Tax-Advantaged ERISA Retirement Plan

Tax-Advantaged ERISA Retirement Plan Employee Benefits and Your Liability Risks

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Table of Contents

Are You Missing Out on Your Retirement Plan Benefits?

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What is an ERISA Fiduciary

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An Evolving Definition of Fiduciary

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FAQ on the New Fiduciary Rules

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Acting as a Fiduciary

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Choosing Investments

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Complying with ERISA 404(c)

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What about a Safe Harbor Retirement Plan?

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Organizing Your Fiduciary File

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Choosing Investments and Understanding Your Liability 3(38)

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How Much Risk Can You Afford?

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Understanding the Roles

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Seven Questions to Ask Your Retirement Advisory Team

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Lessen Your Retirement Plan Risk with Wellspring, an ERISA 3(38) Plan Advisor

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How Does Wellspring Help You Manage Your Retirement Plan?

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How Do We Make Your Retirement Plan Better?

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Additional Benefits Available to Your Employees

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Using Our “3(38) Fiduciary” Role to Reduce Your Liability Risk

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How We Invest as a 3(38) Plan Fiduciary

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Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Are You Missing Out On Your Retirement Plan Benefits?

A retirement plan is not a benefit that only larger companies can offer to its employees.

A retirement plan option is becoming a ‘must have’ for any size business to attract and retain quality employees; however, many companies are not well informed about other tax advantages a good ERISA retirement plan can offer. Understandably, there are questions, doubts, and other unknowns that you, as a business owner, must navigate.

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Do you have enough participants to make it worthwhile to offer a retirement plan?

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What kind of plan should I use?

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How do we teach employees to really utilize this benefit?

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How many hours do you need to allocate to implement a retirement plan properly?

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What are the risks involved with offering a retirement plan?

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Can I really have extra savings for the owners?

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And of course, how much will it cost?

We won’t sugarcoat the truth. For many businesses, it can seem like an enormous and complicated responsibility. But there is one more important factor that most businesses overlook or fail to properly understand. . .your retirement plan may create personal liability for you and other C-suite executives.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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What is an ERISA Fiduciary

The Employee Retirement Income Security Act (ERISA) was enacted in 1974 to protect employees who participate in retirement plans and certain other employee benefit plans.

At the time, there were concerns that pension plan funds were being mismanaged, causing participants to lose benefits they had worked so hard to earn. ERISA protects the interests of plan participants and their beneficiaries by: •

Requiring the disclosure of financial and other plan information

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Establishing standards of conduct for plan fiduciaries

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Providing for appropriate remedies, sanctions, and access to the federal courts

It’s the fiduciary provisions of ERISA that help protect participants from the mismanagement and abuse of plan assets. The law requires that persons that make decisions about the retirement plan, known as “Fiduciaries”, must act prudently, solely in the interests of plan participants and beneficiaries, and for the exclusive purpose of providing benefits while paying reasonable expenses of administering the plan.

Fiduciaries must also avoid conflicts of interest. They cannot allow the plan to engage in certain transactions with the employer, service providers, or other fiduciaries (“parties in interest”). There are also specific rules against self-dealing.

Who is a plan Fiduciary? Anyone who: •

Exercises any discretionary control over the plan or its assets

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Has any discretionary responsibility for administration of the plan

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Provides investment advice for a fee or other compensation (direct or indirect)

Plan Fiduciaries may include, for example, discretionary plan trustees, plan administrators, investment managers and advisors, and members of a plan’s investment committee.

Fiduciaries must take their responsibilities seriously.

If you fail to comply with ERISA’s requirements, you may be personally liable for any losses incurred by the plan. Criminal liability may also be possible.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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What is an ERISA Fiduciary

An Evolving Definition of Fiduciary In 2016 the Department of Labor (DOL) finalized regulations updating, and expanding, the definition of “fiduciary” in regards to the provision of investment advice. Originally these regulations were set to become applicable in April of 2017. The current administration wanted to delay the applicable date to allow the DOL to fully examine the impact of the new rules. As a result, the DOL pushed back the applicable date to June 2017. Then, days after his confirmation, Secretary Acosta confirmed that June 9th would be the date the new rules would become applicable. That date has arrived and we have a new operative definition of fiduciary for the financial services industry.

