On-Demand: Wealth Management Webinar Series – Part II

So with that, we'll move in and I will say to you that you're free to ask questions throughout the presentation, but we will be, at the end of the presentation offering you an opportunity to ask questions at that point in time. Your choice though guys, if you want to ask in the middle, feel free to, but we will be having specific time at the end for that. So let's go into the consultative retirement planning services idea.

What you're seeing here is something that we call the CARE wheel. CARE is an acronym we've trademarked, which stands for the Corporate Advocacy Retirement Experience. There are many different cogs within this wheel, as you can tell by the infographic that you're looking at here. It might be emerge as an acquisition issue. It could be a plan design issue, plan administration, ongoing education, fiduciary review, documents, and vendor management.

So the amount of energy and service that goes into the 401(k) process is significant and if you are a business owner, a plan sponsor, and let's say you make widgets, you know everything there is to know about widgets, but when it comes to managing a 401(k) plan or a corporate retirement plan effectively it's a bit daunting. And unless you have expertise in this space, it does make sense to work with entities that ultimately have the type of experience to help you manage all of the various parts that you see listed within the CARE wheel.

Why offer retirement plans? Well, couple of big reasons. They SEP up a platform and methodology for accumulating funds for retirement, right? It will help you attract and retain better employees. They come with tax benefits, deductions and deferral of income, right? Corporate deductions and individual deferral of income. They provide an asset protection element for those who operate in high risk professions, doctors, lawyers, those kinds of entities ultimately do have some additional risk and these kinds of plans can help protect to that end.

Introduction to retirement plans, types, examples, considerations. This is going to be a fair amount of stuff we're going to go through. So let's take a peek first. Before we do that, actually, let's take a quick poll, all right. Just for a little bit of interaction so that I'm not the only one speaking here for the next 45 minutes to an hour, I'm going to ask you guys a question and give you some time to answer it. So what are the two categories of retirement plans? So please feel free to select here, 401(k), define contribution plan, define benefit plans, B and C. We'll give you some time to select that and see what kind of audience participation we capture from you. We'll wait just a little bit longer for a couple of other people to submit. Don't be shy. This is not a graded test. It's just so that we get some interaction within the presentation. So feel free to take a step. We're almost at 50% of attendees. I'm just going to give it a couple more seconds while you guys continue to click on.

All right, let's take a look at results. Let's see what we get out of this question. So what are the two categories of retirement plans? 9.1% say 401(k), 4.5 said defined contribution, none said defined benefit plans. All right, well the two categories are defined contribution and defined benefit, right? 401(k) is a type of defined contribution plan. So B and C is the answer. And when we look at the bottom there, 86% of the those who submitted did select B and C, so congratulations. They will be a basket of goodies delivered to each of you. Please keep an eye out for it and if you don't get it, apologies, but we'll absolutely try to make right by that, okay. So let's move into the next slide. Types of plans. The defined contribution plans, when you're looking at a defined contribution plan, it works as follows, right? The employees contribute a percentage of their paychecks to an account that is intended to fund their retirement. Employers will at times provide a matching portion of the employee contribution as an added benefit. This allows employees to invest pre-tax dollars where they can grow that money tax deferred until retirement. There's a max, there's also profit sharing. But this is the SIMPLE idea of a defined contribution plan, right? You're defining the contribution. I'm going to decide I want to put in X amount of my salary up to a specific limit and then the employer could say, "Okay, dear employee, we want to help you in retirement and because we have the ability to do so. We are going to provide a matching contribution. So if you're putting in X, we'll put in X plus to help you get to that healthy retirement."

Define benefit plans a little bit different, right? Commonly known as pension plans. This is the kind of stuff that 20 years ago plus was the predominance of the retirement plan space. They offer guaranteed retirement benefits for the employees. So all of the burden of the defined benefit plan sits with the employer providing it. It's funded by the employers. The retirement payouts are based on a SEP formula that considers an employee's salary, age and tenure with the company. So pension plans were initially how we all went into retirement. In the early '80s when 401(k) came into play that kind of started to change. And today, like I said, at the top of this, the largest solution within the retirement space is 401(k). That's essentially where you'll find most of the retirement plan assets setting.

Another polling question, Which type of retirement plan requires the use of an actuary? Defined benefit plan, defined contribution plan, all of the above, none of the above. Again, we'll take a little bit of time, you guys feel free to answer along now that there might be a gift basket at the end of this, maybe we'll get you a 100%. We'll see how that all goes. All right, we've got 40% logged so far. I'll wait a little bit longer just so that we make sure that we get everybody in there that wants to answer. Again, which type of retirement plan requires the use of an actuary? Defined benefit plan, defined contribution, all of the above, none of the above. Okay, let's take a look at the results.

So 45.5% defined benefit, 4.5 defined contribution, 36% all of the above. 13.6 none of the above. So defined benefit plan is the correct answer. A defined benefit plan requires actuarial assumptions, right? So they are utilizing a SEP formula. There's a fair amount of complexity when it comes to figuring out the funding and who gets what. So that's where you'll use an actuary in a defined benefit, not defined contribution. Let's move on to... That's not bad, actually. Almost half of you ended up polling defined benefits, so good work there. Glad to see that there's that much understanding within the space.

