We’re witnessing a once in a lifetime shift in how we work, so how we save for retirement must make a parallel shift. What’s needed today is a new approach for delivering retirement benefits – portable retirement is the future of workplace savings.
Icon CEO, Laurie Rowley, recently sat down with Jeremy Goldman on the FutureProof podcast to discuss the structural problems with 401ks, the looming retirement savings crisis and how Icon’s portable retirement plan is the answer.
Over half the workforce doesn’t have access to a 401k. Of those who do have access, the problem is changing jobs with your plan — it’s hard to do. $100 billion is cashed out of 401k plans at job change every year. Add to this the fact that in five years, half the workforce will likely be independent contractors (so they won’t even have access to a workplace retirement savings plan unless a change is made), and it’s not hard to imagine that there’s a $4.2 trillion gap between the savings people will need when they retire and what they’ll have.
The retirement savings industry is well aware of this crisis and spends a lot of time trying to fix the structural bugs in the 401k system. But up until now, they’ve only managed to make a bad product worse. Portable retirement savings is the answer.
Icon is the workplace retirement savings plan for the modern worker and employer alike. It leverages advances in digital technology to deliver a flexible, frictionless and low cost way to invest and save for the employee. And it gives employers a low-cost, no-risk benefits solution to employing people across multiple regulatory environments.
If you’re a California business owner, you’ve probably heard about the state retirement plan mandate. But did you know that complying isn’t difficult? There are a lot of good options beyond an expensive and complicated 401k plan.
Mandated retirement savings plans have landed in New York. As of October 2021, New York became the latest state to require private sector employers to provide their employees with a retirement savings plan. Whether you work in New York or employ at least 10 people within the state, this is big news.
Here’s what it means for you.
Who is Mandated to Offer a Retirement Savings Plan
You must offer your employees a retirement savings plan if you meet these criteria:
If you do meet this criteria and don’t already offer your employees a way to save for retirement, don’t panic. There has not been much guidance from the state regarding qualifying plans, however here are options that may work for you.
If you don’t offer your employees a retirement savings plan, the penalties are hefty:
This legislation applies to both for-profit and nonprofit private sector companies. If your company is located in New York City, or if you employ 5 or more people within in NYC who are over the age of 21, work 20 hours or more a week and you’ve been in business for more than 2 years, you might be wondering how the state law interacts with the city’s Retirement Security for All Act, that was passed in May of 2021. The answer is: it’s too soon to tell.
The city’s law contains language stating officials won’t implement the law if New York state passes its own version of a retirement savings mandate that covers the majority of people. The likelihood is that the New York state law will supersede NYC’s mandate, but we’ll continue to follow this story and when and if there’s news, we’ll let you know.
If You Work in New York State
Congratulations! As long as your employer meets the above-stated criteria, it’s now required to offer you a retirement savings plan. Here’s what you need to know based on the type of plan you’re offered.
Icon IRA
401k
New York State Secure Choice Savings Plan
Icon CEO, Laurie Rowley, recently sat down with Jeremy Goldman on the FutureProof podcast to discuss the structural problems with 401ks, the looming retirement savings crisis and how Icon’s portable retirement plan is the answer.
Over half the workforce doesn’t have access to a 401k. Of those who do have access, the problem is changing jobs with your plan — it’s hard to do. $100 billion is cashed out of 401k plans at job change every year. Add to this the fact that in five years, half the workforce will likely be independent contractors (so they won’t even have access to a workplace retirement savings plan unless a change is made), and it’s not hard to imagine that there’s a $4.2 trillion gap between the savings people will need when they retire and what they’ll have.
The retirement savings industry is well aware of this crisis and spends a lot of time trying to fix the structural bugs in the 401k system. But up until now, they’ve only managed to make a bad product worse. Portable retirement savings is the answer.
Icon is the workplace retirement savings plan for the modern worker and employer alike. It leverages advances in digital technology to deliver a flexible, frictionless and low cost way to invest and save for the employee. And it gives employers a low-cost, no-risk benefits solution to employing people across multiple regulatory environments.
