Navigating Employer Sponsored Retirement Plans

Learn how to navigate your employer sponsored retirement plan with Sequoia's Vice President of Wealth Planning, Heather Welsh and special guest, Kimberly Oros of CBiz Retirement Plan Services.
 
Hello and welcome to the Sequoia Investments and Insights podcast, a podcast providing insights and resources to the financial markets, while discussing relevant and timely topics to help you navigate the current investment industry.
 
Heather Welsh:
I'm Heather Welsh, vice president of wealth planning with Sequoia Financial Group. On today's episode, we'll be discussing navigating your employer-sponsored retirement plan. Joining me is Kimberly Oros, vice president with CBIZ Retirement Plan Services. Kim, thanks for joining me today.
 
Kimberly Oros:
Thank you, Heather. I appreciate the time on today's broadcast with your Sequoia audience.
 
Heather Welsh:
With fewer employers offering traditional pension plans, individuals are tasked with taking a greater role in saving for retirement. Thankfully, many employers offer savings plans such as 401(k)s and 403(b)s to assist with your retirement planning goals. Those plans can take many different forms and have a wide variety of features, which may make them difficult to understand or maximize the benefits available to you. Kim brings her expertise today to help make sense of some of those nuances. Let's start at the beginning, Kim. When are you able to participate in your employer's retirement plan?
 
Kimberly Oros:
Retirement plans have two potential eligibility conditions, a minimum age requirement, and/or a minimum service requirement. Plan sponsors can set a requirement that participation in the company's plan occur as early as age 18, but no later than age 21. Employers also have the option to set a service requirement, granting entry to the plan immediately, or can require up to one year of service to join the plan. It is also worth mentioning these service requirements typically apply to 401(k) plans. Most 403(b) plans allow employees to participate immediately.
 
In addition, Congress recently passed the SECURE Act. The SECURE acronym stands for Setting Every Community Up for Retirement Enhancement. One of the provisions in this act allows long-term part-time employees, who may have been previously excluded from plan participation, the option to elect salary deferrals into their employer's retirement plan.
 
Finally, eligibility requirements vary by plan. To determine when you can participate in your employer's plan, request a document written in layman's terms referred to as the SPD, or summary plan description.
 
Heather Welsh:
If a plan includes a service requirement for plan participation purposes, does this prevent or delay an employee from rolling funds from a prior employer's plan into their new employer's retirement plan?

Kimberly Oros:
Thank you for mentioning eligibility requirements and how these requirements may apply to plan rollovers. Plan sponsors do have the option to waive eligibility requirements for incoming rollovers. Since so many employers proactively force out terminated employees with account balances under $5,000 for administrative ease purposes, we find in practice today that most of these same plans do allow rollovers immediately into the plan. This ensures that new employees have a place to invest account balances that may have accumulated from prior participation in other retirement plans.
 
Heather Welsh:
Thanks, Kim. In addition to contributions employees make, I know some employers also make contributions to the plans they offer. Can you discuss the differences between employer matching and profit-sharing contributions?
 
Kimberly Oros:
Sure, Heather. The main difference between matching and profit-sharing contributions is what you need to do to share in this contribution. Matching contributions require you, as a plan participant, to defer either a percentage or a flat dollar amount of your pay to receive the matching benefit. Profit-sharing contributions are added to your retirement account simply if you have met the plan eligibility terms.
 
Both matching and profit-sharing contributions are paid out based on a formula found in your summary plan description. Matching allocations can vary greatly, but tend to have two basic formulas, a match based on a percentage of compensation, or a fixed dollar amount. For example, match formulas based on a percentage of compensation could be stated as 25% up to 8%, or said another way, 25 cents on the dollar up to 8% of compensation. Another option is 50% up to 4%, which is 50 cents on the dollar up to 4% of your compensation. Match formulas that are based on a fixed dollar amount could be written as "50% up to $2,000." This means 50 cents on the dollar up to a maximum of $2,000, or dollar for dollar up to $500.
 
In contrast, profit-sharing contributions do not require a salary deferral, so these formulas are typically allocated based on a percentage of compensation, or a fixed dollar amount. For example, profit-sharing contributions could be allocated as 2% of your compensation, or provided as a flat dollar amount, such as $1,000 for each plan participant.
 
A couple of notes on profit-sharing contributions. Profit-sharing contributions can change from year to year. In most cases, profit-sharing contributions require that corporate profits exist, so in years like we are facing today, it is possible that no contribution would be allocated for the plan year. Most profit-sharing contributions are paid out after the end of the plan year, so it is likely that if you leave employment during the year, you may not receive a profit-sharing contribution for that year. This is commonly referred to as a last day of service requirement.
 
Heather Welsh:
Kim, could you discuss safe harbor contributions? Are these matching or profit-sharing contributions?
 
