PRECISION Magazine - 2013 by Adam Pozek

PRECISION Expert Guidance and Creative Solutions for Retirement Professionals

The Not-So-Safe-Harbor 401(k) Is your plan in compliance? This Is Going On Your Permanent Record How To Select A Quality Employee Benefit Plan Auditor We Don’t Need No Stinkin’ Service Agreements! Cheap Technology: Streamline Your Life

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VOL 1 2013

Cheap Technology: Streamline Your Life By Adam C. Pozek, ERPA, QPA, QPFC

CHEAP TECH TOOL #15 & #16

With technology evolving at a rapid pace, it can be hard to separate the useful from the useless. We’ve gathered a collection of cheap solutions that can help streamline both your personal and professional life. Get started with the two below, then find additional tips throughout the magazine. Dropbox – www.dropbox.com It’s all about cloud storage these days, and Dropbox is one of the kings of that hill. Like many other cloud services, simply save or copy any file(s) into the local Dropbox folder on your computer, and it automatically syncs to your online account and any other computers you connect to your account. Connect your iDevice, Android or Blackberry, and all your files are instantly accessible while on the go. Change a file using any one of those devices, and presto the updated version magically appears on all other connected gizmos within seconds. Security and encryption? Yep. Not only does Dropbox employ bank level encryption, the data centers that house the servers are guarded by professional security staff … really. But, what sets Dropbox apart from the crowd is its integration with many other apps and services. Audiotorium (discussed below) is a great example. Simply type your Dropbox user name and password into the app, and all your notes and recordings are instantly available across your connected world. GoodReader is another one. Open a PDF from your account; make changes, highlights, etc. and save. You guessed it. Synced to your other devices. For the low price of free, you can sign up for a basic account that includes 2GB of storage space. The desktop software and mobile apps are also freebies. Need more space? Upgrade to 100 GB or more, starting at only $8.25 per month. Audiotorium for iPad, itunes.apple.com/us/app/audiotorium-notes-text-audio/id362787978?mt=8 You don’t have to attend too many meetings or events to accumulate a pile of notes large enough to choke a paper shredder. Then you have to hope you can read your own handwriting and remember what you meant by those cryptic references. Audiotorium app for iPad solves those headaches and more for about the same price as a triple cappuccino from Starbucks. Open the app and see a familiar-looking yellow legal pad. At the touch of a button, begin recording the audio while you take notes from within the same app. Use keywords to tag all your entries with client name, location, date, etc. Audiotorium can use your DropBox account to instantly save your notes and recordings to the cloud, allowing you to email a link to other meeting attendees before you even leave the parking lot. One thing that is missing, however, is one of those secret-agent microphones that picks a single voice out of a crowd; so if you’re meeting over that triple cappuccino, you may want to stick with the typing part.

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FROM THE EDITORS Expertise is a word you hear a lot these days. Easy to say, hard to define. In today’s age of information-overload, anything you could want to know is a Google search away. But, expertise transcends the ability to seek out and absorb data. Expertise is also a product of commitment, focus and drive. Even with a time machine to squeeze 48 hours into every day, attempting to become an “expert” on every topic impacting your business would be an uphill climb. We’ve learned that while we may know our business inside and out, it’s just as important to surround ourselves with people who know theirs too. And, can break things down in a clear, concise way. That philosophy is what drove us to create Precision Magazine. This collection of articles was developed by our team members, as well as other “experts” who know a thing or two about topics relevant to retirement professionals. In assembling the magazine, we focused on content that is timeless, thorough and provides practical recommendations that you can implement right now. While it’s impossible to fit a complete roadmap for success into 22 pages, we hope you find the articles informative and helpful for both you and your clients. And the best part? Our real-life experts are only a phone call or email away.

Keith Clark, Doug Hoefer and Adam Pozek Partners, DWC ERISA Consultants LLC

TABLE OF CONTENTS 3. Related Companies: Who Is In Control? Adam C. Pozek, ERPA, QPA, QPFC 6. This Is Going On Your Permanent Record Amy E. Ouellette, CFP®, QPA 9. How To Select A Quality Employee Benefit Plan Auditor Christopher E. Etheridge, CPA, CFE 12. The Not-So-Safe-Harbor 401(k) Plan Adam C. Pozek, ERPA, QPA, QPFC 14. We Don’t Need No Stinkin’ Service Agreements! Ilene H. Ferenczy, Esq. 17. The More Things Change, The More They Stay The Same: Timeless Keys To Selecting Plan Service Providers Keith H. Clark 21. Four Marketing Questions To Ask Yourself Rick Alpern

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Related Companies: Who Is In Control? By Adam C. Pozek, ERPA, QPA, QPFC

It seems that businesses of all sizes are more frequently being structured using multiple companies and/or that business owners are acquiring interests in other companies. With the upcoming implementation of the Affordable Care Act, some companies are actively restructuring to stay below the 50-employee coverage threshold. Regardless of the reason, there are complex IRS rules that must be considered when it comes to both the retirement and health benefits being offered to employees.

Background During the mid-1980s, Congress created a series of complex rules that require all companies in a related group to be combined when performing annual nondiscrimination testing on the retirement plan(s). More recently, Congress decided to apply these same rules to determine which companies are subject to the Affordable Care Act. While this requirement can be a limitation, with some careful planning, it can also be used to provide retirement benefits to multiple companies more cost effectively. Before considering some examples, it is first necessary to dive a little bit into the weeds to understand the gist of the rules themselves.

From Company to Individual In a nutshell, this means that a person who owns at least 50% of a business is deemed to own a proportionate share of whatever that business owns. For example, if Fred owns 80% of Bedrock, Inc., and Bedrock owns 40% of Rubble Rousers, Inc.; Fred is deemed to own 32% of Rubble (80% x 40%). There are a number of variations and exceptions, but we did promise to spare you the details.

All in the Family The Tax Code requires that an individual’s ownership be attributed to his/her spouse as well as lineal ascendants and descendants. There are several very important exceptions that require going a little further down this rabbit hole.

•• Attribution between spouses is limited, depending on each person’s direct ownership and involvement in the other spouse’s business.

