Some of the Top Mistakes Employers Make When Building a Retirement Plan

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As an employer, offering a retirement plan is one way to help your employees realize their post-career goals after their years of hard work. When you’re designing your retirement plan, there are key areas to be aware of based on your entity type, such as governmental agencies and non-governmental businesses in both non-tribal and tribal organizations. If you’re unaware of these various factors and differences, you could face administrative and legal challenges.

We’ll share the common—and sometimes costly—mistakes we’ve encountered working with these different types of businesses and explain how you can seek to avoid similar challenges.

Mistake # 1 Not Discussing Your Goals and Needs

Many businesses elect to work with a third-party professional who specializes in retirement plan design and administration. However, the partnership can pose problems when the third party offers a standard prototype design without fully understanding your business type and goals. It’s critical to interview potential third parties to ensure they are well-versed in tailoring a plan to your organization. Ask them questions and discuss which features or strategies are appropriate as you’re establishing your company’s retirement plan.

For example, we frequently come across businesses offering a 401(k) matching program that have not yet adopted a safe harbor provision. There are qualifying factors, but the safe harbor provision helps you maintain compliance and avoid the expense of annual nondiscrimination testing required by the IRS. Unfortunately, many businesses are not made aware of this option and the cost savings available.

Mistake # 2 Setting Up the Wrong Type of Plan for Your Business

Every entity that sponsors an employee retirement plan must follow specific guidelines under various governing boards such as the IRS and the Employee Retirement Income Security Act (ERISA). The type of retirement plan you establish is essential to remaining compliant while not taking on unnecessary risks or costs. However, if you are unaware of the key differences, you may find yourself in a plan that’s unsuitable or costly to your business. Let’s look at a couple of examples.

  • Non-ERISA Plans for Governmental Agencies. It’s critical to know that on the governmental side for non-tribal and tribal agencies, you may be eligible for a non-ERISA plan, excusing you from the requirements found in a traditional ERISA plan. However, once you have filed a standard ERISA plan with the IRS, you cannot reverse it. This can be a damaging revelation for an agency that has implemented a traditional plan and unnecessarily opened itself up to Department of Labor audits and ERISA requirements.

  • 457 Deferred Compensation Plans. The same situation occurs when assumptions are made and a tribal government establishes a 457 plan, committing to its guidelines and associated administrative costs. In traditional, non-tribal governments, a 457 may be appropriate; however, tribal governments, unrecognized under 457 regulations, are usually best suited with a non-ERISA 401(k). In this case, it’s challenging for a tribal government to terminate a 457 plan, which requires lengthy IRS approvals.

Mistake #3 Not Using Technology

Sometimes companies set up a retirement plan without a clear strategy for leveraging technology.

As a plan sponsor, you have a legal obligation to ensure your employees adequately understand the plan’s details. Technology can help to simplify this area. For example, if you have a payroll site where employees can view and print their statements, you may consider adding your retirement plan disclosures, forms, and other resources. This way, you’ll stay compliant and reduce your fiduciary risk while giving employees a central location for important retirement information.

When employees feel more informed and engaged in their retirement benefits, we’ve found they’re more inclined to participate and take an active role in their financial future. And technology and access can be significant factors in helping them pursue their goals.

Mistake #4 Not Providing Employee Education

It can be difficult to coordinate schedules and carve out an hour for your company’s retirement plan education. However, not providing employee education can have long-term consequences.

As we’ve mentioned, providing employee education is part of your fiduciary responsibility as a plan administrator. Employees should be aware of the plan’s details and have an opportunity to ask questions and learn about plan updates, economic and business news, and general investment planning. In extreme cases, you could violate your duties and be at risk for employee litigation in the future by not providing suitable educational opportunities.

Whether through technology or group meetings, we encourage you to establish a retirement plan strategy that consistently promotes employee education. You may also think about how your education needs to shift based on your audience—for example, when speaking to executives versus frontline employees.

We do this for companies by taking advantage of regularly scheduled team meetings or trainings and simply dedicating a few minutes to the retirement plan and employee questions.

Mistake #5 Not Establishing an Investment Committee

As you can see, you must stay up-to-date on the various administrative duties and evolving regulations regarding your company’s retirement plan—and establishing an investment committee can be the determining factor in meeting those needs.

