The fourth quarter is a great time to conduct your retirement plan reviews with your clients and set clear goals for 2016. With that in mind, here are three important (and effective) talking points that should be added to your next review.
Talking point 1: Automatic distributions
At this point you have talked to your clients about automatic enrollment and automatic escalation features. These strategies have worked and as an industry we now have compelling data to support why plans should add these features. Unfortunately, we have forgotten one important part. We automatically enrolled the employee, we automatically helped the employee increase their savings rate, and now we have forgotten to automatically distribute the employee’s money. Sure, there are rules around automatic distributions, but a distribution process is just as important as automatic enrollment and automatic escalation.
Why talk to your clients about it?
There are a few strategies that can be used to distribute balances, but the easiest method is to add an automatic distribution process to a plan. The IRS allows a plan to automatically distribute any balance under $5,000 that a past employee may have left behind. There is a procedure that has to be followed, but distributing smaller balances can help organize and make the plan cheaper to administer. Most record-keepers and some auditors will price their services by the amount of account balances in the plan. Removing small account balances that were automatically enrolled in the plan will help lower expenses. In addition to the potential impact on fees, plan notices are required to go out to past employees. Having an automatic process for distributing smaller balances will help reduce the administrative burden of tracking down a past employee to give them a notice.
Talking point 2: Costs associated with retirement plans
Fees have compressed in the 401(k) and 403(b) industry over the past five years because of technology and competition. Technology has reduced the administration cost that companies like Empower and Fidelity face today. It has allowed these companies to become more efficient and ultimately that efficiency gets passed to your client in the form of lower fees. Estimated plan fees are a plan’s all-in costs, including fees related to investment management, recordkeeping, and trust and custodial services.
Why talk to your clients about it?
Occasionally a record-keeper will lower their fees automatically, but the vast majority of the time they will not. It is up to you to review the costs associated with your client’s retirement plan. Fidelity will never call your client to tell them that Vanguard will administer their 401(k) plan cheaper. Often times, it is up to the advisor to be proactive and review the plan to see if there are costs that can be reduced. A simple phone call or a quick negotiation can save thousands of dollars.
Talking Point 3: Plan procedures
As 401(k) specialists we usually do a wonderful job reviewing the investments and costs associated with the plan. It is extremely important, but unfortunately there can be issues in other areas that may arise. It is important to discuss plan procedures in addition to the usual funds and fee conversations. Some of the top mistakes sighted by the DOL and IRS are on the topics of eligibility, loans, definition of compensation, fidelity bonds, notices, and of course timely deposits of employee money.
Why talk to your clients about it?
The area of plan procedures are a clear target for an auditor because they are easy to spot. Does your client have a fidelity bond? Are they following the plan document? Were notices distributed in a timely manner? These are all very easy for an auditor to spot and potentially fine your client. It is pretty easy to have a conversation with your client during a review meeting about these topics. Minor adjustments to procedures or the plan document can save your client money if an audit were to occur.
Get 2016 off to a get start by adding these three talking points to your reviews. It will help the plan run smoother and ultimately improve the financial lives of the people in those plans.
Michael Clark is a Certified Financial Planner with Raymond James Financial-affiliated Keiron Partners in Orlando, Florida.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