•• There is limited attribution between parents and

What Is Ownership?

children over the age of 21.

Since these rules are primarily driven by the ownership of the companies involved, it is essential to review some of the nuances of this seemingly obvious concept. First, ownership in this context is more of a generic term that refers to not only shares in a corporation but also to membership in an LLC, partnership interest in a partnership or LLP and composition of the Board of Directors in a not-forprofit organization.

Second, and perhaps more important, there are instances in which the ownership held by one person or entity is attributed to another person or entity. While we will spare you the gory details, it is important to provide an overview of how attribution works.

•• There is no attribution between siblings. •• Attribution may extend only to one generation under certain circumstances, while other times it extends to multiple generations.

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Controlled Groups

Putting It Together

There are two general types of controlled groups (“CGs”), and we will quickly describe each one before considering some examples.

It’s time to look at some examples to pull all this craziness together. Our cast of characters will include Fred, Barney, Dino, Mr. Slate, Wilma (Fred’s wife) and Pebbles (Fred and Wilma’s 18-year-old daughter).

1. Parent/Subsidiary: Exists when one entity owns 80% or more of another entity, e.g. Company A owns at least 80% of Company B.

Example #1 Our characters hold the following ownership in two companies:

2. Brother/Sister: Exists when the ownership structure meets two thresholds.

•• Common Ownership: The same 5 or fewer individuals must own at least 80% of each company under consideration.

•• Identical Ownership: The best way to explain this is via an example. If Jane owns 10% of one company and 5% of another company, her identical ownership among the two is 5%. To meet this threshold, the sum of the identical ownership of those from the first step must be greater than 50%. If you aren’t snoring yet, give yourself a pat on the back. You’re doing better than most!

Rubble Bedrock, Inc. Rousers, Inc.

Identical

Fred 40% 30% 30% Barney 40% 30% 30% Dino 10% 0% 0% Slate 10% 0% 0% Wilma 0% 20% 0% Pebbles 0% 20% 0% Common 80%

60%

At first glance, it does not appear that the same 5 people own at least 80% of both companies; however, once we consider family attribution, Fred’s total ownership in RR is 70% (30% direct + 20% attributed from Wilma + 20% attributed from Pebbles). Together, Fred and Barney own 80% of Bedrock and 100% of Rubble Rousers, making the two companies part of a CG. Example #2 Fred owns 100% of Quarry, LLC, and Wilma owns 100% of Stone Age, Inc.; neither is at all involved in the other’s company. Under one of the exceptions noted above, their ownership would not be attributed to each other, so it appears no CG exists. However, since Pebbles is under the age of 21, she is attributed the ownership from each of her parents, making her the 100% owner of both companies and causing the two to form a CG.

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Related Companies: Who Is In Control? continued Making Sense of It All So, what does all of this really mean? Basically, when there is a controlled group, all of the related companies are treated as a single employer for purposes of the retirement plan (and for determining whether the business has at least 50 employees, subjecting it to the Affordable Care Act). In other words, the employees of all the related companies must be included in the annual nondiscrimination testing. That might sound onerous, but it doesn’t have to be.

make it more cost-effective to do so by creating a single plan covering all of the employees. That means only one plan document to maintain, only one plan to administer and only one Form 5500 to file each year. Through the use of more complex forms of nondiscrimination testing, it might even be possible to provide different benefits to the various companies in the group via a single plan.

Conclusion

Keep in mind that the annual testing compares the benefits provided to highly compensated employees (HCEs) to those provided to Non HCEs. If two companies in the same CG have similar numbers of HCEs and NHCEs, it is completely plausible that the tests would still pass even if the employees of one of the companies don’t receive any plan benefits.

There are many facts and circumstances that can affect CG determinations, and even seemingly slight nuances can be game changers. As a result, it is important to work with someone who is knowledgeable and experienced in this area to assist with the analysis. With some due diligence and careful planning, you can make sure that you are in control of your controlled group.

When the goal is to provide similar benefits to the employees of several companies, a CG relationship can

For more articles on this topic, visit DWCConsultants.com/Precision

CHEAP TECH TOOL #24

Adam is a nationally known writer and speaker and 20+ year veteran of the pension consulting business. He is a partner at DWC ERISA Consultants, where he works with businesses of all sizes and industries from across the country. Google Alerts, www.google.com/alerts?hl=en The Interweb is big, with information lurking in all sorts of dusty corners. We are expected to be up-to-the-minute, but knowing exactly where to look can be a challenge. Maybe it’s news about your largest client or a detail that could help you land that new prospect. How do you find those crucial needles in the Internet haystack? Two words – Google Alerts. This free service from Google allows you to create alerts, delivered straight to your inbox at your desired frequency (from immediately to weekly) when there is a new hit on the world wide web for any search term or phrase you choose. • • •

Track the latest fiduciary litigation about excessive fees. Monitor how, when and where your name or your company’s name pops up online. Find out what’s happening with your largest client so you can congratulate them or come to their rescue.

If you can Google it, you can create a Google Alert for it.

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This Is Going On Your Permanent Record By Amy E. Ouellette, CFP®, QPA

We’ve all heard it; we’ve all been there. “I don’t know where I put it, but I’m sure I can get a copy from [fill in the blank]” followed by a mad flurry of emails and phone calls to past service providers, who may or may not have the information you need. Or, be willing to part with it without a hefty fee. Can you point out in past or present service agreements the clause that says the service provider would maintain plan records, forever and ever, amen? When an auditor comes knocking, or the ghosts of employees past show up with their attorneys, the buck stops with the plan sponsor; it doesn’t matter which way and in how many directions fingers start pointing. That is why it is critical to have a solid plan record retention policy in place. Smaller businesses don’t generally have the resources to maintain a whole department (or even a single, full-time staff member) to dedicate to their retirement plan. So when it comes to the details that seem like minutia, business owners and their HR professionals can see their plans as just more paperwork. We, on the other hand, are in the business of producing reports with test results, running calculations and helping maintain plan compliance. We know those tests and numbers don’t mean much to the business owners; they just need to say “Pass.” And that’s okay – as long as those employers have a system in place to store, organize

and maintain all that paperwork showing not only the tests but also the details behind them. It’s not just the annual compliance reports that need to be maintained, however. The law requires that plan sponsors maintain all records that confirm the plan has been run properly, document all information reported on the annual Form 5500 filings and support the benefits provided to all plan participants and beneficiaries. This includes employment history, payroll records (both of which should generally be retained for other business purposes) as well as plan financial statements from recordkeepers and custodians. Of equal importance are plan documents. Specifically, signed copies of all plan documents, amendments, resolutions, etc. should be retained with other plan records and be readily available. After all, one of the first things an auditor usually requests is a complete set of timely executed plan documents. Remember, if it isn’t signed, it hasn’t been legally adopted. So what records must a plan sponsor keep to prove the plan is being properly run and the correct benefits given to participants? Essentially, almost everything but the proverbial kitchen sink. Here is a partial list.