Your investment committee will be the fiduciary body responsible for managing and updating your plan, ensuring investments are appropriately diversified and fund fees are reasonable, and ultimately acting in your employees’ best interests.

When forming a committee, consider who can effectively represent your employees and inform their needs. For example, you may find a group of executives, HR staff, and a third-party partner are sufficient for your company. In contrast, another company may also appoint employee delegates based on their various employee subsets for additional accountability.

Creating a Strong Foundation

There are many moving parts when designing, implementing, and administering a retirement plan. However, when you focus on the key areas in your initial design or partner with a professional specializing in retirement plans and administration, you can strive to avoid the common challenges and unnecessary costs while helping your employees succeed.

At RWM Financial Group, we help commercial businesses and governmental agencies design and oversee well-managed retirement plans in non-tribal and tribal organizations. Learn more about building a custom, cost-effective strategy that is compliant and promotes success for you and your employees.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does the advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

RWM Financial Group Introduces a New Website Experience

We’re happy to announce the rollout of our newly designed website, which provides you with a more efficient and convenient online experience. We’re committed to the modern, unique, and professional approach we extend to every client who walks through our doors—and we thought it was time our website reflected that same perspective.

We worked hard to implement changes that can better serve our existing and new clients. The new website will feature a fresh, clean, and intuitive layout. The user-friendly environment will make it easier to navigate and find the information most important to you, such as our videos, tutorials and calculator. We’ve also added a new blog to continue connecting with you and offering you the latest news and insights within financial planning, retirement programs, and wealth management.

image4.pngWe’re most looking forward to you getting to know our advisors and team culture a little better. The personalities, talent, and skills present in the team that serves you will always play a critical role in helping you achieve success and support your employees and business. We’re highlighting the team that makes it all happenimage3.pngYou can rest assured our website is the only thing that’s changing. You can still expect the same high quality of service, relationships, and retirement and wealth management guidance that have been at our core since we began. Thank you again for your trust and business. We hope you enjoy the updated look and feel. We look forward to bringing you along on our journey as we continue to refine and improve our systems to meet your needs in the best ways we can.

What to Consider if Your Inheritance Includes a Retirement Account

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Did you recently receive an inheritance that included a retirement account, such as a 401(k) or IRA? You may wonder when you should and are required to take distributions and what investment strategy will be most effective for your financial situation.

The main characteristic of a retirement program inheritance is that most beneficiaries must deplete the account’s funds within 10 years of the original account holder’s passing. The 10-year rule, passed within the SECURE Act in December 2019, does not specify an amount you must distribute, just that you must withdraw all the funds within 10 years. There are a few exceptions to the 10-year timeframe you may qualify for if you’re the legal spouse not more than 10 years younger than the decedent, chronically ill, or disabled. Different rules apply to minor beneficiaries.

For the sake of this blog, we will focus on non-spouse recipients who do not meet any exceptions. When you decide to take your distributions will determine the type of investment strategy that will best fit your financial needs. Let’s discuss what you should consider when selecting your withdrawal strategy.

Choosing a Withdrawal Strategy

When you decide to start taking distributions may be different from someone else’s approach for several reasons. Below, we’ll outline what may help you determine your withdrawal schedule and how it will affect your investment strategy and planning.

  • Your current financial situation. If you need the additional cash flow now, taking a lump sum may be an effective path to explore with your inheritance. You should, however, consider how a lump sum will affect your taxes if the account is considerable. Immediate withdrawals could also affect your investment risk tolerance if you plan to rely on the distributions as an extra income stream. However, if you do not need additional income, you may consider how the funds can grow tax-free for a few years or the entire 10 years to take advantage of market fluctuations.

  • Your next life stage. Are you retiring soon? If you’re planning to retire within five years, your inheritance can be another form of retirement income. In this case, you’ll want to discuss with your financial advisor your options and how a little more risk could benefit your long-term savings. However, let’s say you have seven to 10 years or longer until your retirement. Then, you may benefit from a more aggressive investment strategy and possibly two market cycles to potentially add more value.