“401ks are the best way for employers to offer a retirement savings plan and for individuals to save for retirement.” This is the marketing the 401k industry has been pushing since it was created almost by accident by the Revenue Act of 1978. And we’ve all bought into it at some point in our lives. Maybe you still believe it. If you do, you could be forgiven for taking this statement as gospel.
The 401k industry, through herculean lobbying efforts and behemoth marketing budgets, has sucked all the air out of the public conversation around retirement savings plans. In fact, unless you work in finance or HR, you might not even be aware that there are other options. Options that could reach the 81 million private sector workers without access to a 401k.
By dominating the conversation about retirement savings, the 401k industry has created a vacuum of information. And in that vacuum, arose the Multiple Employer Plan (MEP). Because if you’re a small business, you can’t afford to dedicate the financial resources and manpower it would take to set up and maintain a 401k plan for your business. It comes with too much risk due to the employer’s fiduciary liability, it’s too expensive and with the many hats small business employees must wear, it’s too complicated for them to navigate.
So in rides the MEP on a white horse. “You need to offer a 401k,” the industry says. “We can help you,” they claim. “It’ll be cheaper, less risky and way easier because we’ll do all the plan management for you.”
These statements might have been true at some point in the distant past, but are definitely not true today. Which is evidenced by the growing number of ERISA lawsuits now plaguing the MEP industry.
Here’s the truth: the 401k industry created MEPs to access a new clientbase. Not to benefit the plan participants. They pool a bunch of small businesses into one 401k so that the 401k has more assets (i.e. money) to manage. And since the industry makes money off of assets under management (AUM), the more money they have in each 401k, the more profitable that account is to the MEP administrator.
“But isn’t there some ancillary benefit to the small business? Like lower cost due to economies of scale?” No. In fact, due to technological advances it’s now often cheaper for a small business to open a single employer 401k than it is for them to join an MEP. That’s because MEPs commingle the funds of multiple companies and are incredibly complicated to manage. It can’t be done cheaply.
“What about fiduciary risk? Doesn’t the MEP administrator take that on?” No. The MEP administrator might share the fiduciary risk with the employer, and it might tell the employer it takes the fiduciary risk, but due to ERISA rules, if the employer is offering a 401k, it maintains a fiduciary duty to its employees. So in the case of an MEP, the employer is responsible for monitoring the MEP administrator to ensure its operating the plan to the benefit of plan participants for a reasonable cost. Which is really hard.
“Isn’t it simpler to outsource the management of the 401k plan to the MEP administrator?” Nope. Monitoring an MEP is exceedingly complicated. Here’s why: the MEP administrator maintains all discretionary power when it comes to managing the 401k. So the individual employers don’t have a say in which investments are offered to their employees, plus, their interests are competing with all of the other employers in the plan.
Add to this, the basic 401k rules. Staying in compliance with ERISA rules regarding rebalancing and discrimination on an annual basis is hard enough for a single employer 401k plan. But now, each employer has to worry not only about their own company staying in compliance, but every other in-plan company staying in compliance as well. For if one company is out of compliance, the entire plan is at risk.
The lack of power individual employers have within an MEP adds another complication. Once an employer signs up, that’s it. Their employees are in the plan until the plan itself is dissolved or the employee leaves the company. That’s because participating companies do not have the right to individually terminate. This has led to hundreds of thousands of dollars of assets being held hostage from employees who want to move their assets elsewhere.
In creating MEPs, the industry took a complicated inefficient product and made it worse. Then they sold it as something it wasn’t.
There was a time when 401ks made sense: when people worked for the same large company for 25 years or more, then retired. But that time has passed. Now, the average person will work for about 12 companies throughout their career (Bureau of Labor Statistics) so businesses large and small need to look beyond the 401k.
The retirement savings plan that is actually cheaper, simpler and less risky for small businesses is a payroll IRA like Icon. With a payroll IRA, your employees get personalized saving and investing with automatic savings and pre-tax contributions, with the added benefits of lower fees and full portability. Employers get the benefit of low cost and easy set up, as well as no fiduciary responsibility or complex plan management. And because the plan is non ERISA all types of employees qualify, W2 and 1099.