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This Is Going On Your Permanent Record continued 1. Basic plan information, including:

•• Properly executed plan document(s), amendments, and/or restatements, including company resolutions adopting each;

-- Any draft copies that are kept should be clearly

opt-out elections;

•• Election forms for choices such as deferral amount, investment direction, beneficiary designation, and distribution request; and

•• Transactional history of contributions and

labeled as such.

•• Minutes of company meetings discussing adoption or amendment of plan details (including the reasons for such changes);

-- Pertinent notes regarding decisions to implement or change plan provisions can be helpful if changes are questioned.

•• Timing and details of statutory/regulatory changes operationally implemented prior to being memorialized via an amendment or restatement of the plan document;

•• Participant communications, including summary plan descriptions, summaries of material modifications, educational materials, required notices, etc.; and

•• IRS Determination, advisory, or opinion letter(s) for all plan document(s). 2. Employee/participant information, including:

•• Personal details, including name, social security number, date of birth and marital/family status;

•• Employment history, including hire, termination, and rehire dates (as applicable), and termination details (e.g. voluntary or involuntary discharge, death, or disability);

•• Compensation and hours history used to determine eligibility and calculate contributions;

•• Officer and ownership history and familial relations; 7.

•• Details of employee exclusion or employee

distributions. 3. Financial reports, including:

•• Statements from the trust, custodian, brokerage accounts, and/or bank accounts which reflect deposits, withdrawals, income, fees, and other transactional activity;

•• Documentation that such accounts are properly maintained as plan accounts (not company or personal);

•• Certified audits and/or appraisals depending on plan size and type of assets held;

•• Distribution records including withholding and Forms 1099-R; and

•• Reconciliation of deposits to deductions taken on company tax returns. 4. Proof of the fidelity bond covering the plan. The regulations specify minimum time frames to keep some of this information available. But other pieces are considered “indefinite” keepers. For example, all documentation supporting the information reported on Form 5500 must be retained for 6 years from the date the form is filed. That means that a calendar year plan that files its Form 5500 for the 2013 plan year on the latest possible date (October 15, 2014) must keep supporting records on hand until at least October 15, 2020. Plan documents, on the other hand, should be part of the employer’s permanent record.

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As unwieldy as this may seem, a record retention policy does not necessarily have to be complicated. Most of the information we send and receive these days is electronic, and electronic records are much easier and cheaper to maintain. Of course, not all records may be electronically stored. While electronic copies may serve as back-up records, sponsors must maintain originals of documents that cannot be converted to legible and accurate electronic form, or if the physical copy has significant value (e.g. legal documents with seals or notary stamps). It is also important to review storage media from time-to-time to ensure it keeps pace with the rapid evolution of technology. It wasn’t that long ago when CDs were considered the newest and safest backup media. Now, many new computers do not even come with a CD drive at all. While it might seem long-term record-retention only accomplishes cluttering your file cabinets (real or virtual) with information that is not “your business,” consider this: it is much easier to create a system or a habit to organize and maintain proper records than it is to spend even more hours hunting for information while under pressure from a government auditor or a plaintiff’s attorney.

Guidelines for Electronic Storage While electronic storage can seem like a simpler solution, there are a few important points to keep in mind when verifying that electronic records are compliant. An electronic system must:

•• Be maintained with controls in place to ensure accuracy and authenticity of the records;

•• Be able to index, retain, preserve, retrieve, and reproduce the records in a safe and accessible place;

•• Be able to convert the records to legible paper form;

•• Not impose access restrictions (e.g. time or location) that would impair an individual’s ability to comply with reporting and disclosure requirements of ERISA; and

•• Be adequately secured, organized, backed-up and maintained by established procedures. For more articles on this topic, visit DWCConsultants.com/Precision

For over a decade, Amy has worked in the financial consulting industry and currently serves as a Director at DWC ERISA Consultants. She is active with ASPPA (American Society of Pension Professionals & Actuaries) and was awarded their Academic Achievement Award in 2010.

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How to Select a Quality Employee Benefit Plan Auditor By Christopher E. Etheridge, CPA, CFE

Generally, benefit plans with 100 or more participants on the first day of the plan year are required to have an audit performed annually in conjunction with the filing of Form 5500. In accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Department of Labor (“DOL”) requirements, the Plan Administrator must hire an independent qualified public accountant (“IQPA”) and ensure the plan has obtained a quality audit. Employee benefit plan (“EBP”) audits represent a critical portion of the many audits performed by CPAs each year. Unfortunately, many of these plan audits are deficient. Since any deficiency can lead to DOL rejection of the Form 5500 and assessment of penalties against the plan sponsor, employers need to know that their IQPA is actually qualified to perform this type of work. In other words, the responsibility of selecting a qualified IQPA represents a significant risk to plan sponsors, requiring that high priority and due care be exercised during the selection process.

DOL Guidelines During the reviews, the DOL identified certain factors that it believes contribute to whether plan audits comply with professional standards and generally accepted auditing standards (“GAAS”), including:

•• Size of the firm performing the engagement; •• Adequacy of technical training and knowledge on the part of the IQPAs;

•• IQPA’s awareness of the uniqueness of plan audits;

•• Whether IQPAs have established adequate quality review and internal process controls; and

•• Extent of audit work performed by the IQPA.