  • Your tax impact. Whenever you decide to start taking your distributions, you should consult with a tax professional about possible tax implications. Every type of retirement account has different taxation on distributions, so it’s helpful to evaluate how your taxes could be affected. If the account is significant, a lump sum may push you into a high tax bracket, and you may determine withdrawing a monthly amount may mitigate a higher tax burden. If the amount is smaller, perhaps a longer-term approach will produce higher, tax-free returns within the required timeframe.

While the 10-year rule may limit when and how to use or invest your money, you have several investment and planning options based on the type of retirement program you inherited, your current financial situation, and your future goals. Once you decide on your withdrawal strategy, it will better inform how to invest your funds to meet your needs. We can help you navigate the different scenarios to understand the short- and long-term financial implications of your withdrawal and investment approach. Contact our team to learn how we can guide you through the complex rules associated with your retirement program inheritance so you can plan for today and prepare for the future.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Brahm Named to LPL’s Executive Chairman’s Club

We are excited to announce that Brahm Rossiter was recently named to LPL Financial Holdings’s Executive Chairman’s Club. This honor speaks to Brahm’s commitment to our clients and their unique financial needs. It is also a reflection of our clients’ loyalty in their relationship with us as a firm and their willingness to share their experience with others. They allow Brahm, and us, to continue to grow.

This award is given to the top 5% of LPL’s more than 17,000 financial advisors across the nation and is based on the annual production among them.

Rossiter Wealth Management is an affiliate of LPL Financial, one of the nation’s largest independent broker-dealers based on total revenues, according to Financial Planning magazine June 1996 – 2020. LPL equips its advisors with various tools and technologies that we use to better serve our clients and their financial needs.

Congratulations to Brahm on this recognition!

How to Design a Retirement Program for Your Large or Small Business

Implementing a retirement program for your company is a significant step in attracting and retaining top talent, affording your employees long-term financial benefits, and scaling your business overall. Still, the features and benefits of retirement plans vary by business based on several factors. Which ones should your company consider? We’ll explain what small and large businesses should think about when designing a successful program.

Employee and Company Goals

Your goals are the foundation for designing a retirement program that specifically meets your business’s and employees’ needs. Begin by outlining your goals—what you want for your company and what you want for your employees.

In addition to providing for your employees, you might consider the current stage of your business cycle. For example:

  • A smaller, family-owned business thinking about changing leadership may be concerned with how the retirement program will affect their tax and succession planning.

  • A startup enterprise may want to design a 401(k) plan for attracting and retaining experienced talent.

  • An established company may focus on updating its current plan to meet new compliance standards.

Your employees may want or need:

  • The empowerment to retire when they choose

  • Retirement education and personal financial coaching

  • Profit-sharing options

Plan Contribution Requirements

There are a wide array of retirement programs available to serve your employees well. The plan or plans you select will be based on your goals and operational costs versus the required contributions to maintain compliance. Whether you’re the owner of a large or small business, there may be a significant range in salaries among your employees, which will determine plan participation and if you’ll meet a plan’s contribution requirements. Here’s what you should consider:

  • Identify employees or divisions of employees that won’t participate in the primary retirement program. Excluding part-time employees or C-Suite executives, for example, may reduce your overall plan costs or change your contribution requirements.

  • There are specific IRS requirements that ensure retirement plans are balanced and mutually benefit all employees. For example, in a small business with few employees, if upper management maxes out their contributions while hourly employees contribute at a lower amount, it might disproportionately allocate plan funds to higher-paid employees, and corrections would be required to balance the plan. Review plan options to ensure you meet contribution requirements to uphold compliance standards.

Technology and Logistics

Logistics and technology are other factors that will determine the success of your retirement program. For example, how will you deliver plan disclosures and employee education?

  • Large companies: you might be able to rely on resources such as email or a benefits website to sufficiently deploy annual disclosures and employee education. You may require additional planning for an in-person group training, while one-on-one employee meetings may not be plausible at all.

  • Small and family-owned companies: you may be able to distribute required documents and provide group and individual employee education via individual and/or in-person communications that require fewer logistics. Just be sure to keep a record of communications.

From your business size to what technology you use, it’s no wonder that retirement plans are highly customized to the individual company. At RWM, we call it a job well done when both employers and employees win. If you’re ready to implement a retirement program that creates value for your employees while also meeting your needs as the owner, we can help. Contact us if you have questions about designing or updating your retirement program.