolerance (i.e. how much pain do you need to go through to reach our long-term financial goals)
  3. Allow the market to work for you versus working against the market (i.e. the market collectively knows the most than any single investor).

The only problem is that the DOL and U.S. Treasury do not care about what I “believe in” even if it is so eloquently stated in my ADV. They are interested in seeing a process that has led me to these conclusions I have made about a successful investment experience
and why that is in the best interest of the plan’s participants and their beneficiaries. In other words, “show me, don’t tell me.”

So What is the Process?

Those who have decided to pursue this type of “process,” have typically landed on some sort of fiduciary monitoring report. You start with the entire investment universe of funds and ETFs, screen each of them against a set list of fiduciary mandates such as
fees, experience of staff, performance over multiple time horizons, and assets under management. You assign a score to each fund within their assigned Morningstar asset class, and then choose the funds with best overall fiduciary score for each major asset
class chosen in the plan’s IPS. This can also include a target-date retirement fund series as well as professionally managed, risk-based model portfolios. Industry leaders such as fi360 have built an excellent screening tool that plan advisors can use to help build
their 3(38) process.

Final Thoughts

This monitoring report is a more objective way to stating why a particular lineup, based on both qualitative and quantitative factors, serves the best interest of plan participants. Most 3(38) providers update and distribute the report on a quarterly basis, giving
insights into funds that have possibly been put on a “watch list” or completely replaced. This report can assist the plan sponsor in making sure they are ultimately fulfilling their fiduciary duty of monitoring all aspects of the plan.