Posted by Andrea Vassiliadis on Wed, Mar 24, 2010 @ 10:18 AM
While 2010 has brought an unprecedented opportunity in the Roth arena, it is not a decision to make casually. I cannot over emphasize the fact that each individual looking at the pros and cons of this must have professional help from a tax advisor, a financial advisor or an estate attorney.
It all comes down to some major number crunching, based on the accounts you hold (and their rules), your tax brackets (now and at time of your retirement), your age, and your short term/long term needs for that money. Simple, right? NOT! Get professional advice to sort it all out.
Roth has come around as a hot topic again because the income limit that historically held individuals back from being able to convert their Traditional IRAs or qualified retirement plan accounts to a ROTH IRA, is sunsetting* this year (thanks to a provision of the TIPRA - Tax Increase Prevention and Reconciliation Act of 2005). In addition, during 2010, taxpayers who convert their assets will have the option to forego paying taxes on the conversion on their 2010 tax returns. Instead, taxpayers can include the taxable portion of the conversion on their 2011 and 2012 returns.
There are many subtleties to consider, but a Roth IRA may be generally appropriate if:
- you can pay the taxes OUTSIDE of your IRA or employer plan
- you have a long time before you will need the assets
- you want to eliminate having to take Required Minimum Distributions from these funds during your life time
Converting won't make sense for everyone. If it does make sense for you, the tax savings can be significant. I would certainly recommend taking a closer look and giving it some extra thought this year!
*Sunsetting refers to the income limit expiring at the end of 2010.
Posted by Andrea Vassiliadis on Fri, Mar 19, 2010 @ 08:58 AM
This blog should resonate with those of you running specialized small businesses like myself, where you know your field of expertise like the back of your hand. It is all you do, and that is your key selling point. You have chosen to go the boutique route and focus on deep knowledge and intense customer service, staying independent in your offerings. Maybe you're a CPA or a Wealth Manager or you sell Group Health plans or Insurance. You work very hard every day to do things just the way you want them done, so you can be proud of your work. Luckily, you have avoided strangulation by red tape that leads to apathy, by going corporate.
But, one day you're happily struttin' your stuff when *BAM!*, you get THE phone call. A beloved client, who has been with you for five years has decided to go with their payroll company, who now offers every single service known to man and rolls it all up. The payroll company starts the day by making your coffee and ends the day by tucking in your kids at night and putting a mint on your pillow. It's nothing personal, your beloved client tells you. They have been very happy, but the payroll company offers perfect service for no money, and in these hard economic times... blah blah blah... What to do?
It's time for us small business owners to unite against these corporate giants, and form our own strategic partnerships that they can never compete with! Because guess what? Their corporate service is NOT as good, and it is NOT even close to free! Through any combination of efforts, we can create our own "bundled" products for our clients that blow away anything these giants can slap together. Imagine the bundled plan built on the blood, sweat, tears, vision and heart of the owners of each line of business... NOT a corporate balance sheet and a board vote to add a department that may or may not stick around.
I'm very big on this concept and have had the great privilege of meeting some of the sharpest most dynamic folks in their industries. Other entrepreneurs with the same philosophy of building and working together to improve our businesses and what we can do for our clients. And of course, people I know I can trust and who know they can trust me. And heck, I even get to learn a thing or two along the way, and have a lot of fun to boot!
Now I know that my beloved clients can get the same quality for their other needs, and there is no fear of them going anywhere else. There is enough business out there to band together for our clients, to bring them good old fashioned boutique expertise, without driving up the cost. If we all just work together.
Posted by Andrea Vassiliadis on Tue, Mar 16, 2010 @ 08:44 AM
A lot of questions are coming up lately about the new final regulations, effective January 14th, 2010, on the timely remittances of employee contributions. While it is important that small businesses* are aware of these new rules, it may not change their procedures.
The rules have always stipulated that contributions must be made on the "earliest date on which such contributions can reasonably be segregated from the employer's general assets". (In no event can this be beyond the 15th day of the following month). A big DOL audit "pain point" these days is assessing what this really means with today's technology so widely available.