As a small business owner, you have an opportunity now to make a positive difference not only in your current employees’ lives, but also in your recruiting efforts. How? By offering your employees a way to save for retirement. Social security is rarely enough to cover living expenses and, although Americans accrue most of their retirement funds through employer-sponsored retirement plans, only 81 million private industry employees have access to one. So as top talent weighs offers from multiple companies, those that include a retirement savings plan are going to stand out.
If you’re a small business that either wants to start offering a retirement savings benefit to employees, or you’re unhappy with your current plan, here are your options.
Here are the good things about 401ks:
Here are the not-so-good things about 401ks:
In an effort to solve some of the problems small plans pose for 401k administrators (i.e. fewer AUMs), they created a plan that bundles multiple small employers together into the same 401k plan.
Since they’re 401k plans, MEPs maintain all of the above benefits and drawbacks with the following additional rules:
In an effort to help bridge the retirement savings gap, some states are rolling out state-sponsored IRA retirement savings plans. The idea is that employees who work for a company that doesn’t offer access to an employer-sponsored retirement savings plan, will be automatically enrolled in the state-sponsored plan.
States with available state-run plans:
Pending State-run plans:
If you’re located in one of these states, it might be tempting to just let the government handle the retirement benefit for your employees. And there are upsides to these programs:
Here are the drawbacks of the state-run retirement savings plans:
Icon is the easiest and most affordable way to offer a retirement plan. Here’s what makes the Icon IRA so great:
In an industry where finding a banking partner can be difficult, it can be even more difficult for cannabis companies to offer retirement plans to their employees.
Federal laws can make it difficult for cannabis companies to get the financial and administrative support they require to operate their business as many financial institutions and 401k providers refuse to do business with cannabis providers.
Difficult or not, by June 2022, all cannabis companies located in California, regardless of size, must provide these traditional benefits.
There two major reasons cannabis companies need to start offering employees retirement benefits:
If you’re one of the many cannabis businesses scrambling to offer retirement savings accounts to employees, here are your options:
We’re over a year and half into Covid and people are still resigning in droves. In fact, a record 3% of the American workforce left their jobs in August (that’s 4.3 million workers), leading economists to refer to this period as the Great Resignation. Some of these workers may have simply switched jobs, but not many, since non-farm employment only rose by 194,000 in September.
So what are people doing? We don’t know for certain. They might be working for themselves, working part time (4.5 million people reported being partially employed in September), or they might simply be taking a break since employee-reported burnout is also at an all-time high, with women suffering more than men.
What we do know for certain is most of these people will lose access to their singular way of saving for retirement: their employer-sponsored 401k. Once you quit, you can no longer contribute to your plan. So if you’re one of the millions of people who has resigned or is thinking about resigning, what will you do with your 401k and how will you continue to invest for retirement? Good news! You’ve got options.
If you’re in this boat, you can choose to rollover your current 401k balance to your new employer’s plan or you can choose to roll it into an IRA. If you’ve researched your new employer’s 401k plan and you like the investment options, you’re comfortable with the fees, and if it accepts rollovers, rolling your current balance into the new plan could be a good option.
If you don’t like the investment options, if the plan doesn’t accept rollovers, or if the administrator charges high fees (or any combination of these reasons), then you can roll it into an IRA. If you choose to do nothing and keep your balance where it is, you won’t be able to continue contributing to that 401k, so you’ll need another way to save for retirement such as an IRA with Icon.
Icon’s retirement savings account was created using the best parts of the 401k and IRA to create a new type of retirement plan called portable retirement. Like a 401k, investments are managed for you. Like an IRA, it’s portable, and you have access to it wherever you go. And if you should decide to take a job with a new employer, they may support your Icon account.
If you no longer have access to a workplace retirement plan, that’s ok! You don’t have to push off saving for your future. Even small levels of contributions, once invested, can make a huge difference in later years.
