Retirement Plan FOCUS Bulletin - Fourth Quarter
What's new at Fulton Financial Advisors?
Earlier this quarter, the FFA Retirement Services team launched our first “Pre-Retirement Seminar.” This in-person seminar was designed to help provide guidance to those participants that were beginning to think hard about retirement and all of the complex choices that go along with that decision. It was held in Lancaster and attended by nearly fifty individuals.
Leveraging the expertise of a variety of subject matter experts, we covered the following topics:
- The Basics of Social Security
- Insurance Review
- Reverse Mortgages
- What to do with your 401(k) balance
We designed this seminar to be engaging and not overly lengthy. Within the two hour time frame, we provided attendees the basics of these topics and provide guidance and direction on how they can learn more.
The response from a written survey of attendees was universally positive. We look forward to providing these seminars throughout our entire 5-state foot print in 2019 and making them available to all of our clients and prospects!
Maintaining a Better Plan
Loan Processing change
Plan loans enable participant’s access to retirement funds to help with “today’s” financial issues while allowing them to pay themselves back so the same money continues to be available for their eventual retirement. However, it’s important to remember that when loans are taken, those funds are no longer invested for long-term growth. In addition, loan payments are made with after-tax funds that will eventually be taxed again when withdrawn at retirement. While not necessarily the best use of retirement plan assets, we realize that loans have become a prominent feature in today’s plans and is a feature that’s here to stay.
One of our system enhancements helps to streamline the loan repayment process, and we’ve successfully implemented the process for many of our clients’ plans. With the success we’ve experienced, we’re now convinced that we should be processing all loan payments under this enhanced process. We believe this enhancement is a benefit for you as Plan Sponsor and ultimately for your participants.
Very simply put, loan payments are included as a total payment amount in your upload file rather than having to manage a second loan file for payroll uploads. Our system compares the total loan payments received to the total loan payments expected. Using the logic of “apply to oldest loan first,” our system will continually work to keep participant loans out of default. In addition, participants are able to pay more than their expected payments and are not required to have those payment be in multiples of the expected payments. For example, if an expected loan payment is $39.50, but the participant wishes to pay $50.00, the participant can pay $50.00. The $39.50 is applied as expected and $10.50 will be applied directly to principal. This approach helps participants save money over time by more quickly reducing principal allowing savings on interest payments.
The original amortization schedule provided at loan issue is just a “snapshot in time” of the loan. If at any time partial and/or extra payments are applied, the remaining loan balance is automatically re-amortized. The current amortization may differ from the original schedule provided at loan issue, but the current schedule is always available on Plan Sponsor Web, and is the schedule of record.
Please feel free to reach out to your Relationship Manager for more information.
Industry & Legislative Changes
Student loan repayments within a retirement plan
We all know that student loans are become an increasing concern for younger workers joining the workforce. The payments on these student loans can be large and, sadly, can preclude these younger workers from contributing to a retirement plan. Even worse, these individuals are potentially missing out on being able to receive an employer contribution.
One firm, Abbott Labs, has recently made a proactive step towards finding a solution for their employees. This firm successfully secured a Private Letter Ruling from the Internal Revenue Service allowing them to make company contributions on behalf of those employees that were paying student loans through payroll deductions. This unique approached allowed for the company to make a 5% non-elective contribution on the behalf of any employee deferring at least 2% of pay towards their student loans. The net effect? These participants were able to experience receiving an employer contribution toward their retirement as they paid down their student loans.
As you can imagine, there was a bit of a buzz in the industry as a result of this development and we received some inquiries into how our clients can implement a similar feature.
Unfortunately, don’t expect to see this practice becoming common place in the immediate future. First and foremost, the IRS approved this feature via a Private Letter Ruling – meaning that this approval was only provided to Abbott Labs who maintains an individually designed document. An individually designed document itself is not common and is expensive to implement. In fact, the cost to pursue an individually designed document and a Private Letter Ruling typically costs in excess of $100,000.
The vast majority of 401(k) sponsors maintain a volume submitter document as it is a cost effective manner to establish a plan. At this point, this feature is not available in any volume submitter documents.
However, the industry is continuing to explore this innovation and how this can be utilized in a widespread method. In our opinion, this will be a more common feature in a few years but, in the short-term, will remain cost prohibitive. We applaud this development and wonder what other changes we may see on down the road (perhaps a similar program to help those with high interest credit card balances). We’ve already approached our plan document provider and we will continue to keep you posted as this new feature is explored by the industry.
Don't take our word for it
cybersecurity emerges as a critical issue
The following article is the result of a survey of 500 advisors that handle retirement plans in an unbundled environment. Although the article highlights Cybersecurity – we found the advisor’s comments regarding the drop in service levels that their clients are experiencing from the record-keepers they use to be even more interesting. Please click here to learn more.