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Since 1992, the DOL has performed multiple studies to assess the quality of audit work performed by IQPAs. The DOL reviewed the audit programs and workpapers for various firms to determine compliance with established audit and accounting standards. The results have not been favorable. As a result of the findings, the DOL has referred hundreds of practitioners to the American Institute of Certified Public Accountants (“AICPA”) Professional Ethics Division and/or the State Boards of Accountancy for potential disciplinary action due to deficient work.

The following are questions to ask a current or prospective EBP audit firm to assess the quality of their work. Is the firm a member of the AICPA Employee Benefit Plan Audit Quality Center (“EBAQC”) and to what other professional organizations does it belong? The EBAQC was established to help CPAs meet the challenges of performing quality audits in this unique and complex area. Compliance with rigorous standards and practices specific to EBP audits, including establishing a program to ensure that all plan audit personnel possess knowledge of such standards and practices, is central to the EBAQC. A good firm will also have memberships in organizations such as American Society of Pension Professionals and Actuaries (“ASPPA”) and Worldwide Employee Benefits Network (“WEB”) as well as established professional relationships with attorneys, actuaries and consultants, within their local benefits community. What percent of the audit practice is comprised of EBP work? It is helpful to know how much experience the firm

has in auditing benefit plans and how many plan audits they have performed in the last two to three years. One of the most common reasons for deficient plan audits is the failure of the auditor to perform tests in areas unique to EBP audits. Consider an audit firm that views employee benefit plan audits as a core industry (not as “summer work”) with regard to both practice management and scheduling decisions.

What is the size of the audit firm? The DOL noted a correlation between the size of an IQPA firm and the probability of audit deficiencies. Most notably, firms with 20 or fewer employees were responsible for almost two-thirds of the deficient audits reviewed. Many firms utilize their staff as both tax and audit professionals, meaning the staff perform tax work during tax season and then perform employee benefit plan audits during the summer. A good firm will have professionals whose sole focus is on audit matters and standards. An even better firm will have audit professionals specifically devoted to EBP audits. When a firm has invested resources in full-time, dedicated EBP quality control specialists, their clients’ needs are better served. Have the firm’s plan audits undergone an AICPA peer review or review by the Public Company Accounting Oversight Board (“PCAOB”) or the DOL? Firms belonging to the AICPA are required to have their practice reviewed by an outside CPA firm every three years. The plan sponsor should inquire as to how many EBP audits were selected in the review process and the outcome of the reviews. Ask to see the Peer

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How to Select a Quality Employee Benefit Plan Auditor continued Review report letter to confirm a rating of “pass.” Firms that audit public companies which file a Form 11-K with the SEC are subject to inspection by the PCAOB. Finally, the DOL may perform various levels of review of plan audit workpapers. Ask to see the results of such reviews.

practice guidelines. A good firm will have a section of the QCD specifically related to plan audits. It should state who is responsible for quality control, specify continuing education requirements, and designate the firm leaders for the EBP practice.

Does the firm have in-house ERISA expertise to assist in resolving compliance issues, or do individuals outside of the group have to be consulted?

We recommend that all audits be reviewed by the engagement partner and an independent quality control reviewer (with expertise in plan audits) prior to issuance.

EBP teams should have experience with qualified plans, welfare benefit plans and 403(b) plans. This experience is evidenced by a solid understanding of ERISA, DOL and IRS compliance requirements including correction of plan defects and reporting and disclosure. Having this industry-specific knowledge in-house facilitates effective and efficient collaboration with the plan’s other service providers to timely resolve any issues encountered during an audit. How thorough is the firm’s training program, and how does the firm keep current with changes in laws and regulations? One of the basic tenets of GAAS requires that IQPAs possess adequate technical competence to complete the engagement, and every CPA must complete a certain amount of continuing education each year to maintain their professional license. Audit teams should receive intensive training each year, including specialized training for EBP audits. What are the firm’s internal processes used for quality assurance? Every firm should be governed by a Quality Control Document (“QCD”), which states the day-to-day

The DOL notes that firms which performed grossly deficient work had not implemented an adequate system of internal quality control. What are the key areas of the firm’s audit work and what will be examined during the audit? Frequently, audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to benefit plans such as participant data, plan obligations, participant loans, benefit payments and party-in-interest/prohibited transactions. An auditor with limited EBP experience might not be aware of the significance of these areas. In summary, it is the plan sponsor’s fiduciary duty to ensure that a quality audit is performed and that the Form 5500 is complete and accurate. These inquiries, directed to the current or prospective IQPA, should assist the sponsor in prudently selecting a quality auditor. To search for EBPAQC Member firms, visit DWCConsultants.com/Precision

Chris is a partner in the CPA firm of Frazier & Deeter, LLC where he heads up the firm’s employee benefit plan audit practice. He is his firm’s representative on the AICPA Employee Benefit Plan Audit Quality Center and a member of the Georgia Society of CPAs Peer Review Committee. To learn more about Chris and his firm, visit www.FrazierDeeter.com.

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The Not-So-Safe-Harbor 401(k) Plan By Adam C. Pozek, ERPA, QPA, QPFC

Mandatory Safe Harbor Contribution One of the fundamental requirements of SH plans is that the employer is required to make either a matching or non-elective contribution on behalf of eligible non-highly compensated employees, and the formula must follow what is written in the plan document. This means no cutting back during slow economic times and no trueing-up matching contributions for owners who front load their deferrals when the plan calls for a pay period match.

The Safe Harbor (“SH”) 401(k) Plan can be an effective tool to allow business owners to maximize their benefits; however, it comes with a few strings attached. Recently, the head of the IRS plan audit division announced that it has come to IRS attention that a number of Safe Harbor 401(k) plans may have gotten some of those strings tangled and that they are planning an audit initiative to investigate the matter. Right about now, you may be asking, “So, what? SH plans get a free pass, what compliance issues are there to worry about?” The reality is that while Safe Harbors do provide a free pass on the ADP test and sometimes the ACP test and top-heavy requirements, there are other rules that can actually be more stringent than those that apply to regular plans. Let’s take a look.

