Welcome to Season 2, Episode 18 of Meet the Expert® with Elliot Kallen!
Nobody wants to be sued by employees or ex-employees. Elliot Kallen brings on Eric Petersen, Pension Consultant at Hicks Pension Services, to discuss Defined Contribution and Defined Benefit plans — and how employers can save more towards retirement.
Meet Our Guest
Pension Consultant, Hicks Pension Services
Eric Petersen has been a Pension Consultant for Hicks Pension Services for the past 26 years. He helps business owners understand how qualified pension plans work and how these plans can be beneficial to the business.
Is America prepared for retirement?
Elliot Kallen (EK): Eric, you are a Third Party Administrator. We are Fiduciary Financial Advisors on 401(k)s. Together, we’re part of your 401(k) team. That means we've both seen a lot of 401(k) plans. In your opinion, is America prepared for retirement?
Eric Petersen (EP): In general, America is financially unprepared for retirement. If you look at the statistics of the average participant, it’s not enough to retire comfortably.
A few statistics:
- The average account balance of someone in their 40s is $93,000.
- The average account balance of someone in their 50s is $160,000.
- The average account balance of someone in their 50s is $180,000.
As further evidence of this, our federal government knows this and is trying to enhance 401(k) plans so that participants can accumulate wealth more quickly.
California is now mandating that all employers with 5 or more employees offer a workplace retirement plan by June 30, 2022. California’s new retirement savings program, CalSavers (a modified Roth 401(k) program), is offered as an alternative to Traditional 401(k) plans.
Why is investing in a corporate 401(k) so important?
EP: When we look at the different ways we can save, we need to take tax considerations into account. A 401(k) plan allows you to save for retirement with pre-tax money. If you look at any type of graph showing pre-tax vs. after-tax growth, a pre-tax account grows so much more quickly because no money went to the government. You are enjoying compounded growth on that deferred amount.
When we look at some of the top financial stresses that we have, the number one answer is not saving enough toward retirement. But there is an easy way around this dilemma — sign up for automatic enrollment. This allows an employer to conveniently automatically deduct elective deferrals from your wages. This is especially important if your company offers a match.
What are some benefits of offering a 401(k) to your employees?
EP: Employers used to open 401(k) plans so that they can look like a real, legitimate business. Today, candidates won’t consider a job offer unless the company is offering a 401(k) plan — with an employer match! As a fringe benefit, the 401(k) weighs heavily in whether an employee decides to work for you.
We’re advising our clients to think about Profit Sharing, Safe Harbor matching, and New Comparability Testing.
EP: Companies are allowed to put money in plans for their employees (e.g., through an employer match). Another mechanism is through Profit Sharing Plans. The important part about that is who gets what — how is that money split up?
Now, through New Comparability Plans (also known as Cross-Testing), you can judge each employee separately, and essentially customize the profit sharing contribution for each one, so long as certain tests show that the contributions don’t discriminate against non-highly compensated employees over the long run.
As business is picking up, companies want to put even more money away. That’s when we can start talking about Cash Balance Plans and Defined Benefit Plans. What is it, and when should a company entertain it?
EP: A company should establish a Defined Benefit Plan (or Cash Balance Plan, a hybrid version of the Defined Benefit Plan) -- when we look at how much we can save through a 401(k) — $26,000 in 2021 — we can get up to $60,000 saved toward retirement annually.
When companies are more profitable than they’ve ever been, and folks want to save over $60,000 annually toward retirement, we can look at a Cash Balance Plan. You can save hundreds of thousands of dollars on a tax-deferred basis.
We are Fiduciary 3(21) and 3(38) Advisors. How important is it to have a Fiduciary Advisor on your plan?
EP: It’s extremely important at a lot of levels. The federal government wants to protect the retirement dollars of employees — that is their number 1 guiding principle. ERISA is here to protect participant account balances from employers going out of business (and the money’s gone), against overly high fees, and against lack of employee financial education.
That’s where Fiduciary Advisors come in. Employers must hire Fiduciary Advisors to provide general financial and investment education, interactive investment materials, and information based on asset allocation models.
Employees just have no idea how to invest because they aren’t educated in financial instruments; in fact, 30 percent of retirement funds are sitting in cash instruments — earning nothing! This is another scenario that can be prevented by a Fiduciary Advisor.
Not only does using a Fiduciary Advisor protect the employer from Fiduciary liability, it also helps employees make better decisions so that their money can grow better.
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Fees are a hot topic in the 401(k) world. Should an employer seek to find the lowest possible fees, or can it be advantageous to pay slightly higher fees for significantly better service?
EP: That’s where suitability comes into play. The most important component is the suitability of investments for the participants. You can have the lowest fees, but if your investments don’t perform well, then it’s not a suitable retirement vehicle.
There’s also the education process. We’re an online society, especially in terms of investments, and the online tools need to be top-notch or participants can be frustrated and not participate. There’s a lot that goes into it. Fees cannot be the only checkbox that you have.
When Elliot does his due diligence, there are 20 different checkboxes that each provider must perform on or they don’t even get to be in the running. Fees are part of it, but they aren’t everything.
For Administrators, Trustees, and Committees — how often should these folks review their current plan? How often do they need to be benchmarked?
EP: The industry standard calls for an annual review, minimum, where we review the suitability of investments.
- Are we doing what we intended to do?
- Are we creating a retirement plan?
- Can our participants, within this program, reach their retirement goals? And are they doing it?
- Do we have the proper tools? Are they working?
- What do we need to change?
What does Hicks Pension do that is unique to you?
EP: As a TPA, in general, it’s our job to help Plan Sponsors maintain the tax-deferred status of their plan. If we are not following, operationally, everything that is required in a retirement plan, our plan could be audited and we could lose the tax-deferred status of our retirement dollars. They could take that away, unless we follow their very specific guidelines on what we’re supposed to do (compliance testing, annual filing).
Our #1 job is to maintain the tax-deferred status of retirement dollars for plan participants.
The next part is that small businesses are growing and busy and HR departments wear a lot of hats, and outsource it to Hicks Pension Services.
TPAs must figure out what makes an employer’s plan work best, and keep their plan compliant. We aren’t one-plan-fits-all — we look at all employers individually to assess what set of features work best for that employer and their participants.
» Interested in TPA services? Visit Hicks Pension Services to learn more.