Kimberly Oros:
Great question, Heather. Safe harbor contributions can actually be either matching or profit-sharing contributions. In simple terms, we like to say that safe harbor contributions are really the gold standard for employer contributions. Safe harbor contributions require the plan sponsors get through a few additional conditions, but they really result in supercharged contributions for their plan participants. Safe harbor profit-sharing contributions provide all eligible employees with a 3% contribution. Safe harbor matching contribution provides those employees deferring to the plan with a dollar for dollar match up to 4% of compensation.
 
Heather Welsh:
Thanks, Kim. I understand that employer contributions may not immediately be yours to keep. Could you tell us a bit about vesting schedules and what factors should be considered if an employer's plan has a cliff or a graded schedule in place?
 
Kimberly Oros:
You are correct, Heather. Retirement plans can have three vesting options. These vesting schedules apply to the employer contributions, anything you defer from your paycheck is not subject to a vesting schedule. The three vesting options that may apply to employer contributions are immediate, cliff, or graded.
 
Immediate vesting usually applies to those gold standard safe harbor contributions, and they are more common in 403(b) plans than 401(k) plans. Immediate vesting means that every dollar your employer puts in the plan on your behalf is yours, regardless of the time you work for your employer.
 
Cliff vesting means your employer will deposit funds into your account, you will see those dollars on your statement, and will be able to select and modify the allocation of those funds, but these contributions are contingent upon a stated time period as an employee. Plans using a cliff vesting schedule must usually provide for 100%, or full vesting, within three years of employment.
 
Graded vesting, again, means that the funds are deposited into your account along with your 401(k) deferrals, but instead of the all or none vesting that occurs with a cliff schedule, graded schedules allow for a portion of your balance to vest each year. Vesting typically ranges from 20% to 25% per year, and plans using graded vesting schedules must typically provide for full vesting within six years of employment.
 
Heather Welsh:
With that background on the different types of employer contributions and vesting schedules, how do you make sure you don't leave money on the table when determining how much to contribute to the plan?
 
Kimberly Oros:
There are actually two ways that money can be left on the table in a retirement plan. The first is if your plan has a matching contribution. As we mentioned, employers can contribute to plans in two ways. If your plan provides a profit-sharing contribution, you are very fortunate, and are receiving the full contribution just by being an eligible plan participant.
 
However, if your plan provides for a matching contribution, this is where you could be leaving money on the table. Remember back to our match conversation, these funds are allocated based on a formula. To ensure that funds are not left on the table, make sure your contribution meets the maximum percentage or dollar amount set in your match formula. So if your plan matches dollar for dollar up to 4% and you contribute 3%, you are giving up a 1% tax-deferred pay raise every year you do not defer that full 4%. If your plan matches 50 cents up to $2,000, for example, and you defer $1,000, you are walking away from a $500 annual paycheck that is tax-deferred.
 
The second time when you could be leaving money on the table refers back to that topic of vesting. This comes into play if you are considering a job change. If you are not vested, or are partially vested in your retirement account, that means those unvested funds do not move with you to your new employer's plan, or to an IRA rollover. These funds stay in the current retirement plan, and are allocated to the employees remaining at the company. This actually seems fair, since these are the employees who will likely handle the work after you have left.
 
I am not saying that you should stay at a job until you are 100% vested in your retirement plan, but factor this into the decision, and/or your negotiations when evaluating a career move. This is definitely a time to read the fine print in your plan's SPD. Leaving on December 15th, for example, to enjoy the holidays, versus starting your new position on January 10th, could be the difference in whether or not you receive a profit-sharing contribution for the year, or receive another year of service credit if your plan has a graded vesting schedule.
 
Heather Welsh:
Kim, I've seen retirement plan provisions vary from one employer to another. What plan withdrawal provisions are required by ERISA law, versus optional provisions set by employers?
 
Kimberly Oros:
The only plan withdrawal provisions that are required by law are when you leave the company. This means if you no longer work for the company due to death, disability, or termination of employment. Features like loans, hardships, early withdrawal provisions and in-service distributions are all optional, and can be set by the plan sponsor.
 
Loans allow you to borrow half of your balance up to $50,000, which is typically paid back to your account over a five year term. Plans are typically limiting the number of loans outstanding to no more than two at a time. A hardship feature, on the other hand, gives you the option to withdraw funds from the plan permanently if you meet certain needs considered to be a true hardship. The list is restrictive, and limited to the exact financial need to cover the following expenses for yourself or a dependent. Post-secondary education, purchasing of a primary residence, to prevent eviction or foreclosure, to pay medical or burial expenses, in the case of certain natural disasters, and most recently, due to pandemic financial impact.
 
An early withdrawal provision means that if you do not meet the service requirements and retire before normal retirement age, but after early retirement age, which could be as early as age 55, your account balances becomes fully vested. Lastly, in-service distribution provisions allow a plan participant to withdraw funds while still employed, but after the age of 59 and a half. This option allows for diversification beyond the investment options set up in the plan.
 