The Safe Harbor rules require contributions to be deposited no later than the last day of the year to which the contributions relate, e.g. December 31, 2013, for the 2012 Safe Harbor contributions. However, for SH match plans that calculate the match each pay period (or on any frequency other than annually), the match must be deposited no later than the end of the quarter following the quarter to which it relates. Deposits made after these deadlines represent compliance failures that can subject the plan to penalties.

Top Heavy Minimum Contribution Generally speaking, SH plans are deemed to satisfy the top-heavy requirements that could otherwise require a plan sponsor to make additional contributions for employees. A common misperception is that this is absolute. There are some common fact patterns in which a top heavy contribution may still be due. Consider two quick examples.

•• A top heavy plan provides for immediate eligibility to make deferrals but requires a waiting period for SH eligibility. Those eligible to defer but not to receive the SH contribution are not covered by the top heavy relief, so the employer must make the 3% top heavy contribution for those short-service employees.

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The Not-So-Safe-Harbor 401(k) Plan continued •• A top heavy SH plan includes a profit sharing provision. The top heavy relief is conditioned on the only contributions being deferrals and SH contributions. If the plan sponsor makes a profit sharing contribution, the relief is lost for the entire plan.

Amendments

These issues typically arise with SH match plans when participants who defer less than 3% of pay don’t receive an employer contribution of at least 3%. However, there can be issues even with higher deferral rates and with SH non-elective plans. The reason is that plans can use alternative definitions of compensation, e.g. compensation from an employee’s eligibility date, to calculate the SH contribution, but the top heavy contribution is required to be calculated using full-year compensation.

When amending SH plans, timing is critical. A few years ago, the IRS published guidance indicating that it is ok to amend a SH plan mid-year to add a Roth feature or to provide for hardship distributions. Some interpreted this as being a partial list and believed that other types of changes were also permitted as long as they made the plan more generous. However, the IRS has since “clarified” that the guidance on adding Roth and hardships is pretty much an exclusive list, meaning that no other changes are permitted once the year begins. No accelerating eligibility requirements; no increasing the deferral limit or adding catch-up contributions; no changing your safe harbor match from pay period to annual. Nothing.

Forfeitures

Conclusion

Most plans allow the use of forfeitures to offset company contributions. Unfortunately, that does not apply to SH contributions. The reason is that IRS rules require the SH amounts to be fully vested when contributed to the plan. Since forfeitures result from non-vested balances, such amounts couldn’t have been vested at the time of contribution.

The SH design works well for many companies; however, there may also be other designs that are equally as effective without all the additional rules.

Forfeitures can usually be used to pay certain plan expenses, but there is a bit of a conundrum when forfeitures exceed those expenses. A separate set of rules requires any forfeitures remaining at the end of the year to be allocated as additional contributions. If a plan with leftover forfeitures is top heavy and those forfeitures must be allocated, it can trigger additional top heavy contributions as described above. Quite the tangled web of overlapping rules, I know, but those are the rules nonetheless.

To those who might be tempted to skip the annual compliance review on a safe harbor plan, please be reminded of the adage that an ounce of prevention is worth a pound of cure. The IRS may be coming to a safe harbor plan near you. Avoiding problems is certainly preferable, but fixing any problems on your terms is much better than waiting for the IRS to show you that your safe harbor plan isn’t quite as safe as you thought. For more articles on this topic, visit DWCConsultants.com/Precision

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We Don’t Need No Stinkin’ Service Agreements! By Ilene H. Ferenczy, Esq. Um, yes you do. While many of us have great relationships with our clients – many may be real life friends and not just business acquaintances – you need to operate your business in a way to maximize its success. There are many reasons why a service provider to a retirement plan should have a good written service agreement. In fact, if you don’t have one, you are really flying blind.

Hey, You Were Supposed to Do That! If you are a service provider to a plan, you are under contract. That contract may be written or oral, but when you were hired, a contract was legally formed. If it was an oral contract, then neither you nor your client is sure of the terms. They may think you are doing many, many things that you think are not in your wheelhouse. If they sue you for nonperformance, the judge and jury are likely to hold you, the professional, liable for not being clearer about the scope of your duties.

engagement and the cost of any review of prior work you may perform. It can outline that you are allowed to rely on what the client tells you about plan issues without a requirement to look deeper into the data. Even more importantly, the agreement can talk specifically about services you do not perform. The agreement can clarify whether you are or are not a fiduciary, that you provide investment advice only to the plan and not to the participants, and that you do not offer legal or accounting services. This has real value. One TPA was sued by participants who said it had become a de facto fiduciary through its actions and owed them a duty of communication regarding plan issues. Besides evaluating the services the TPA actually performed, the court looked to its engagement agreement, which specifically provided that it was not a fiduciary and that it did not communicate with plan

A written service agreement, on the other hand, makes it evident what you do and don’t do, thereby clearing up any confusion on the client’s part.

OK, That’s One Reason to Have an Agreement. Are There Other Reasons to Do It?? Absolutely. A written service agreement can benefit you in many ways. Below are some general things that service agreements can do.

1. Limit your exposure to liability Besides ensuring generally that your client is informed about the service you provide, a written agreement can outline your responsibility for specific tasks. For example, when you take over work for an existing plan, it can clarify what responsibility you have for the accuracy of work done before your

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We Don’t Need No Stinkin’ Service Agreements! continued participants. The court found that the TPA was not a fiduciary. Similarly, a TPA we know has been sued in connection with investment-related issues despite the fact that it never provided investment services to a client. Even if you are not a TPA, the point is that the terms of the written service agreement can significantly impact the outcome of such suits.

2. Control Client Expectations

You may contractually limit your liability in a service contract. Some service providers limit the type of liability, such as the kind of damages for which they can be sued (e.g., no punitive damages, no consequential damages), while others limit the dollar amount that the angry client can recover contractually (e.g., limited to the errors and omissions policy maximum or to X times annual fees charged).

Part of these expectations has to do with what you will charge the client. ERISA Section 408(b)(2) and its regulations require disclosure of certain charges from some service providers. However, if you are a nonfiduciary, you are likely subject to Section 408(b) (2) only if you receive revenue sharing or other indirect payments. Nonetheless, clients expect you to charge a certain amount and, when your fees are significantly higher, dissatisfaction ensues. A properly drafted service agreement, with a complete and understandable fee schedule, will set those expectations correctly. Furthermore, it will help you if you need to initiate collection efforts against a nonpaying client.

