Why You’re Ready for the 401(k) Plan of the Future

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Too few plan sponsors understand the service hierarchy surrounding 401(k) plans, let alone the responsibilities of each servicer.

Do you know who is responsible for what in your plan? Chances are, you don’t.

In the event of a compliance or liability issue, this lack of knowledge can cost you dearly.

Several years ago, the Department of Labor hired 1,100 more auditors to audit every qualified retirement plan in the United States by 2020.

In FY 2016, the Employee Benefits Security Administration, responsible for ensuring plan integrity in the U.S. closed 2,002 civil investigations and 67.7 percent resulted in fines on plan sponsors who, one could say, were not paying attention to their plans.

The average fine was $259,000. Could your P&L handle that?

We want to raise your awareness of who’s who in your 401(k) plan, and suggest an innovative alternative to you to sleep better at night. We worry about you sponsoring a plan with a false sense of security.

By default, you, the plan sponsor/employer is 100 percent responsible for your plan, especially its investments.

You hold the ultimate decision-making authority for those investments, their selection, monitoring, replacement or removal─with the freedom to accept or reject any recommendations.

trap 1If you are uncomfortable making your plan’s investment decisions, you have several choices. You can work with a non-fiduciary registered representative (a broker). You can work with a 3(21) fiduciary, like Roush Investment Group, also an Accredited Investment Fidicuary. Or you can work with a 3(38) investment manager.

Let’s quickly define our terms and spell out the main pros or cons of each role.

In general, fiduciaries hold the responsibility and duty to:

  • Operate the plan only in the interest of participants for the sole purpose of providing benefits
  • Act “prudently,” as in how a professional would perform under similar circumstances
  • Diversify the plan's investments to minimize risk of any large losses
  • Follow plan document terms written to govern the plan
  • Avoid conflicts of interest with the plan

Roush Investment Group is a different breed of 3(21) investment fiduciary. However, before I explain our difference, let me first explain the term 3(21) which defines our responsibilities under The Employee Retirement Income Security Act of 1974 (ERISA) in § 3(21). A quick review in layman’s terms.

The 3(21) Fiduciary

As your 3(21) investment fiduciary, a fee-paid professional, we advise and provide investment recommendations to our clients, the plan sponsors. A 3(21) fiduciary advisor gives direct guidance and recommendations to each participant on his or her investment selections.

The plan sponsor retains the consequent decision-making authority for the investments, and may accept or reject the recommendations. We share fiduciary responsibility with you, and we assist in writing the investment policy statement (IPS), the governing document which is the foundation of the process.

As plan sponsor, you also must decide who executes the investment decisions for the plan or select your 3(38) investment manager, the primary point of today’s post.

The 3(38) Fiduciary

ERISA Section 3(38) defines the investment manager as a special type of fiduciary, specifically appointed with full discretionary authority and control to decide on actual investments, subject to plan document terms and the IPS. The manager may select, monitor, remove and replace the investment options offered under the plan.

The 3(38) must be a registered investment adviser, bank or insurance company, and must acknowledge its fiduciary status in writing. Service agreements must carefully drafted to provide for the appointment.

Advantages of a 3(38) on Your Plan

The powerful draw of a 3(38) fiduciary, if properly appointed─plan sponsors are relieved of fiduciary responsibility for the investment decisions made by the investment manager. The 3(38) fiduciary assumes even greater liability than a 3(21).

While still responsible to monitor the investment manager’s proper performance of services, you do not need to worry about or second-guess investments. Now you have an extra layer of protection.

Every plan sponsor needs a 3(38)-investment manager to mitigate risk and liability.

Your brokerage firm, investment advisor, insurance agent, or financial planner cannot reduce your liability because they offer no process for continuous monitoring of the responsible parties in the hierarchy. And yet, you pay for services. In fact, benchmarking is all they can offer; however, then you are compelled to take that knowledge and execute or not.