As a fiduciary under the rule, financial advisors must receive level compensation (meaning no additional compensation for suggesting a specific investment) in connection with covered recommendations unless their engagement falls under an exemption. The DOL continues to make the Best Interest Contract (BIC) exemption available to allow fiduciaries to receive commissions and other forms of non-level compensation.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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What is an ERISA Fiduciary

FAQ on the New Fiduciary Rules After years of proposed regulation issuance, comment periods, drafting and anticipation, the Department of Labor (DOL) published interim guidance regarding the definition of “fiduciary”.

It is important for plan sponsors to understand the reasoning behind, and the scope, of the final rules. The following Q&A is meant to assist you in understanding the regulations and how they pertain to you, your plan and your participants.

Q: Why did the DOL issue these new rules?

A: The definition of “fiduciary” for purposes of providing investment advice dates back decades, predating the advent of 401(k) and other defined contribution plans. Prevalent thought within the retirement industry was that the definition was due for an update to reflect the evolution of the retirement plan landscape and to bring more parties under the scope of ERISA’s standard of care for fiduciaries.

Q: Who are the primary targets of the new rules?

A: The primary targets of the new rules are providers of retirement plan services and products. Advisors, consultants, recordkeepers, third party administrators, etc., are those most impacted by the new rules. The primary objective of the regulations is to sweep into the definition of “fiduciary” more individuals and organizations who may influence plans, plan sponsor fiduciaries and participants in regards to investing related activities. In so doing, these individuals/organizations will be held to the highest standard of care in providing investment advice and recommendations under the terms of ERISA. Q: In a nutshell, what do the new rules say?

A: Essentially the new rules provide that an individual/organization will be a fiduciary under ERISA if they make a recommendation to a plan, plan sponsor fiduciary (e.g., a plan committee) or plan participant (or beneficiary) regarding investment products/services, distributions or rollovers . . . and they receive a fee for doing so. “Recommendation” is defined as a communication that can reasonably be viewed as a suggestion that the recipient of the information take (or refrain from taking) some course of action.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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What is an ERISA Fiduciary Q: In the past I recall hearing that certain providers could not be a fiduciary, does that remain true?

A: In the past, service providers that received uneven, or “conflicted” compensation, would not agree to serve in a fiduciary capacity because they could affect, or influence, their compensation which would have resulted in a prohibited transaction. Under the new rules, a Best Interest Contract Exemption (the “BIC Exemption”) has been created to account for such scenarios.

Additionally under the new rules, all individuals/organizations meeting the definition of fiduciary are going to be treated as fiduciaries, regardless of the design of their compensation.

In order to avoid a prohibited transaction, fiduciaries receiving conflicted compensation (such as commissions) can continue such a compensation design as long as they meet certain requirements, one of which is to commit to providing recommendations that are in the best interests of the recipient of services/recommendations.

Q: Does our plan fall under the new rules?

A: All ERISA-covered plans that have an investment element will be covered. 401(k), 403(b), profit sharing, money purchase pension and defined benefit plans will all be covered.

Interestingly, recommendations for taking a distribution or rolling over to an Individual Retirement Account (IRA) will also be covered. And an unexpected surprise for most plan sponsors is that health savings accounts (HSAs) are also covered.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Choosing Investments As a fiduciary for an ERISA retirement plan you will be responsible for selecting the investments that will be available to the participants in the plan. The choice of the investments is one of the most important tasks that a plan fiduciary can accomplish.

However you choose a small set of investments, or a broad set of them, allowing the employee to make the final choice, the responsibility will still rest with the fiduciary.

Making these choices is full of dangers and liabilities if done incorrectly. In the following sections we discuss some aspects of this challenging task.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Complying with ERISA 404(c) The Employee Retirement Income Security Act of 1974 (ERISA) contains Section 404(c) that permits employees to direct the investment of their own retirement accounts. An employee may want to direct their own retirement account so they can control how much of their savings are being invested into what types of investments.

Section 404(c) may be poorly understood by some employers and employees and may be too vague to give reliable relief from plan liability for employee investment issues. The section follows a “prudent standard of care” requirement and offers “safe harbor” for employers or other plan sponsors who allow their employees to direct the investments of their accounts.

According to ERISA, plans intending to comply with 404(c): •

Must have the opportunity to choose from a broad range of investment alternatives (which are adequately diversified)

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May direct the investment of their accounts with a frequency which is appropriate

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Can obtain sufficient information to make informed investment decisions.