Under this new Safe Harbor provision, this rule is automatically deemed to be satisfied if the amounts are deposited into the plan no later than the 7th business day following the day on which such amounts would otherwise have been payable to the participant in cash. This applies to loan repayments as well.
A couple of other points:
- This Safe Harbor is optional, but if not elected then the company is held to the original standard.
- The rules apply on a deposit-by-deposit basis, and can be applied in the same manner to multiple employer and multi-employer plans.
So no reason to panic small businesses! Many of you are already doing the right thing just by remitting contributions on a payroll-by-payroll basis. For those of you who are not, it's probably time to take a closer look and take advantage of that Safe Harbor.
* A small business is defined as a company with less than 100 participants at the beginning of the plan year.
Posted by Andrea Vassiliadis on Tue, Feb 02, 2010 @ 10:15 AM
I always say I can clear a room faster than any presenter when I meet with a prospective client, especially when they have included many "decision makers" from their company in the meeting. I simply say "by the way, by sitting in this room, each and every one of you are a Fiduciary of this plan". But it's true, and it's important that everyone in attendance knows this. There is a lot of talk about "participant education", but the education needs to start first with the Fiduciaries.
For example, at Acme Company, we have Susan the President, Harold the CFO and John from HR attending the meeting. The owner of Acme, Carol, is the only Trustee of the Plan and she is not in attendance. Susan, Harold and John all have very different concerns going into the meeting, and may not have a full understanding of all the concerns they should even have. Furthermore, they all think only Carol has any liability since she is the "Trustee".
Susan will be looking at the balance between cost and service and quality. Harold will be interested in the bottom line expense of operating the plan. John will be worried about ease of operations (i.e., is the payroll linked to the mutual fund platform, or is he looking at a manual process?). But are any of them looking at the Plan as a whole, from outside their specific arena? Do they understand they actually are liable for trying to make the best, most prudent decisions they can about how to choose the best mix of provider and advisor, to help maintain and service their Plan?
Susan, Harold and John have all unwittingly become Plan Fiduciaries, because they are involved in the decision making process. This means that they are responsible for how well the plan operates, and to ensure that the company they hire to oversee the Plan actually delivers on their promises. Lawsuits won by disgruntled plan participants are ending the days of passivity for Plan Fiduciaries.
I make it clear who's who and what's what. Guaranteed Carol will be at the next meeting, and boy can I clear a room!
Posted by Andrea Vassiliadis on Fri, Jan 15, 2010 @ 10:26 AM
It never ceases to amaze me how often I meet with a prospective client that has an existing 401(k) plan, and they have no idea why their plan is designed the way it is. Last week, I met with a client who was not happy that they were locked into making a 3% Safe Harbor contribution to their employees, as cash flow was very tight. There was nothing I could do for them for 2009, but I certainly want to help them review their options for 2010.
Having a Safe Harbor provision can be a silver bullet in these plans, to eliminate a couple of key testing issues. The most common reason is to avoid the "Average Deferral Percentage" or ADP test. In simplified terms, this test is failed when the ADP test of "Highly Compensated Employees" (HCEs), defined as over 5% owners, and/or those earning over $110K in the prior year, EXCEEDS the ADP test of the "Non Highly Compensated Employees" (NHCEs), by more than two percent. If that happens then generally the HCEs have to be refunded some of their deferrals, which then becomes taxable income again.
A Safe Harbor provision eliminates this test, and commits the company to making EITHER:
- a 3% of eligible pay contribution (regardless of whether the employee is deferring on their own)
- or a matching contribution
Either way it must be 100% vested immediately, UNLESS (remember my last blog? "Auto Enroll vs. Employees Doing Nothing") the company has chosen to auto enroll participants. In which case the company can have up to a two year vesting schedule on the Safe Harbor. They must notify employees by December 1 of the prior year that they will be doing this the following year, and are basically locked in. The company can terminate this mid-year, but it's a messy process.
