Products September 4, 2015

Safe Harbor Plan Launch Deadline Closes In

A safe harbor plan requires an initial plan year that is at least three full months, making October 1 the effective deadline for creating a new plan in 2015. 
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There probably aren’t many better proxies for measuring small businesses’ interest in creating retirement plans than the sales figures for a company like ShareBuilder 401k.

The firm specializes in helping small businesses and mid-sized employers launch safe harbor and tradition design 401(k) plans. Stuart Robertson, president of ShareBuilder 401k, tells PLANADVISER sales are up a strong 23% to 24% year over year.

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“In our corner of the business, there is a lot of energy and strength in the marketplace,” Robertson says. “Some of that is our own sales success, but some of that is also the confidence that small businesses have right now in the U.S. economy.”

The past couple weeks have seen a market reassessment, but the weakness and uncertainty ruffling the markets is pegged mainly to Europe and Asia, not necessarily the economy here in the states.

“It’s the fundamentals that are driving interest in safe harbor plans and other plan designs,” Robertson says. A survey his firm completed in 2014 found that 86% of small-business owners who currently offer a plan are willing to spend more on their plan in return for increased support for the plan and for their employees. This includes paying for access to investment advisers (37%) and employee guidance tools and materials (35%).

The survey further suggests that if an adviser can stress the importance of paying reasonable fees and show how he can strengthen the plan and participants’ results, his firm may be able to win more small-business accounts.

“So far, we have not seen a change in the buying behavior based on increasing market volatility,” Robertson adds.

NEXT: Discounts available on safe harbor startup 

Robertson says ShareBuilder 401k is, like last year, offering small business owners $100 in savings if they establish a new safe harbor 401(k) plan before September 15.

The big benefit of safe harbor plans is their simplicity, he notes. Traditional 401(k) plans are subject to annual nondiscrimination testing to ensure that the average deferral rates and employer match contributions of the highly compensated employees do not exceed the average deferral rates of the nonhighly compensated employees by more than (i) 125% or (ii) two percentage points and two times such deferral rates. If the average deferral rates of the highly compensated employees exceed the average deferral rates of the nonhighly compensated employees by more than the legally permitted percentage, then potentially costly remedial steps must be taken.

Safe harbor 401(k)s are not subject to the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. Robertson points out that this provision allows highly compensated employees to max out their annual contributions to defined contribution retirement plans, sans testing problems. In exchange for more relaxed testing requirements, plans of this type must make certain minimum employer contributions and meet other requirements related to vesting, withdrawal restrictions, and participant communications (see “Matching Contributions Under Safe Harbor Plans”).

A helpful publication from Legacy Retirement Solutions’ President Steve Warner warns safe harbor 401(k) plans “must be adopted before the beginning of the plan year and maintained throughout a full 12-month plan year.”

“In the context of the first year that the plan or 401(k) feature is established, a plan is permitted to have a no shorter than three month plan year for purposes of the safe harbor 401(k) feature,” he explains. “Therefore, it is possible to establish a calendar year, safe harbor 401(k) plan as late as October 1st and still obtain the exemption from the ADP and ACP tests in relation to the remainder of the year.”

More information on the ShareBuilder 401k promotion is here.

Client Service September 4, 2015

New School Year: Time to Educate Educators About Saving

The beginning of the school year is a time for retirement plan advisers to start new relationships and keep existing employees on track.
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For retirement plan advisers working in the public education market, September through December are the most active times for new clients and increased contribution levels, according to Jim Kiley, senior vice president and national sales manager for Security Benefit, covering the Eastern U.S.

“Obviously, a new teacher or young person starting in a public education profession, should start saving sooner rather than later,” he tells PLANADVISER. “The profession itself offers a number of savings vehicles, but the most important is a 403(b).” Kiley explains that while most employees in the public education market have pensions available, a 403(b) plan gets them accustomed to saving on a regular basis, and pensions are not as robust as they used to be. “Becoming a disciplined saver is necessary for Millennials who may change jobs over their career and who have the benefit of compounding since time is on their side,” he adds.                               

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In addition, returning teachers have likely gotten a raise for the new school year, and it is a great time to set new goals for systematic savings. Kiley says it is the ideal time traditionally for advisers in the 403(b) market and probably their biggest time for sales.

NEXT: Focus on education about saving

A survey conducted by Greenwald and Associates and commissioned by Security Benefit found Generations X and Y K-12 educators would prefer to learn about financial planning issues at work, and there are certain areas in which they need more education. Advisers and plan sponsors need to educate educators, at the workplace and in some cases online, Kiley says.

He suggests that education should be more geared toward establishing an overall savings habit, but, while it should be somewhat generic and include information about all savings vehicles available, advisers should point out the benefits of the tax advantage of saving in a 403(b).

Advisers may speak at the orientation meeting for new employees, and sit down with everyone and evaluate what they are doing to be on track for a successful retirement. Kiley adds that more tenured employees are helpful with educating new participants, especially if they started saving early and have seen the pension plan benefits change over time.  

“I think the most important thing for both advisers and plan sponsors is to focus on changing behaviors to promote saving,” Kiley says. “This may include breaking down how they spend their money, as well as directing them into the right investments and the right path to having comfortable retirement.”

The beginning of the school year is a time to start new relationships and keep existing employees on track, he concludes.

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