Plan Sponsors wishing to register as 404(c) compliant must provide annual written notification to participants with its intent to comply with 404(c) and MUST provide Information about investment instructions (including contact information of the fiduciary responsible for carrying out participant investment instructions).

In addition the plan sponsor must be able to provide: •

Notification of voting and tender rights;

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Information about each investment alternative; and

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A description of transaction fees and investment expenses.

Compliance with section 404(c) of ERISA protects plan fiduciaries from liability for losses that result from the investment decisions made by participants. Conversely, failure to comply with 404(c) could result in liability for losses due to poor investment decisions made by plan participants.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

What about a Safe Harbor Retirement Plan?

ERISA requires several tests each year to prove 401(k) plans do not discriminate in favor of employees with higher incomes. This testing limits highly compensated employees’ contributions based upon non-highly compensated employees’ contributions. It may be advantageous for a plan sponsor to consider adopting a “safe harbor” design for their retirement plan. Adopting a safe harbor retirement plan design permits an employer to essentially avoid “discrimination testing” because the testing is deemed met by offering a safe harbor contribution to non-highly compensated employees thus allowing the highly compensated employees to defer the maximum amount allowed by their plan and Internal Revenue Code limits, without receiving any refunds.

General rules for all safe harbor contributions include the following: • Safe harbor contributions are 100 percent vested.

• There may be no allocation requirements imposed on safe harbor contributions, for example, a 1,000-hour service requirement or a last day employment rule.

• Safe harbor contributions may be used toward satisfying the Top Heavy plan minimum contribution requirement.

• All eligible participants must receive a written notice describing the applicable safe harbor provisions between 30 and 90 days before the beginning of the plan year. This notice must be provided for each year the plan will be safe harbored.

Generally, there are two types of safe harbor contributions: 1) the non-elective contribution, which is a 3% contribution to all eligible participants, or 2) a matching contribution to participants who are contributing to your plan. There are two options from which to choose for the matching contribution, either the basic or the enhanced match. The basic safe harbor matching contribution is defined as a 100% match on the first 3% of compensation deferred and a 50% match on deferrals between 4% and 5% of compensation. Alternatively, the employer may choose an enhanced matching formula equal to at least the amount of the basic match; for example, 100% of the first 4% deferred. All that said, employers wishing to explore a safe harbor solution should also be aware that it may entail more cost (if their present contribution structure is less than the required safe harbor required structure).

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Organizing Your Fiduciary File As a plan sponsor and fiduciary of your company’s retirement plan, keeping an up-to-date fiduciary file is critical. To begin, we recommend preparing your file in four key sections and the contents of each section could include the following: I. Documents: plan document, IRS determination letter, summary plan description, investment policy statement, 404(c) policy statement and notice, form 5500s, service provider contracts, nondiscrimination test results, corporate tax returns, corporate board resolutions, fee structure, etc.

II. Administrative: evidence of employer contributions, distribution documents, audit results, participant complaints, fiduciary liability insurance contract, correspondence, etc.

III. Participant Communication: enrollment material, documentation of communication events, etc.

IV. Investments: documentation of investment activity, executive summaries from committee meetings, current fund menu and expenses, etc.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Choosing Investments and Understanding Your Liability 3(38) Many employers are not aware that CEOs, CFOs and Presidents have personal liability for the assets in the company’s retirement plan. This means that employees, past and present, can sue the business owner for the performance of the plan and its assets. For that reason, it is crucial that the employer understands this risk and manages exposure to it.

An employer can decide to “do it all themselves,” which means they select the investments and take all the risk. Alternatively, they can share partial risk, or none of the risk.

How Much Risk Can You Afford?

A retirement plan can be built using a rule called “3(21) Fiduciary,” which defines the plan as sharing the risk with a partner investment company. Or, the employer can transfer all the risk to the partner by utilizing the “3(38) Fiduciary” rules. However, only a Registered Investment Advisor like Wellspring Financial Partners can be a “3(38) Fiduciary” for you.

Investment Knowledge Prefered Level of Involvment Liability Level

“Do it for Me” 3(38)

“Help Me” 3(21)

“Do it Myself”

Investment Manager

Co-Fiduciary

Sole Responsibility

Low

Risk Scale

High

No matter which rule you choose, it is important to remember that The Plan Sponsor always retains a duty to prudently select the Investment Advisor/Manager and make sure it is carrying out its appointed duties (3(21) and 3(38), respectively).

