With the recent announcement of one of the largest social security increases in years, it was highly anticipated that many retirement plan limits would increase too. Here they are:
QP Consulting LLC has been named one of the National Association of Plan Advisors (NAPA) top DC advisory firms. We would like to thank all of our clients for making this happen!
The last in our part five series on financial wellness is the one we are asked the most about, Investments!
As we frequently explain to employees, investments are the least important part of your overall financial wellness. By this we simply mean if you aren’t saving enough, then where you are invested isn’t terribly important. If you don’t have an emergency fund, when that emergency hits you won’t have the money available to prevent a potentially crippling financial event.
If you haven’t sought out guidance relating to your options and benefits package, it is possible you are missing out on key matching dollars or employer programs that can make your life much easier. But if we have done all of the prior four steps well, then investments really matter.
Where should you be invested based on your risk profile and time horizon. Of more importance, what level of risk do you need to take on to achieve your goals? Lastly, what combination of investments in your 401k, 403b, 457b, HSA, and taxable accounts is needed to have a well diversified portfolio? This is the last critical piece to your overall financial wellness and one that you will want to analyze once you have completed steps one through four.
The fourth key part of most financial wellness plans dovetails with part three. To receive the guidance you need, whoever is providing that guidance will need detailed information on the benefits made available to you by your employer. Step for is Benefits!
Maybe your employer offers a retirement plan, health plan, long term disability, vision and dental. Most of these programs involve some cost sharing by you the employee. Should you spring for dental or pay as you go? Should you use a high deductible health plan or a traditional plan? What is an HSA?
For most Americans, the open enrollment period for your benefits can be confusing and downright intimidating. Fortunately many folks have excellent HR departments that can guide them through the ins and outs of their benefits package. But what about those who work for a very small company that doesn’t have an HR department? What about the self employed? Understanding the ins and outs of your benefits package goes a long way to improve your financial wellness. That is why it is key to have a clear understanding of the benefits and how you can benefit from each program offered by your employer.
Stay tuned for part 5!
Now that we have an emergency fund, most people need help in differentiating the options available to you. This falls into category three, GUIDANCE.
How do you decide how much to save in your 401K? What about an HSA or 529 plan? Which one should you fund first and then in what order do you fund the others if you have the financial wherewithal?
The market has a solution for just about every financial need you might have. Unfortunately, the market also offers a lot of products you don’t need however their are sales people who make a living selling you these items (sometimes whether you need them or not).
To determine what the optimal approach for you is, you will need guidance in determining the most effective way to plan your financial life. This can be a combination of tools from your HR department, the vendors that service your employee benefits plans, or an independent entity that isn’t involved with the benefits your firm offers. As we move through our careers and lives, frequently we need more guidance as our financial lives get more complex.
Stay tuned for part 4!
Now that we know how much we spend and where we spend it, we can move onto step two.
By there very nature, you don’t know when an emergency will happen. You can plan for it however. It is important for people to have an emergency fund so they don’t have to pay for things on credit thus snowballing an emergency into a full blown financial crisis.
What if your roof is taken out by a tree in a hurricane? What if your child needs emergency oral surgery? What if you are unable to work for a period of time?
These issues can create cascading financial issues for most Americans. By saving and having a budget coupled with an emergency fund, you can sleep well knowing one problem won’t create tons of other issues.
Stay tuned for step 3!
Defining what financial wellness is can be difficult. When asking HR managers, you will likely get a range of answers. With wellness being all the rage, we will break it down to the five critical aspects of wellness starting with the most important one (in our humble opinion).
When conducting enrollment meetings for retirement plans, we frequently focus on how much you need to save to fund the same lifestyle in retirement. Before we even get to that point however, we have to make sure people know where their money goes. Housing is likely a huge chunk. Taxes are another. What about health, savings, transportation, education, food, utilities, etc.
This is the most important step because to change spending behavior, we have to know where are current spending occurs.
Stay tuned for steps two thru five!
Over the past decade, many investors have decided to move their money from higher priced active managers to lower priced passive managers. A passive manager just aims to mirror the performance of an index. The most commonly referred to index in the 401K space is the S&P 500 Index. Active managers have responded to this tidal wave by trying to offer lower priced share classes, collective investment funds that pool active and passive investments, or they have penned white papers on the value of active management.
Despite these efforts, managers like T. Rowe Price, have experienced heavy asset losses: T. Rowe Price asset flows . These losses have created a very difficult environment for these managers as they try to maintain profitable positions while having liquidity to deal with net redemptions. Many managers are also employing “smart beta” strategies which incorporate aspects of passive management but with different valuation metrics. Dimensional Fund Advisors has been active in this space since the early 80’s and are a bit of a hybrid of both.
With the DOL fiduciary rule, many firms are also now offering stripped down share classes that don’t pay additional revenue to intermediaries. This makes those options more acceptable to lower cost investors while also eliminating many of the inherent conflicts that active managers have had within their distribution channels. While the active vs. passive management disparity will continue forever, what is missed in this discussion is that all investment decisions are active in nature. You always determine how much to have in stocks vs. bonds. You always determine what portion to invest in big companies versus small. You also determine what percentage to invest domestically or internationally. The passive vs. active discussion focuses on how you populate that asset class but having exposure to it in the first place tends to be the most important factor in determining investment success.
We frequently meet with plan sponsors who assume that because they don’t have a big plan with millions upon millions in assets, that they are somehow protected from being sued. While there is very little in it for litigators and that is the common reasoning behind why a small plan won’t be sued, that is not an absolute guarantee.
This plan sponsor had a 1.1 million dollar plan with Nationwide, Nationwide 401k lawsuit . Excessive fees are excessive whether your plan has a million dollars or 500 million. Your participants are still trying to reach the same goal which is retirement with dignity. The issue with small plans is there are fewer assets to spread fixed costs across. This naturally makes the fees higher in most cases then larger plans which have economies of scale. ERISA doesn’t state how fees must be invoiced but it does state that they should be reasonable.
Following a prudent process to determine how your plan fees and services stack up is key. The word fiduciary is the buzz word of the past few years. Just about every investment advisor worth a nickel serves as either an ERISA 3(21) or ERISA 3(38) fiduciary. What is more important however is to gauge the experience of your advisor in the retirement plan space. How much of their business is derived from retirement plans? How many retirement plan clients do they have? How were they trained in retirement plans?
These are the key questions plan sponsors should be asking to determine their ability to assist your plan. They should be able to provide customized benchmarking and relevant experience to help improve your plan and advise your committee. #401k #fiduciary
Recently there has been a rash of lawsuits targeting University retirement plans. Many of these were coordinated and announced at the same time. The issues are pretty common across all cases:
- Not evaluating recordkeeping fees,
- Using mutliple custodians thus eliminating the ability to leverage economies of scale,
- Retention of historically poor investment options,
- Not conducting a competitive bidding process.
While the suits are in progress, these failures by well regarded institutions of higher learning can be informative. It is up to every plan sponsor to have a well documented prudent process for evaluation of investments, fees, & services. Trucker Huss has put together a well detailed piece here:
Whether for profit or not for profit, having a detailed process in place and utilizing an independent fiduciary is key. #401k #403b #fiduciary