You may control the location and type of action a dissatisfied client can take against you. For example, you can require the client to sue you in the courts closest geographically to you, rather than where they are located. This will reduce your litigation costs, and will also ensure that they cannot “hometown” you with local-business-friendly judges. You can require mediation or arbitration in lieu of a lawsuit. You can also outline a dispute procedure for resolving the problem with your client prior to involving the courts or outside argument solvers. A service agreement may contain indemnification clauses, under which the client is required to pay for your time if a participant, government agency, or other outside person sues you or wants you to provide information or testimony in relation to a plan issue. Without this protection, if you receive a subpoena for records, you will likely be required to pay the costs of providing those out of your own pocket.

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It is not unusual for a client’s expectations as to your services or their obligations to be out of whack. A properly drafted service agreement will outline your mutual responsibilities, so that clients will know what they need to do and what to expect from you. This tends to lead to happier clients.

You will find that many of your “billing problems” are really client expectation problems. Clients think you will be cheaper than you are or do not realize that you will be billing for certain tasks. When client expectations align with reality, the billing problems will generally become more manageable. You will always have a client or two that hits hard times and can’t pay; but you will have fewer clients who are failing to pay because they are angry.

3. Intangibles Having a service agreement also helps reinforce to your client that this relationship is important and that the plan and its management are not throwaways. If you are great at providing service, then it is likely that your client thinks that what you

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do is easy. A service agreement can show that what you do is extensive and difficult and the fact that it appears so easy is attributable to your amazing expertise. You can also find out upfront, to some extent, who is going to be a cooperative client. If a prospective client does not want to enter into a written agreement with you, you have to ask yourself: why not? What is in that agreement that the client doesn’t like or will refuse to do? If the agreement cannot be tailored to meet the client’s needs and concerns, perhaps you’re not the right provider for him or her.

Won’t My Clients Be Offended That I’m Insisting That They Sign an Agreement? Again, ask yourself: why would they? They sign agreements with their lawyers and their CPAs; they sign purchase orders for those that provide them with supplies; they likely have some kind of written agreement with their own clients. What is it about you and your services that are undeserving of a formal contract?

Furthermore, everyone’s memory of what was said tends to get a little blurred by subsequent events. If all you have to show regarding the agreement is your best recollection of a five-year-old conversation, chances are that your client’s best recollection will be different. That’s just life.

We are in a service business. The exact nature of the service we provide can be a little hard to pin down, and people’s expectations of what we do can be very different than reality. You need to protect yourself from misunderstandings or being blamed for things that are not your responsibility by having a written agreement with your clients. It’s just downright risky not to.

Remember also: business is business, even with friends If your client perceives that you have cost him thousands or more through your error or omission, he or she may have no choice but to sue you for those damages. How many people do you know that would take a large loss that he or she would perceive was your fault without asking for the money back? Even if it is painful personally, the client may have no choice but to seek legal recourse because he/she cannot afford the loss that was sustained. Ilene Ferenczy is a partner in the law firm of Ferenczy + Paul, LLP, a boutique firm specializing in employee benefits law and working with plan sponsors and service providers. She is the author of numerous books including Employee Benefits in Mergers and Acquisitions, the co-editor-in-chief of the Journal of Pension Benefits with DWC’s Adam Pozek and has worked with many providers to update their service agreements to comply with the DOL’s fee disclosure regulations. To learn more about Ilene and her firm, visit www.FerenczyPaul.com.

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The More Things Change, The More They Stay The Same: Timeless Keys to Selecting Plan Service Providers By Keith H. Clark

Our industry has experienced a lot of change in the last 30 years – from service models to systems to sales pitches. Back in the late 1980s, delivering hard copy participant statements 120-180 days following the end of the year was the gold standard. In fact, in the days before mutual funds, delivery of participant statements in any shorter timeframe was considered remarkable. As the trend shifted to quarterly reporting, some providers emphasized the ‘cool factor’ of their participant statements; others, the ability to customize reporting at the plan sponsor level; still others emphasized lower costs and stuck with a ‘just the basic facts’ model. As an adjunct MBA professor, I have always found the “art of the defined contribution sale” to be an interesting case study. In the 1980s, service contracts were far shorter and the key provider contact was typically from the investment department of a large, national financial institution or insurance company. Today, a vast majority of plans, regardless of size, work with an investment professional. Any plan sponsor representative responsible for selecting or recommending new providers is most likely contacted well over 50 times a year (or more depending on the effectiveness of the SPAM filter). Here are a few of my favorites from the walk down sales memory lane. Search Consultants – These consultants offered to help plan sponsors wade through the process of vetting and selecting service providers. Some recused themselves from the list of candidates, instead including only those providers with a proven track record of success. Others would throw their hats (or those of an affiliated company) in the ring and stacked the deck with other “finalists” that were obviously not a good fit in order to ensure a desired

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outcome. Both types had a favorite tool of the trade – the Request for Proposal or RFP – which was 500 pages (slight exaggeration) of Q&A drudgery for the candidates who wished to be considered. Some of the RFP “classics” included the now infamous Y2K preparedness questions, inquiries into number of clients lost in the last three years (no, the real number, not just the ones lost to acquisitions), and the all-encompassing “please describe your systems” (for the tech savvy in the group). Advisor vs. Broker – Simply put, the investment advisor charges a fee for service and a broker is paid a commission. Typically, both are paid from plan assets, either as a direct charge (in the case of an advisor) or via fees built into the underlying investment option (in the case of a broker). Brokers could claim they didn’t “charge extra” beyond the fund expenses, but the advisor could highlight the ability to provide unconflicted advice. DIY Websites – These sites tried to be a one-stop shop by collecting RFP-type responses for many providers who subscribed to the service so that sponsors could do their research and make their choices all in one place. Unlike travel sites, however, these sites didn’t provide discounts, so once the research was done, sponsors, like travelers, were free to go directly to the providers to negotiate the best deal. And how about some of those sales pitches that have been around forever. The entire process is seamless. – With thousands of pages of fine print governing this business, there are bound to be occasional bumps in the road, no matter how seamless anyone tries to make it.