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Understanding the Roles A Plan advisor has different roles and responsibilities, and different levels of risk depending on the fiduciary rule selected for the plan. The following table outlines the roles under the two rules.

3(21) Fiduciary

3(38) Fiduciary

Recommending Investments to the Plan Sponsor

The Investment Manager becomes “solely” responsible for the selection, monitoring and replacement of plan investment options. Discretion

Monitoring those investments and suggesting replacements as appropriate

The Plan Sponsor and other plan fiduciaries are relieved of the responsibility for the Investment Manager’s decisions.

Fiduciary relief - ERISA 405(d)(1) (1 out of 8 Small Plans Experience a Lawsuit)*

Advising the plan sponsor in following a fiduciary process, including the Investment Policy Statement (IPS)

Plan Sponsor - Investment Manager agreement in writing. Investment Manager acknowledges fiduciary status in writing.

Wellspring can accept full fiduciary responsibility — and the risk If our full-index or passive investment menu is utilized in your plan as encouraged by the “Prudent Man Rule (3rd Restatement),” Wellspring will accept full 3(38) 405(d)(i) Independent Fiduciary Acknowledgement.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Acting as a Fiduciary

Seven Questions to Ask Your Retirement Advisory Team If you already have a retirement plan advisor, how do you know if that advisor is the right choice for your employees and limits your liability? Ask these seven questions. If they can’t say yes to these seven questions, you could be doing better.

We all know that employees who feel satisfied and valued can drive profits! As a smart employer, you already know that a retirement plan is an important benefit to attract and retain a strong and enthusiastic workforce. Companies typically choose to either use their own inhouse resources or partner with an investment advisor. But, how good is your plan advisor?

We suggest you ask seven questions.

1) First and foremost, is your advisor a 3(38) Fiduciary?

Did you know that Plan Sponsors/Trustees, whether it is the CEOs, CFO, Presidents and/or any other plan fiduciaries, have Personal Liability for the assets in their companies’ retirement plan? Wellspring Financial Partners, a unique ERISA 3(38) Plan Investment Manager (fiduciary), can partner with your company to reduce your liability exposure and investment responsibility!

2) Do they tailor Retirement Spending Reports for every employee?

Are your employees truly engaged? Reaching out to your employees with easy-to-understand language and offering high quality material, shows you care about their financial success.

3) Do they offer a comprehensive financial plan for every employee?

Wellspring believes it’s important to guide and motivate your employees using comprehensive planning. We charge a nominal fee of $160 for this service, which is typically valued at $2,200 per employee.

4) Do they provide special education sessions?

Not just employee education about their 401K plan, but education for their whole financial picture.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

5) Do they provide documentation that protects you, the Trustee?

Wellspring includes an exclusive third party scorecard on plan investments that marks the best the industry can offer.

6) Do they have little to no change in their investments menu?

If your investments are performing well, leave them alone. Wellspring Financial Partners has a five-year record of no investment menu change. It shows our investments are consistently and historically benchmarking well.

7) Does your Advisor provide a Fee Audit Report?

Do they pledge to renegotiate provider pricing so your plan always stays on the front end of best fiduciary practices and stays competitive?

YES?

OR NO?

If your company can say yes to even four of the seven questions, Wellspring Financial Partners applauds you. You should stay with your current advisor.

If you answered no, you could be doing better for you and your employees. Wellspring Financial Partners is proud to say we can answer YES to all seven questions! Remember it is your legal responsibility to do the best that you can for your plan participants, including yourself! We would like to talk to you about how we can help you improve your plan.

It’s true—we want you to join our team of successful clients, and can prove why we are different than the rest.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

How Does Wellspring Help You Manage Your Retirement Plan?

By Providing: •

Quarterly Fiduciary Investment Reviews – Using an exclusive independent Scoring Service

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Customized Service Plan – Blueprint of Commitments and Target Dates

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Annual Fiduciary Plan Review with the Administrator

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Total Plan Fee Benchmarking Analysis

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Investment Policy Statement and Monitoring

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Annual Audit requirements: Minutes of Trustee / Employee Meetings

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Monthly Plan Sponsor Newsletters

Even better………. Wellspring Financial Partners is a “FEE ONLY” Plan Advisor; therefore, we work only for YOU and are compensated only by YOU! The truth is your employees often make bad financial decisions that cost cost their families, but also cost you. We have a formula to change that outcome to success. Our job is not only to help you manage your plan, and to lower your risk, but we also take great pride in making the plan and financial life BETTER for you and your employees.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

How Do We Make Your Retirement Plan Better?