So, you can always choose to keep your 401k where it is and also open an IRA to continue building your retirement savings, but unless you have a large balance and a great plan, 401k fees could eat so far into your savings they all but disappear. The better option is to roll your 401k into an IRA like Icon’s retirement savings account. This way, you continue to contribute to your future, all of your money is in one place, and high fees don’t erase your hard-earned savings.
Like we said above, Icon’s retirement account is plan that offers the best functionality from 401k and IRA accounts. Plus, it’s portable, can be managed from your phone, and can be adjusted to fit all the career decisions you’re likely to make throughout your working life.
With any of these scenarios, there’s always the option to cash out your 401k. But here’s why that’s not such a good idea:
Right now, more than 50% of both men and women think they’ll have to work part time in retirement given their current savings rate (according to a survey by T. Rowe Price). And 21% of men and 31% of women think they’ll run out of money in their later years. That doesn’t have to be the case.
On average “the market”, which is a commonly used term that refers to the world of traditional investments like mutual funds and ETFs, grows at a rate of 7% per year. That means if you invested $100 the first year, you would earn $7. But that’s not all. Without contributing another dollar to your account, your earnings would start earning money as a function of what’s called “compounding”. Take a look:
The above example assumes there are no additional contributions to your account. To see the effect of compounding on various contribution levels, check out this calculator from the SEC.
Did you know that by offering a 401k to your employees, you become their fiduciary? According to the Employee Retirement Income Security Act (ERISA) of 1974, that means you must act in their best interests. This might sound easy enough but in the past year, over 90 companies have had to defend themselves in lawsuits brought about by their own employees for fiduciary mismanagement of the company’s 401k plan. At the heart of these cases are claims of excessive fees that employees have to pay as part of their 401k plan. The result of these lawsuits is an estimated $1 billion in settlements.
These companies probably didn’t set out to harm their employees. But unfortunately, the set of requirements for retirement accounts set forth by the Department of Labor are both vague and comprehensive – which is horrible for plan sponsors and managers, and perfect for plaintiff lawyers.
It’s not just Fortune 500 corporations that are at risk for lawsuits, even plans with assets as low as $4.5 million have been successfully sued.
So how do you make sure you do right by your employees and protect yourself from excess litigation? The first step is to understand what your fiduciary responsibilities are.
According to the Department of Labor, anyone involved in the management of a 401k plan is legally required to:
Investment-specific fiduciary responsibilities require plan managers to offer a set of ‘prudent investments’ to their participants— which are defined as, “funds that meet their objective for a reasonable fee”. Plan managers must also provide access to a broad range of financial markets so that plan participants are able to properly diversify their accounts to avoid major losses.
New to the world of investments? Too bad. Under ERISA, retirement plan managers are held to the ‘Prudent Expert’ fiduciary standard. This means they must act ‘with the care, diligence, prudence, and skill of someone familiar with such matters’ — specifically an investment professional. Employers lacking expertise are not excused from this requirement, so the vast majority of employers are expected to either seek professional advice or risk litigation.
401k plan managers are also responsible for extensive record keeping. Specifically, plan documents must provide enough information to be “verified, explained, or clarified, and checked for accuracy and completeness.” Mandatory records include fee invoices, trust statements, services contracts, claim records, payrolls, plan documents and amendments, board resolutions, insurance contracts, among many others.
If you’re looking to protect your plan from Excessive Fee litigation, you have a couple of options:
Fiduciary Liability Insurance
You can obtain Fiduciary Liability Insurance. Without it, you’re vulnerable to the following claims:
Fiduciary Liability Insurance can be extremely costly, depending on the structure of your retirement plan. And as a result of the previously discussed lawsuits, premiums have spiked by an average of 30-40%.
Icon’s innovative platform enables employers to help their employees save for retirement without exposing the business or themselves to all of the above. By using a payroll IRA as the investment vehicle, instead of a defined contribution plan (like a 401k) our plan removes the fiduciary risk, ERISA requirements and federal filing requirements. New to the world of investments? No problem. Icon is an SEC registered investment advisor, so the fiduciary burden is on us.
With Icon setting up your company’s retirement plan takes minutes, not months. It’s the easiest, most affordable way to offer a retirement plan.