The stock market went down in 2022, so no surprise, so did 401(k) account balances.
According to Vanguard’s 22nd annual “How America Saves” study, the average 401(k) balance was $112,572 at the end of 2022 — a 20% drop from 2021.
I’ve been through some bear markets and I’ve seen worse results over the years.
As Bitcoin starts inching back up, I’m in the black again and expect more clamor for crypto options in 401(k) plans.
Senator Tommy Tuberville, R-Alabama, reintroduced legislation to create a law, the Financial Freedom Act which calls to roll back any Department of Labor (DOL) guidance that limits the type of investments self-directed 401(k) account investors can select through a brokerage window.
Tuberville’s bill is trying to reverse 2022 guidance in which the DOL warned that fiduciaries could be liable if offering cryptocurrency through a participant-directed option.
With a Democrat-controlled Senate with no Democrats co-sponsoring the bill and a Democrat-controlled White House, I expect this to go nowhere.
The ESG rule issued by the Department of Labor (DOL) has incensed anyone who believes that the selection of retirement plan investments should be based solely on total return. It’s incensed 25 state attorney generals to sue to stop the rule.
If you’re that incensed with the rule, what can you do? Pretty simple, don’t offer one. Let the courts and politics figure it out.
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The ESG rule issued by the Department of Labor (DOL) has incensed anyone who believes that the selection of retirement plan investments should be based solely on total return. It’s incensed 25 state attorney generals to sue to stop the rule.
If you’re that incensed with the rule, what can you do? Pretty simple, don’t offer one. Let the courts and politics figure it out.
I had a contractor work on my house for a couple of projects. Frank installed a new front door, installed a garage, re-did the sheet rocking of a few rooms, and installed a new kitchen. We thought he was dependable and would never believe that he would take advantage of us.
As part of mold remediation, we had to sheetrock the den. I thought the job was about $9,000 to $10,000. Frank wanted $14,000. I thought it was high, but we found another contractor who would do it for $9,000. We would never know we were paying too much unless we benchmarked Frank’s proposed fee. Who knows how much we overpaid on the other projects?
Competing plan providers hear it all the time from prospective clients all the time, about how their current provider would never overcharge them. Unless a plan sponsor benchmarks the fee they are being charged (which is their fiduciary duty to do so), how will they ever know?
Benchmarking the fees you are being charged is not about the lack of trust in your providers, just exercising their fiduciary duty. It’s OK to have faith in your providers, but not blind faith.
Overpaying Frank was our mistake and we’re out of money, overpaying your plan providers is a breach of fiduciary duty and possible liability from plan participants.
They often say that the road to hell is paved with good intentions. I don’t know who said it first (I heard it originated with St. Bernard, the saint, not the dog), but perhaps they were a 401(k) plan sponsor that had a loan provision that did the plan a lot of harm.
While the idea of a retirement plan is for a savings vehicle and any access by the participant to that money defeats that purpose, I like offering the provision so that a participant can leverage it when they are in a cash bind.
The problem with the loan provision is that I have come across too many compliance issues with it that have caused plan sponsors lots of grief. The grief usually involves the requirement that the loan is paid back on at least a quarterly basis or be considered a default, where the participant is required to receive a 1099 form for a deemed distribution. This error is a result of the third-party administrator not keeping tabs on the loan. This may be a result of an incompetent administrator, an incompetent plan sponsor, or as a result of the plan offering multiple loans. Any loan that does not meet any of the plan loan requirements is considered a prohibited transaction, which risks the plan’s tax qualification.
How to avoid the mess? I still think having a loan provision that offers multiple loans is a recipe for a disaster, I always recommend only allowing one loan outstanding at a time. In addition, make sure the TPA you work with has the software necessary to track these loans, as well as make sure the payroll information is correct for loan repayments.
While the talk about retirement plans is usually centered on 401(k) plans, the value of a defined benefit plan for those companies that could afford it should not be discounted. Thanks to the generous deductible contribution of the requirements of minimum funding, small business owners can certainly sock away more money than they ever could do with a defined contribution plan.
The problem with these huge deductible contributions is that there are always some unscrupulous plan providers that exploit the defined benefit plan sponsor’s ability to make large contributions to their advantage.
Defined benefit plans are huge savings vehicles for retirement, but they should not be used solely as a vehicle to purchase life insurance. I have seen too many defined benefit plan sponsors purchase large life insurance policies where their minimum funding contribution is used solely to pay the premium of a large insurance policy within the plan. The problem? When times go bad and the plan sponsor doesn’t have the financial wherewithal to continue making the contributions, they essentially forfeit the goal of the life insurance policy. A company that didn’t buy a policy or bought a smaller policy is in a better spot as ceasing future accruals isn’t such a calamity as to those that lost their policies.
Life insurance is an attractive tax savings vehicle with a defined benefit plan, but like red meat and wine, it should only be used in moderation. I would recommend avoiding setting up a defined benefit plan with the whole purpose of funding life insurance. I would recommend not using a third-party administrator (TPA) who also sells life insurance because I believe it’s the ultimate conflict of interest when the plan designs you create as a TPA is used to sell the life insurance you’re selling. Let’s face it; there are bigger margins in life insurance than in plan administration. Also, avoid defined benefit plans that feature special trusts and special trustees as the Internal Revenue Service (IRS) has found these as possible grounds for plan disqualification. I’ve had one client being audited by the IRS over this, for the last 2 years.
How to avoid these insurance hucksters? Pick a TPA that is independent of an insurance salesperson, make sure your entire annual minimum contribution isn’t fully used to pay the life insurance premiums, and get a second opinion from an ERISA attorney.
Defined benefit plans should be used to save for retirement, not to net an insurance salesman a huge commission.
Bank of America’s newest survey shows that at the end of 2022, fewer participants took hardship withdrawals and loans.
Participants taking a hardship distribution declined in the fourth quarter of 2022, with the average at 0.4%, down from 0.5% in the third quarter. Also, the average hardship amount also declined in the fourth quarter from the third by 8%.
For loans, the fourth quarter data shows that 60,789 participants borrowed from their workplace plan, which was a decline of 12% from the third quarter. However, loan defaults rose slightly to 15.9%, up from 15.7% in the third quarter and totaling more than $450 million.
Despite the. good news, the average plan participant contribution rate dropped slightly from 6.6% at the end of 2021 to 6.4% at the end of 2022.
Love those New York Rangers. In other news, the National Hockey Players Association will get a new leader.
U.S. Labor Secretary Marty Walsh will leave the Biden administration to run the NHLPA. The hockey players’ union has been searching for a new executive director to take over for Don Fehr, who had been in charge for more than a decade.
A Boston Bruins fan and former Mayor of Boston, Walsh will be remembered for his tenure under the DOL with the implementation of the ESG rule, as well as guidance against crypto in retirement plans.