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Negotiate and managing fees to keep them reasonable and competitive when benchmarked against plans of similar size and/or demographics. This saves valuable time researching and comparing fees

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Providing benchmarked investments and professional investing advice, while keeping you informed, current and compliant. We are the experts and we have access to up-todate information on investments to inform you and your Plan Participants what’s safe and best for their financial well-being. No need trying to stay abreast of a very complex and dynamic industry

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Liaison between Administrator / Record-keeping to ease your Administrative Burden.

Management of other service providers surrounding your plan

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Act as comprehensive Financial Advisor for all of the Plan Participants and their families.

Let your Wellsprings Financial Partners’ advisors educate and advise your Plan Participants

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

Additional Benefits Available to Your Employees Your Wellspring Financial Plan Investment Advisor knows it’s important to provide a retirement plan that your employees can understand and trust, but we also enhance our value to you by offering additional employee support.

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Employee retirement plan orientation

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Financial advising: Helping with financial advice to employees outside the retirement plan to help them achieve peace of mind by addressing budgets, college, life insurance and life financial goals.

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Optimize their retirement plan and their spouse’s plan to guide their entire family financial picture.

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Investment due diligence and monitoring to remove the worry of what investments they should select and why.

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A Personalized Retirement Spending Report (“RSR”) for each Employee

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

Using Our “3(38) Fiduciary” Role to Reduce Your Liability Risk When you choose to utilize a “3(38) Fiduciary” partner, there are two different ways the employer can delegate the liability to the investment management partner: 3(38) Platform level or 3(38) Plan Level.

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Plan Sponsors utilizing a 3(38) Platform still retain the ultimate fiduciary responsibility (and liability).

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If the relationship chosen by the Plan Sponsor is at the Plan Level, the investment manager takes on the entire responsibility for the plan, relieving the employer (Plan Sponsor) of liability to the employees.

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The real value in retaining an Investment Manager pursuant to ERISA section 3(38) lies in having a truly independent firm make the same types of decisions that a well-informed plan sponsor would. That kind of 3(38) would, among other things, have unfettered access to all investment options and be free from the constraining outside influences to select whatever options it deemed prudent.

– Scott Simon, Attorney, “Principal of Prudent Investors” Morningstar’s Fiduciary Focus

3(38) Platform Level

3(38) - Plan Level

The 3(38) Platform will pre-screen and assess the investment universe to narrow the prudent investment options available. Selections of investments is the responsibility of the Plan Sponsor.

The Investment Manager becomes “solely” responsible for the selection, monitoring and replacement of plan investment options. Discretion

3(38) Platforms will not determine sufficient number or style of investment options to permit participants to create a diversified portfolio. That is up to the Plan Sponsor.

The Plan Sponsor and other plan fiduciaries are relieved of the responsibility for the Investment Manager’s desicions.

Fiduciary relief - ERISA 405(d)(1) (1:8 Small Plans Experience a Lawsuit)*

Most 3(38) Platforms assert in their agreements that the Plan Sponsor retains the ultimate fiduciary responsibility to determine the plans investment menu and adherence to compliance. No Courts have ever found Platforms culpable.

Plan Sponsor - Investment Manager agreement in writing. Investment Manager acknowledges fiduciary status in writing.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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Lessen Your Retirement Plan Risk with an ERISA 3(38) Plan Advisor

How We Invest as a 3(38) Plan Fiduciary Wellspring Financial Partners believes in smart, passive investing. While pure Index Fund investing is passive, it does not always achieve the best returns.

Investments for plans managed by Wellspring include Dimensional Fund Advisor’s funds, which feature very broad market investments smartly and passively managed.

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The greater the trustee’s departure from one of the valid passive strategies, the greater it’s likely to be the burden of justification [for selecting an active investment strategy] and also of continuous monitoring [of it].

– Reporter’s General Note on Section 227 of the Restatement 3rd of Trusts (Prudent Investor Rule), comments e through h, page 79.

Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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What is an ERISA Fiduciary

4007 E Paradise Falls Dr, Suite 128 Tucson, AZ 85712 Monday - Thursday: 8:00am-5:00pm Friday: 8:00am-4:00pm Phone: 1-844-203-2402 E-mail: info@wellspringfp.com Tax-Advantaged ERISA Retirement Plan - Employee Benefits and Your Liability Risks

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