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Stop Losing 401(k) Prospects- 6 Easy Talking Points for Advisors

Talking Points

By Patrick Shelton, GBA and Jason Oesterlei, ERPA

Many advisors jump right into talking about investment performance and fund expenses but they may be ignoring these 6 simple talking points to flush out the prospect’s fundamental needs and wants:

  • Eligibility
  • Compensation
  • Contributions
  • Vesting
  • Distributions
  • Loans

Eligibility | Who can enter the plan and when?

A plan sponsor can get into trouble when they assume the plan doesn’t cover certain employees (e.g., part-time employees) or mistakenly treat non-electing employees as ineligible under the plan when other plan contributions are made (e.g., Safe-Harbor Non-Elective). Many simply overlook the Plan Document’s definition of an “employee” and the requirements for becoming eligible to make elective deferrals. Depending on the demographic and culture of your workforce, you may elect certain eligibility requirements such as age, tenure or employee classification. To reduce the risk of omitting eligible employees, you should frequently ensure the accuracy of employee data such as dates of birth, hire and termination, number of hours worked, compensation for the year, 401(k) election information and any other information necessary to properly evaluate the plan.

Tip: Auto-Enrollment allows plan sponsors to enroll employees in a plan without the employee’s written consent. This can help increase plan participation and improve compliance testing results. However, this feature can be costly if not properly administered.

Compensation | What part of the paycheck?

If a plan uses multiple definitions of compensation for different purposes, it’s easy for a plan sponsor to make a mistake when determining allocations, deferrals and testing. To avoid technical corrections, it is important to understand the Plan Document’s definitions for different types of compensation and the various ways they are taxed. Certain types of compensation may be excluded for plan purposes; these may include: compensation earned prior to plan entry, fringe benefits, as well as bonus and overtime (if special annual testing is passed)[1].

Contributions | Who is putting money into the plan and how?

Due to lengthy and complex IRS/ DOL testing requirements, it’s challenging for plan sponsors to ensure contribution appropriateness and accuracy. Their plan may permit both employee and employer contributions, so it’s important that they understand their Plan Document’s contribution options and requirements. Any employer contributions must be allocated to participant accounts pursuant to an allocation formula established in the plan document.

Contributions can be broken into 4 major groups: elective deferrals (pre-tax or Roth), employer matching, safe harbor and non-elective (profit sharing) contributions. Each of these groups has its own unique formulas and options that can be applied to help maximize savings. It is important to remember that all money entering the plan is subject to annual limits.[2]

Vesting | When do employer contributions become employee assets?

Participants are only entitled to the vested portion of their account balance upon exiting the plan (e.g., retirement, termination, etc.); the remaining unvested portion must be forfeited to the plan. Sponsors can choose to use these forfeitures to pay plan expenses or reduce employer contributions (e.g., the funds may be used as matching contributions for other employees). Failure to properly follow a Plan’s vesting schedule can lead to incorrect benefit amounts being distributed when an employee leaves the plan. For example, the amounts could be in excess of what is permissible or less than what was due to the participant.

All employee contributions and safe harbor contributions must always be 100% vested. However, plan sponsors may elect a statutory vesting schedule personalized to company needs and wants for employer matching and profit sharing contributions.

Broadly speaking, there are two kinds of vesting schedules: graded vesting (e.g., 6 year graded: 0% year 1, 20% year 2, 40% year 3, etc.) and cliff vesting (e.g., 3 year cliff: 0% year 1 and 2, 100% beginning year 3). Regardless of the schedule, a participant must become 100% vested when they reach “normal retirement age” (defined in the plan document).

Distributions | When can money be withdrawn?

“Distribution” is a fancy word that the IRS and financial industry use to discuss withdrawing money from the plan. Generally, employees are eligible to take penalty-free distributions at age 59½, but it is not until age 70½ that the IRS requires employees to take distributions (Required Minimum Distributions).

Generally, plan documents will only permit a lump-sum distribution when a participant separates from service and is entitled to a distribution. Under the lump-sum option, a participant must take their entire vested account balance in a single distribution. Other distribution options include installment payments and partial payments.

However, you can permit a participant to take a distribution while still employed. These are called “in-service” distributions. These distributions can be available upon the attainment of a certain age (typically age 59 ½ or older) or a “hardship” event. Eligible hardship events are defined by law, but a plan is not required to offer them.

A plan may also permit the involuntary cash-out of small account balances. Balances under $1,000 may be distributed in cash to the participant. Balances under $5,000 may be involuntarily rolled into an IRA for the benefit of the participant. As stated previously, these plan provisions will be clearly stated in the plan document.

Loans | Can employees borrow from their savings?

Retirement plan loans are popular among employees but can add administrative headaches for plan administrators. Employers need to sign-off on loan requests and deduct loan payments from payroll. Offering retirement plan loans is not required: a plan sponsor has the authority to allow them or not, but the provisions must be clearly stated in the plan document.

In Closing…

Understanding these 6 key talking points will allow you to flush out the plan sponsor’s fundamental needs and wants. More than likely, you’ll be the first one to bring it “back-to-basics” with day to day administrative challenges they can relate to. Also, as a word of caution, try not to get lost in the technical details. As an advisor, your primary job is to quarterback the client relationship and provide investment advice– not to be their retirement plan guru. Once you uncover the prospect’s pain points, simply call BPP and let us partner with you as your designated retirement plan experts. We specialize in “fixing broken retirement plans” and we commit to making your life easier.

Depending on the prospect, their may even be opportunities for implementing advanced plan design options such as auto-features, enhanced matching formulas, or offering a cash balance plan. These features can add substantial value to your prospect’s business and could be a key reason they choose to work with you vs. someone else. Again, don’t get too hung up on details, we will help you dive into the more advanced options if an opportunity presents itself.

At BPP, we pride ourselves in being knowledgeable retirement plan consultants and would be happy to walk you through our personalized plan design process to help you develop a plan that is right for your client and their employees.  A well designed retirement plan can eliminate sponsor headaches and ultimately improve employee retirement outcomes.

Be sure to connect with us on LinkedIn or visit our website to stay informed about related topics moving forward.

Click here for a PDF version of the article

BPP is committed to providing every client with the effective tools and services they need to grow healthier retirement plans.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

[1] Mitte, Ed. “CPE_Compensation.” IRS.gov. Summer 2013.

[2] Internal Revenue Service. “401(k) Plans: Deferrals and matching when compensation exceeds annual limit.“ 2017.

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