I gathered up this client's prior reports and census information to take a closer look. Their plan was with a payroll company which performed this ADP test every quarter, even though it was unnecessary in place. The quarterly testing was unnecessary because the plan had a Safe Harbor. What leaped out at me was the fact that the test passed with flying colors for the last three years (since the inception of the plan)! There was one HCE (the owner), who was not even participating! When I asked why, I was told he never intended to participate, and he considered his retirement investments to be his company and some real estate ventures. His goal for even offering a plan was to be competitive in the market place for recruiting purposes. So the burning question was: Why were they set up with a Safe Harbor provision in the first place? The client couldn't tell me, didn't even remember a discussion about it, and were quite upset when they finally understood what a Safe Harbor is and the purpose for having it in place.
Too often plans are designed with these "vanilla" provisions, obligating the company to terms they do not understand, do not necessarily need, and might not be able to afford in this economy. I'm starting to see a trend in my blogs as I ruminate on this stuff: an expert should be reviewing, consulting, and designing these plans to meet the specific goals of the client!
Posted by Andrea Vassiliadis on Mon, Dec 28, 2009 @ 12:57 PM
The US government is strongly encouraging company's to auto enroll employees into their retirement plans. The rationale is simple: it is in the best interest of the employee for their company to automatically enroll them, so the individual can begin putting money into the plan in order to build retirement savings. The employee has 90 days to "opt out" with no tax consequence, and can change the percentages they defer whenever the plan allows. Auto enrollment can have a direct global impact on the growth of individual retirement savings. It is a solution to one of the biggest problems with retirement plans today: employees tend to do nothing. If doing nothing means employees are participating, as opposed to never getting around to enrolling, the long term impact on these retirement accounts can be huge.
A company should not make a decision to implement auto enrollment lightly. The demographics and current participation rates need to be analyzed. The existing plan design needs to be reviewed. Perhaps an increase in employee education and awareness is all that is necessary. What is the climate of the company? Philosophy of the owners/trustees? Would this kind of action be perceived as an infringement of employee rights, akin to "big brother"? By increasing employee participation, would employer matching contributions become cost prohibitive? These questions and more need to be answered before a company takes action to auto enroll employees.
While this may be an important process to put in place, the pros and cons must be carefully reviewed with an expert to ensure auto enrollment is appropriate. An expert will help define the best solution and suggest any improvements to the plan design. Perhaps a "safe harbor" plan is better. Learn all about a safe harbor plan in my next blog.....stay tuned!
Posted by Andrea Vassiliadis on Wed, Dec 16, 2009 @ 12:44 PM
Many non-marketing people, like myself, are intimidated by blogging. Who will read my blog? What is the value of sharing my educated opinion and vast experience in the 401(k) retirement planning world? My director of marketing insists that there is a growing value and interest in using blogs as a source of information. In fact, she claims that it is growing exponetially! As people search the internet for answers, an educated opinion is going to be of far greater value than the results of a Google search or even using that new Bing! thing. So here goes...
Retirement Planning effects everyone, and can be especially frustrating for those who do not work in the industry. Whether you are a business owner, an employee working in HR, or are a participant in your company's retirement plan, it's hard to know what to worry about. And once you get worried, what to do?
In the beginning, no one envisioned 401(k) becoming the primary method of saving for retirement. Pension plans ruled the roost, and Trustees of the plans only had to worry about how to invest a single pool of money that only had to grow at a reasonable rate to be able to pay out benefits to employees at retirement age. Remember when people used to hold the same job for over 5 years?
Economic curves turned many of these into dinosaurs and catapulted 401(k) plans into the lime light. Then came the concept of employees controlling their own investments. It's their money, after all... All was well when you could throw a dart or hire a monkey and make a 40% return in the .com era.... but when the bubble burst, chaos began.
Who's going to educate folks to know how to make intelligent decisions about their investments? Who's going to look after them to make sure they're not killed with fees inside their Plan? Who's going to help the HR person who is responsible for overseeing all this? Who knows what fiduciary compliance means? And who's going to hold the hand of the Trustees who are actually liable and may not even know it?
Consulting on this stuff is why I started my firm 3 years ago to serve Boston, Providence and the MetroWest in retirement planning, and this is why I hired a marketing person to bug me about blogging! Since I've dreamt, eaten and drunk this industry for almost 18 years, I have a couple of useful things to say, so stay tuned...
I hope you enjoyed my first blog!