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We are proactive. – I have yet to find a service provider that says they are not proactive, but I’ve seen many who don’t follow through on it. Our services are free! You don’t have to pay a penny. – Really? Who works for free? The plan sponsor might not be writing a check, but there is a cost. And, since the business owners usually have the largest plan accounts, they are paying a larger dollar amount of the total fee; they just don’t see it. With fee disclosure, wasn’t benchmarking supposed to be easier? I don’t know what is shorter, the healthcare bill or the service provider fee disclosure documents. As the 401(k) plan evolved, so did the reasons for changing service providers. We’ve gone from annual valuation to daily valuation; from single fund platforms to open architecture recordkeepers; from hard copy deferral and investment elections to selfserve websites and live participant call centers. And don’t forget revenue sharing, another tool often used to sell that “free” 401(k) plan.

CHEAP TECH TOOL #35

Getting to the point of the article, if you or your client is looking to hire a new service provider, the secret to successful selection boils down to a few key

characteristics. Whether it is an investment advisor, recordkeeper, TPA/consultants, attorney, accountant, etc., if the provider possesses these traits, chances are good they are an organization with whom you want to work. Ethics – This may be the most important factor to consider. Why? Because an ethical service provider understands the necessity of the other factors in this list if he/she is going to be in business. So, what do we mean by ethics? We think of it as doing the right thing even when there is a slim chance of getting caught. Consider a couple of common examples:

•• Magic Amendment – Unlike disappearing ink, the magic amendment has ink that magically appears in the form of a signature when an auditor asks about a missing document. Keep in mind that retirement plans afford substantial tax benefits to those who play by the rules, including maintaining timely executed documents and amendments. Backdating an amendment essentially amounts to tax fraud. Yep, the same thing the Feds used to finally bring down Al Capone (the fraud part, not backdating his 401(k) plan). It might sound like a reasonable solution to a short-term problem, but the long-term ramifications can be quite

JoliDrive, www.JoliCloud.com Just like moving into a new house, the more space we have, the more likely we are to fill it…and then promptly forget where we put things. From cloud storage to social media and many places in between, the information super highway is no different. Enter JoliDrive to save the day. Use their website to create an information super dashboard that gives you instant access to all your online spaces. JoliDrive has cloud storage covered with preconfigured links to DropBox, Box.net, Google Drive, SkyDrive and SugarSync. Social media? Just a walk in the park, with links to Facebook, Google+, YouTube, Instagram and Flickr. Visit the site to see the myriad other links you can use to create your very own mission control. By the way, it’s absolutely free.

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The More Things Change, The More They Stay The Same: Timeless Keys to Selecting Plan Service Providers continued

ugly. An ethical service provider looks long-term and advises clients to take advantage of the IRS voluntary correction program rather than trying to be the next David Copperfield. After all, a provider’s magic tricks frequently result in the plan sponsor’s liability.

•• Missing Loan Payment – Sometimes a participant misses a payment on his/her plan loan. If not discovered and corrected on a timely basis (usually 4 to 6 months), the outstanding balance is taxed as a distribution. Sure, a provider might suggest quietly fixing it after the fact and not reporting it, because no one will ever be the wiser. But again, that short-term thinking puts both the plan and the participant at risk. Is it really prudent for a sponsor to jeopardize the entire plan by hiding one participant’s tax liability? Ultimately, the plan sponsor must make the decision, but an ethical provider will explain the options – pay the tax, use the IRS voluntary correction program, etc. – and

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discuss the pros and cons of each rather than giving an easy answer with potentially harmful long-term results. Another reason to work with ethical providers is that they will take responsibility for their mistakes. When vetting providers, consider these questions: Will they stand behind their work or point a finger? Does their service agreement limit their liability to a multiple of their annual fee or will they cover the cost to make it right? Focus - Ask the service provider what portion of their business is related to retirement plans, and then go to the website for verification. If you don’t see retirement plans mentioned or they are discussed only in passing, chances are good the provider is not a specialist. Experience/Expertise - Anyone can have multiple degrees or credentials after their name, but what is more important is whether they are able to apply

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that book knowledge. Several important questions include how long an individual has been in the industry and/or with their current company. Here are a few topics to consider when assessing a provider’s expertise and experience:

•• Failed ADP/ACP Test – Ask the best way to correct a failed test. If the immediate response is to adopt a safe harbor plan, you may be getting the easy answer. The fact is that there are several options (some of which are less expensive and come with fewer strings attached), and it’s impossible to know which is best without first learning the specifics. Same thing in dealing with a top-heavy plan.

•• QDIAs and 404(c) – Ask if these items are mandatory. Less experienced providers may say “yes;” however, that isn’t the case. Often, both are preferred for the fiduciary protections they offer,

but there are other options that may be more prudent given the circumstances.

•• Late Deferrals – Sometimes, an employee’s 401(k) contributions aren’t processed properly. This could be the result of different types of oversights, which may have substantially different corrections and disclosure requirements. An experienced provider will get the facts to determine exactly what happened before suggesting a fix. My humble recommendation is to hire providers who will be trusted advisors and not just vendors; providers who are knowledgeable, ethical, and have a strong track record in the defined contribution field. Anyone can say they possess these qualities - the key is to ask the pertinent questions and compare the answers.

CHEAP TECH TOOL #6

Keith has more than 25 years of academic and practical experience in the employee benefits industry, and is one of the founding Partners of DWC ERISA Consultants. A well-known author and keynote industry speaker, he also serves as an adjunct professor at the University of Minnesota, Carlson School of Management.