What’s more, they only bind themselves by the lesser “suitability” standard of care, not the “accountability” of fiduciaries bound to do only what is in the sole interest of the client.


What if you could find a golden referral to a 3(38) investment manager?
What if you could access a failsafe process to bring down your plan liability?
What if you could tuck the responsibility hierarchy under one umbrella without monitoring everyone?
The good news? Every Roush client will soon benefit from the maximum protection that the law allows as we transition to the 401(k) plan of the future─our breakthrough DCPro process.

DCPro─Eliminate the Burden. Optimize the Benefit

Earlier I referred to Roush Investment Group as a different breed of 3(21) fiduciary. And here’s why.

We are pleased to introduce an innovative process, called DCPro, to surround your plan with the ultimate shield of protection. Roush Investment Group identified and appointed industry-leading fiduciary experts to collaborate and manage your plan in your best interest.

DCPro delivers the expertise of a 3(16) plan administrator, a 3(21) fiduciary advisor, and a 3(38) investment manager in one powerful collaboration, each driven to limit your liability exposure.

As your 3(21) fiduciary, Roush Investment Group helps you monitor all servicers to your plan through the latest software and technology platforms. Think of us as your sentinel on watch, your plan’s own security system.

Now, you do not need to be an expert fiduciary or search for the right 3(38) investment manager. Or worry about the compliance readiness of your plan.

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We’ve removed the burden of 401(k) operations from your back office to ours. And provided a named fiduciary to relieve you of fiduciary responsibility to the maximum extent permissible by law.

You are virtually free of compliance threats, No more time-consuming responsibilities, And at a market competitive cost.

Make a Wise Choice

Instead of struggling to piece together a team of independent fiduciaries yourself, who may or may not work well together, take advantage of the seamless structure of DCPro.

We’ve already done all the work for you.

Even if you’re not ready for our solution, we strongly urge you to upgrade the fiduciary protection on your plan by engaging a proven 3(38) investment manager for all the reasons we’ve discussed in this post.

Don’t be caught off-guard by regulators. Make the wise choice to protect yourself now.

If we can be of service, please contact me below.

erin cathcart

Erin Cathcart

Roush Investment Group

O: 559.579.1490 F: (559) 490-2015 C: 559.907.6647

www.RoushInvestments.com

Traditional 401(k) Plans vs. Roth 401(k)s

Why Give Employees a Choice?

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Do you sponsor a 401(k) plan for your employees? Many of our clients do. But less than half of American companies with under 100 employees do 1. If you’re one of those, your cost of doing business in 2017 is set to rise.

A talent shortage persists. In a report by Deloitte, 79 percent of manufacturing companies face difficulty filling positions due to a skills gap. Roughly the same percentage was reported in consumer products (78%), technology (77%), healthcare and business services (both at 74%). All these sectors reported ‘major talent shortages.’

To add to the challenge, millennials (born between 1982 and 2004) represent the majority of the workforce today. And they’re a delightfully contrarian lot.

Some 75 million strong, millennials expect more from work than previous generations. They’re extremely wired, accessing terabytes of information to make more informed decisions. They’re attracted to brands they love and employers who care. And they want great benefits.

No, they expect great benefits.

Your Talent Magnet

If you do not offer a fully competitive 401(k) plan to your employees, you will be hamstrung to attract and retain the top talent you need to grow your business. When a prospective hire considers whether to work for you or someone else, the package of benefits you offer will make the deciding difference.

In a nation suffering from retirement insecurity, workers naturally look to their employers for assistance. A 401(k) plan proves you value your talent and what it brings to the company. What’s more, retirement benefits rank second behind health insurance in importance to your people. Besides, it costs far less to offer benefits designed to keep good people than to find, hire and train new ones.

“If employers would really calculate in a systematic way how much turnover costs to them, they would pay more attention to clever ways of compensating workers, like adding a 401(k) account to their benefits,” says Teresa Ghilarducci, nationally recognized expert in retirement security. “It doesn’t really cost that much, because the 401(k) contributions are flexible, employers can stop them whenever they want, most of the contribution can come from their employees, and employees really like them.”

