Michigan 401k Resource Podcast

Welcome back to another episode in our series on tracking retirement. Today we’re talking all about your fiduciary role. If you’re a plan sponsor or business owner, odds are that you are your plan’s fiduciary. What does that mean? It means you have the duty and loyalty to do what’s in the best interest of your participants and you have to take a prudent man’s approach. Every decision you make on a 401(k) needs to be made with the participants in mind. How can you alleviate this heavy burden? By designing a process that lets you vet investments, investment managers, record keepers, and any other provider to your 401(k) plan. You do this through a system such as a benchmarking process or request for proposal. When we work with a client, we use a benchmarking process each year. Our investments are screened across 11 data points and we do this annually so that you can get the best price. You don’t have to make changes to your investments every year, but you have to go through the benchmarking process each year. If you don’t end up changing anything, you just need to fill out a document that states your reason for staying with your current vendors. In addition to vetting your vendors, you’ll also have to look at your investments. It’s best to work with a professional who can do the heavy lifting for you when it comes to screening. “Your investment decisions should be made with your plan participants in mind.” 316, 321, 338 are co-fiduciaries that you may be using currently or are considering using. All this means is that you’re taking some of your fiduciary burden and giving it to a third-party vendor to help you with it. They are never totally responsible because as long as you can hire, fire, or retain them, you are still the fiduciary. Finally, let’s talk about investment selection. How many should you use in your plan? I’ve heard of people using 30, 50, or even 100 different investments. However, that’s not what you should do. You want to make sure your process is simple and repeatable. The easiest way to do this is by thoroughly vetting and choosing 16 to 25 investments.Fewer investments will also result in participants being less scared about using their plan and an overall increase in plan participation. If you have any questions for us about your fiduciary role or you want to take action and get started on a world-class 401(k) plan for your employees today, don’t hesitate to give us a call or send us an email. We look forward to hearing from you soon.

What is Auto to the 5th? In short, it’s a way that you can use technology to improve the quality of your retirement plan. Not only does it increase your employees’ participation in the plan, but it also protects you from liability. The first feature of Auto the 5th is automatic enrollment. Auto-enroll is greatly helpful, especially if you are an HR director who’s constantly busy chasing employees trying to get them to participate in the plan. In the past, the process of sending out forms to employees and hoping they not only fill them out but also return them to you was quite the ordeal. Thankfully, this hassle is eliminated with auto-enroll. What happens instead is that employees will receive a notification explaining that they are automatically participating in the company’s 401(k) plan but have the option to opt out. So, how much do you make them auto-enroll for? Let’s say you have a plan that matches 50% of the first 6% of contribution. In this case, we would recommend that you do an auto enroll at 6%—the full extent of the match. “The decision should ultimately be based on the rates that will work best for your employees.” This way, all of the employees are in the plan unless they choose to opt out. If you have trouble with this though, the law does allow you to go down as low as 3%. So when companies ask us what they should auto-enroll we usually say 10%, since that is the number needed to successfully get employees to retirement. However, the decision should ultimately be based on the rates that will work best for your employees. Every situation is different. The key is the 30-day notice. This will protect you under the law so that your employees know they’re able to opt out. If you have questions or would like more information feel free to give me a call or send me an email. I look forward to hearing from you soon. (Securities and advisory services offered through FSC Securities Corporation, member FINRA/SIPC. Michigan 401(k) and Financial Independence are marketing names.)

I wanted to touch on two important topics briefly today, starting with the question of how much your employees need to save to successfully retire. We’ll then address the ‘Rule of 72,’ which gives you the ability to figure out how long it will take for your investments to double in value, as well how long it will take social security to eat into your spending power. In general, we tell people you need to save 10% to retire. It’s a little more complicated than that though because you need to figure out what percentage of your current income you need. We call this the ‘income replacement ratio’ or ‘income replacement formula.’   As a hypothetical scenario, let’s say we had a 40-year-old worker who makes $50,000 a year and knows he wants to retire at 66. It sounds simple to just say he needs 80% of his income—$40,000—but you have to consider inflation. Inflation chews into your spending power. We know we have inflation to battle against, but how? “Most 401(k) providers do calculations that tell you how much income you’ll be able to replace.”   This is where the Rule of 72 comes in. We can use this rule to engineer what your retirement needs to look like in the future. For the purpose of this example, let’s say our national average inflation rate was 3%. We’d then take 72 and divide by that three, giving us 24. This tells us that in 24 years, your spending power would be cut in half. If we go back to our 40-year-old who wants to retire in 26 years, he would need $80,000, not $40,000.Now, you might be thinking that this sounds too complicated and that your employees would never be able to figure it out. However, most 401(k) providers will do the calculations that will tell you how much income you’ll be able to replace. Some will even take that lump sum and turn it into a monthly income. If you’d like a list of these providers, I’d be happy to provide you one. This is mission critical. If your employees don’t know what they need to save for retirement, they are going to arrive at a point where they don’t have enough money to fund their retirement. This sounds like it can get difficult, but we provide a service to our clients called a ‘gap analysis.’ This takes a look at what you have in your plan, what you’re saving, and how it gets you to your retirement.  If you’d like a sample report of the gap analysis or you have any questions for us, give us a call. We would love to hear from you.   (Securities and advisory services offered through FSC Securities Corporation, member FINRA/SIPC. Michigan 401(k) and Financial Independence are marketing names.)

Imagine you’re getting ready to go on a great vacation and as your plane gets ready for takeoff, the flight attendant says, “Ladies and gentlemen, the captain would like me to inform you that there is an 85% chance that we will not get you to your destination on time and safely.” Are you going to stay on that flight? No way! Not with an 85% chance of failure! What we have learned in our 30 years of experience working with 401(k)s is that 85% of your employees have an 85% chance of not making it to retirement on time and safely. That’s what this series is going to be all about. We have written a book called “Tracking Retirement” where we used our experience to put all the secrets to creating a successful 401(k) plan together in one place for both you and your participants. Our goal is to help you help them to create paychecks for life for themselves. “We have put all our expert advice in one place.” Over the course of the next year, we’ll discuss topics surrounding your 401(k) and ways you can improve it for yourself and your participants. We will be sending a video out every other week covering a 401(k) topic, including how to reverse engineer your 401(k) expenses to reduce plan costs and how to get Uncle Sam to pick up 30% or 40% of the bill. The Pension Protection Act says that if you use specific automatic features in your 401(k), you can get complete fiduciary liability. Guess what? Those same features improve the quality of the plan for those participants trying to create those paychecks for life. If you like what you’ve heard so far, stay tuned for our next post. If you have any questions in the meantime, don’t hesitate to give us a call or send us an email. We look forward to hearing from you soon.   (Securities and advisory services offered through FSC Securities Corporation, member FINRA/SIPC. Michigan 401(k) and Financial Independence are marketing names.)