Uber, www.uber.com Maybe, you’re headed to the airport after a busy day of meetings and don’t want to risk a cab with a brake-pedal-challenged driver or a creative air freshener. Maybe, the situation calls for a little more polish than a taxi but not quite the stretch limo treatment. Never fear, Uber is here. This handy, dandy, free app for your iPhone or Android device lets you arrange the perfect transportation for the occasion in many major cities around the world. Create your account, add your credit card information and just like that you have access to everything from a Prius to a sedan to an SUV or luxury vehicle. Adjust the on-screen slider to select your vehicle type, and Uber will tell you how long it will take the closest driver to arrive. The fare, calculated using a combination of time and mileage, is automatically charged to the credit card on file. No hassling with payment at airport drop-off, and gratuity is included. Need to split a fare? The app can handle that too. Even better, the price of a town car-type sedan is usually pretty close to what you would pay for a taxi.

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Four Marketing Questions To Ask Yourself By Rick Alpern

You’re busy. I get that. There are clients to see and things to do. But at some point, you might want to stop and ask yourself these questions. Questions you have likely asked before.

This exercise is often a wakeup call for many of our new clients. They are astounded by the lack of consistent answers. Their “Instant Image” is often different among their employees as well clients.

These are what I like to call, “easy-to-ask, butsometimes-hard-to-answer” questions. Most, if not all, of these here should be discussed and hashed out with key personnel in a formal setting so that you are making solid choices founded in as much fact as possible. Do not do this on your own. I am fairly certain that you are always looking for content for your staff meetings. Well here is enough for at least two of them!

2. “Where do you want to be three years from now?”

1. “When our current or potential customer thinks of our company, what is the first thing that probably comes to mind?” Try this exercise: Cut and paste 10 iconic brand logos down the left hand side of a sheet of paper numbering them 1-10. In the 11th and 12th positions add in your logo. Then, pass out the sheet to the group and ask them to write down the first thing they think of when they see each logo. If you use truly iconic brands, you should get a lot of similar answers. For example, when most people see the Volvo logo, they immediately think “safety.” A majority of people think “overnight delivery” when they see the FedEx logo. You get the point. When it comes to your logo at number 11, ask your staff the same question: What is the first thing that pops into your mind when you see your company’s logo. Odds are you will get a plethora of answers. At number 12 ask your staff to write down what they think is the first thing that pops into a potential client’s mind when they see your logo. Again, you will likely get multiple answers.

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Before beginning our brand development process with clients, we spend quite a bit of time with leadership trying to get as specific as possible. We ask questions, discuss and come up with three to five solid, MEASURABLE metrics. This is so important. Before you charge off and start trying to position or rebrand your company, it is imperative to know where you are trying to end up. Knowing where you want your company to be in a few years acts as a guide or kind of a gut-check when making brand decisions. It can help you answer other questions like, “If I go after this type of customer, does it help get me to where I want to be in a few years?” Or, “If I position my company in a particular way, does it help us reach the goals I’ve set for three years from now?” Do not fall into the trap of saying you want your company to be “bigger” or you want to be thought of as the industry leader. These are vague and often nebulous descriptives. Be tough on yourself. Make the goals measurable and definable. The more specific you can be, the better. 3. “Who is my target customer?” If you answer, “everyone,” you may be right … but you are also wrong. You likely want anyone to be a customer … to pay money for your services. But you need to focus in on speaking to a core target customer. This will allow you to tighten your messaging because you will know exactly who you are trying to appeal to. Don’t worry about being too targeted. If you are focusing on the right customer, your core customer, it is very likely that

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the messaging you craft will also resonate with your secondary and tertiary customers. To crystallize your core target customer, list out all the descriptives you can think of. The longer the list, the better. And don’t worry about political correctness. Again, doing this in a staff meeting will yield the best list. Once the list is complete, start eliminating the less important descriptives and cut the list to five descriptives that paint a clear picture of your core target customer. This exercise gets more difficult as you narrow the list. But it also generates great discussions about what is important and what is not. You may be surprised how helpful this is both from a marketing and sales perspective. 4. “What benefits do my core target customer look for when choosing a company like mine?” There are likely a number of reasons why your core target customer buys from you. List all of them out. Prioritize the top five. Now look at your competition and try to estimate who does the best job at delivering each of these top five benefits sought by the core target. Where does your company rank in delivering on these top five benefits sought? Is there a benefit sought that your company can own in the mind of the core target? Can you position the benefit in such a way that it is memorable or sticky? There are lots of examples out there. Miller Lite did an amazing job of owning two highly sought after benefits by their core target. Their core wanted true beer flavor and did not want to feel bloated after a few cold ones. I’m sure their (super sticky) tagline already popped into your head: “Tastes Great. Less

Filling.” You will remember it forever. This works for financial companies too. Charles Schwab’s “Talk to Chuck” positioning did a terrific job of letting core customers know that Schwab had evolved into far more than a transaction-based, low-cost alternative. OakPath, a small, private investment advisory firm located in Northbrook , Illinois has a memorable tagline that smartly positions their company on a key benefit sought by their core target: They desire to retire with enough money to live well. Their tagline: “Retire Ready.” It is short, memorable and spot on. I mentioned at the beginning of the article that these are, “easy-to-ask, but-sometimes-hard-toanswer” questions. And, the questions will lead to other questions. But the answers will produce better marketing strategies and tactics. And that will generate more sales.

For over 25 years, Rick has worked in the advertising, sales and marketing fields and currently serves as President of Single Source Marketing in Danvers, Massachusetts. He is an avid believer in asking questions and listening to clients in order to achieve the best results. Visit SingleSourceMarketing.com for more information.

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Strategic Guidance. Expert Solutions. DWC ERISA Consultants provides third party plan administration, compliance and consulting services for qualified retirement plans, helping businesses across the country navigate today’s complex regulatory environment. With decades of experience, critical thinking and exceptional service, DWC combines strategic solutions with flawless execution. We tailor our services to match the needs of each individual client. We are skilled at working in tandem with any external resources you choose, but can also help assemble the team. For us, it’s about developing an efficient, effective workflow that delivers the level of service you and your clients deserve.

“DWC has served Acropolis Investment Management’s 401(k) clients skillfully. They are brilliant plan design consultants … exhibiting the highest level of integrity, professionalism, knowledge and timeliness.” – Debra Moran, MBA, QPA, QKA Acropolis Investment Management

DWCConsultants.com | 651.204.2600 | Founded in 1999 | Over 700 clients nationwide