Heather Welsh:
With potential changes to tax rates in the future, Roth contributions are becoming an area of recent discussion with many clients. Can you spend a few minutes discussing Roth options in retirement plans?
 
Kimberly Oros:
There are many misconceptions about Roth contributions in retirement plans. Many investors do not realize that you can invest Roth contributions in your 401(k) plan, and that these funds are only invested in a IRA account. While the Roth feature is optional, we do see this provision in most plans today. In addition, if your plan has a matching feature, these Roth deferrals are matched, just like traditional 401(k) deferrals. The match is calculated on a single matching contribution. The match is limited to the calculation of 401(k) deferrals combined with Roth.
 
The Roth feature that is not as common in plans is the in-plan Roth conversion feature, allowing for employers to take traditional 401(k) dollars made to the plan, and convert these Roth contributions by paying the taxes on these funds. We receive questions on this topic frequently, but not all vendors are equipped to facilitate these conversions and the required tax reporting.
 
Heather Welsh:
Thanks Kim, that's great insight. The recent market conditions have given many investors a better understanding of volatility and risk. Has this change created a greater focus on self-directed brokerage or managed accounts within retirement plans?
 
Kimberly Oros:
Yes, Heather, the recent and anticipated future market conditions have changed discussions with both plan sponsors and plan participants on these topics. Self-directed brokerage accounts have been available for many years, and allow a bit more investment diversification beyond the plan's core investment menu. These accounts work well for investors who want to do the heavy lifting themselves, and are willing to put a bit more time and research into managing their investments.
 
Managed accounts, on the other hand, are a newer entry into the retirement account world, and are on the other end of the investment management spectrum from self-directed accounts, by delegating this heavy lifting. Managed accounts are being referred to as the next generation of target date investment options. Target date funds invest retirement assets based on a retirement date. Managed accounts factor in the targeted retirement date, along with the investor's risk tolerance, prior retirement savings, and other demographic factors, to meet the investor's retirement goals.
 
Heather Welsh:
Kim, what are some best practices for 401(k) or 403(b) plan participants?
 
Kimberly Oros:
Best practices in today's retirement plan world focus on making plan enrollment, savings increases, and managing investment allocations easy. This ease comes with automation. Three automated processes we see in many plans are auto-enrollment, auto-escalation, and automatic rebalancing.
 
Auto-enrollment requires you to take action only if you don't want to participate in your company's retirement plan. If you do nothing, you will be automatically enrolled in the plan at a stated percentage, usually between 3% and 6%, and invested in an age-appropriate mix of funds. Both your deferral percentage and the investment mix can always be changed later, this auto-enrollment process just makes it easy to get started. Auto-escalate takes auto-enrollment one step further. Auto-enrollment gets you started in the plan at a stated percentage, and auto-escalate increases every year to a maximum percentage, typically ranging from 6% to 10%.
 
Finally, automatic rebalancing keeps your investment allocation in line with your targeted investment mix. This process can be set up to occur quarterly, semi-annually, or annually. This process looks at your current balances and realigns these balances to match your investment elections, ensuring that your portfolio does not get more aggressive or conservative than your targeted allocation. It's also important to note that to manage these automatic features, it's a great idea to register on the plan vendor's website. In addition to the trend of making plan administration easier, the other trend is making plan operations green, so most vendors now use an app to allow for quick and secure enrollment, replacing the paper booklet and forms of the past.
 
Heather Welsh:
In today's environment, many people may be considering a change to their employment. Earlier, you mentioned how vesting could impact your retirement account balance in this situation. Is there anything else that our listeners should be aware of if they make a decision to leave their current position?
 
Kimberly Oros:
There are a couple of questions to ask or factors to consider. Number one, do you have an outstanding loan balance? If so, how is that loan balance treated? Two, is there a last day requirement to receive a matching or profit-sharing contribution? Three, what options do you have to keep your funds in your employer's plan, or will you be forced out of the plan? And four, if you want to remain in the plan, what fees will be assessed to you as a terminated plan participant? Finally, ask your new employer about fees in their retirement plan. If you have a large rollover coming into the new plan, it may be more effective to roll those funds into an IRA account.
 
Heather Welsh:
Kim, thank you so much for walking us through all of these details. If you have an employer-sponsored retirement plan available to you, consider enrolling as soon as you're eligible to do so. While these plans can be complex, they're great tools to help you achieve your retirement planning goals. Thanks for joining us for today's episode. If you would like to dive further into our discussion, please visit the talk to an advisor page on our website to schedule a meeting at sequoia-financial.com/talk.
 
Closing
Thank you for joining us today, we hope you enjoyed our discussion. Please share our podcast on social media, and leave a comment so we can continue providing topics and interesting segments focused on the financial industry. Until next time, we hope you reach your financial and life goals. Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC-registered investment advisor. Registration as an investment advisor does not imply a certain level of skill or training.
© 2020 SEQUOIA FINANCIAL ADVISORS, LLC Investment advisory services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Registration as an investment advisor does not imply a certain level of skill or training.