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A 401(k) plan offers tax advantages for both the employer and employee. Many small businesses can qualify for a $500 tax credit to offset the cost of operating a 401(k) plan for each of the first three years. Plus, when the employer matches employee contributions, those sums are also tax deductible. Brightscope tells us that more than three-quarters of sponsors make matching contributions to their plans. Little wonder, then, by the end of Q1 2016, Americans held $4.8 trillion in 401(k) plans.

But here’s the sad news.

Remember that roughly half of Americans do not work for an employer that sponsors a retirement savings plan. And consider this: “When you add in people who did not participate in a plan offered to them or who were not working,  a staggering 68% of working-age people (25-64) did not participate in an employer-sponsored plan,” reports Forbes.

The Lucky Ones

Progressive employers give employees a leg up on retirement security with a 401(k) plan and offer a choice between a traditional 401(k) plan and a Roth 401(k) plan. Fifty percent of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.

Here’s the great news: Your employees do not have to choose between one or the other. There’s room for both. By understanding the differences between a traditional and Roth 401(k), you can help your employees save on taxes now and later. Let’s unpack these differences.

The Traditional 401(k) Plan

If you choose a traditional 401(k), you make contributions on a pre-tax basis. You pay taxes when you withdraw these funds at retirement. Because your contributions are not counted as income, your tax bill could be lower today. And, you enable your retirement assets to grow on a tax-deferred basis. Because you are taxed on future withdrawals, in effect, a percentage of your 401(k) balance belongs to the IRS.

Inside Roth 401(k) Plans

The after-tax Roth 401(k) plan does not entitle you to an upfront tax break, like the traditional 401(k), because you pay taxes on your account contributions at the time they occur ("today"). As important, withdrawals are not required and some plans could stipulate in plan documents that withdrawals occur at a defined “retirement age.” However, all accumulated growth and all qualified future withdrawals are tax-free. With your taxes already paid upfront, no tax is charged at retirement withdrawal. The plan your employees select will depend on their individual situations and retirement goals.

What to Consider

At its core, the decision to go Roth or traditional is somewhat of a calculated risk. You are betting on where tax rates will land in the future. Who can know? You can review historical tax rates, take the current political situation into account, then make a guesstimate based on these factors:

  • Your anticipated income growth over your career
  • Your current tax bracket
  • Your expected tax bracket at retirement

If taxes are your employees’ prime concern, they may prefer a traditional 401(k) and defer taxes (on their higher income now) until retirement when lower income and a lower tax bracket is more likely. Let’s say you’re at the beginning of your career with taxes deducted from your paycheck regularly; it makes sense to use this after-tax income to contribute to a Roth 401(k). The contributions grow tax-free, and you will not feel the pain of taxes at retirement.

What if your peak earning years come later in your career, and you find yourself in a higher tax bracket nearing retirement, the traditional 401(k) plan becomes a smart choice.

Alternatively, what if you befall a medical emergency or illness, you can tap a good-size portion of your Roth 401(k) to pay for the unexpected without the tax burden of a traditional 401(k).

Do the Right Thing

We know you care whether the investment lineup in your plan is well diversified. Why not help your employees diversify their tax exposure, as well? By offering both a traditional and a Roth 401(k) plan, you produce a trifecta of advantages. Participants in the plan can lower a certain amount of current taxable income, contribute to a diversified retirement plan, and gain some insulation against future tax hikes.

As long-time fiduciaries, we are duty-bound, and honor-bound, to do the right thing by our clients. That’s why we recommend offering both plans to your employees.

No better feeling exists than the experience of doing the right thing.

If we can be of service, please contact me below. My door is always open.

To Your Financial Freedom,

rick roush

Rick Roush AIF®, CPFA

Roush Investment Group

O: 559.579.1490 F: (559) 490-2015 C: (559) 285-3318

www.RoushInvestments.com