Alrighty, examples of defined contribution plans. They're all types, right? We'll start at the one that is most common that we see typically when you're starting out in the workforce, an individual retirement account. Now this can supplement savings alongside an employer sponsor of your retirement plan, which sometimes happens, right? You maximize your 401(k), you've got more money that you could dump into a retirement account. You start an IRA, an individual retirement account. $6,000 is the maximum contribution, 7,000 if you are age 50 or older. This is for 2022. It's important to note that in an IRA, only individual contributions are permitted. There isn't any type of employer money. The name kind of alludes to that right? Individual retirement account. You can have either a traditional or Roth IRA. The monies must be funded by April 15th so that you get the tax benefit they're in as it relates to the traditional IRA, so that you get the amount in for the specific plan year as it relates to the after-tax Roth.

Now, though contributions are defined, this is actually not considered a defined contribution plan under the rules that govern defined contribution or DC plans, but it is one that we want to mention as an option. And the biggest reason why is that, like I said, if you have a 401(k) plan and you are maximizing that plan and you still have the ability to save more into retirement, then this is a great way to do it. You get yourself an individual IRA and you start dumping money into it.

Another choice as a simplified employee pension plan, commonly known that to as a SEP, this is used by small businesses and self-employed individuals. You can contribute up to 25% of earned income to a SEP. Must be funded by the due date of the tax returns, including extensions, and only employer contributions are permitted here. So if you are working for a small business and you decide that you want to put a simplified employee pension, a SEP in place, employees cannot put any of their own money in. It is all employer contribution.

Typically, this happens with companies that are a hundred or less employees. And what we found is that even though you can do a SEP as a small business today, the way things have changed in the 401(k) space, in the defined contribution space for 401(k)s, it has become very cost effective for plan sponsors to start a 401(k) plan and allow for the variance that comes in, right? Individual deferrals, employer contributions, and all the flexibility that we're going to be looking at as it relates to 401(k) as we go deeper into this presentation.

Another type of the defined contribution plan is known as a savings incentive match plan for employees. A SIMPLE 401(k), which is also known as, by the way, 401(k) light, right? And when we read these bullet points, if you're familiar with 401(k), you'll understand why I'm saying 401(k) light. If you're not familiar with it, when we start to talk about 401(k), you'll see it more clearly. Employers with fewer than a hundred employees not offering other retirement plans may establish a SIMPLE. Employee contribution limit is 14,000. And again, there's what is done as a catch up contribution, if you're 50 or older, you can make additional contributions up to $3,000. These are the 2022 limits, by the way. The employer can provide a matching or non-elective contribution. So a non-elective contribution, guys, what that means is I'm eligible to participate in this plan, but I choose not to. I'm not going to defer any of my salary into the plan. The non-elective contribution is the employer saying, "We know you're eligible. Even though you're not participating because you're eligible, I'm making a contribution on your half." So it's an employer contribution non-elective.

The match formula for a SIMPLE is specific. It is 100% on the first 3% that a participant elects to defer of their salary. So if I'm deferring 3% of my salary, my employer's going to put in 100% of that, he's going to match me 3%. If I put in 1%, it's going to match me 1%. It is fully vested. When you are vested in a retirement plan, that means you own the money. Remember when the money is in there, it is yours, right? But it could be subjected to a vesting schedule. Under a SIMPLE, you're always 100% fully vested. So there is no waiting for that money to become yours, to become vested into your account. If the employer is providing a non-elective contribution, that would be 2% of eligible employee compensation. So again, the nice thing there is that if you decide you don't want to defer any of your salary into the retirement plan and your employer is providing a non-elective, you're going to get 2% of your salary regardless of your involvement to plan just because you become eligible.

Profit sharing, Profit sharing plans are funded by the employer. The maximum employer contribution in the 2022 year is $61,000, so it's a significant amount of money that employees can drop into a profit sharing plan for the participants. And the investing schedule can be applied to profit sharing plans. Typically, you would see about a six year vesting, right? 20, 40, 60, 80, 100% after you've completed six years of service. It is a large number that can come in there. Typically though, you don't see a lot of standalone profit sharing plans any longer. And a lot of that has to do with what you can do with 401(k) plans and profit sharing.

So now we go to 401(k). 401(k) is funded by the employee and potentially by the employer, may choose to offer a matching or non-elective contribution. Employee contribution limit for 2022 is 20,500, and if you are 50 or older, there is a catch up contribution here up to a maximum of $6,500. Now if you take a look right there, I want to just take a pause for a second. You'll notice something about 401(k), and this is one of the reasons why 401(k) has become the most popular choice, right? One, the burden is no longer all on the employer. So from a cost standpoint, from a liability standpoint, 401(k) is an attractive option for a plan sponsor. I don't have to guarantee anything it, which is what you must do in a defined benefit pension plan. The other benefit is that I, we, us as participants in a plan, I can dump the most inside of a 401(k) versus the others, right? 6,000 for an IRA, in a SIMPLE it's 14,000, but in a 401(k), my salary deferral maximum is up to 20,500. And if I am 50 or older, and I have the wherewithal to do so, the catch up contribution is an up to an additional $6,500.

So in total, just from your salary, if you have the ability to do so, in a 401(k) you can defer, on a pretax basis, $27,000 for the 2022 plan year. And then if your employer is providing a match and/or a non-elective, there's additional company money that would come in on your behalf. The maximum from all sources, and by that we mean salary deferral, match and/or profit sharing is $61,000 in 2022. So same value as you would get inside of just the employer funded profit sharing.

You also have 403(b) plans. Now these are offered to those that work within government agencies, educational institutions, non-profit organizations, hospitals. The maximum from all sources, again salary deferral, match and/or profit sharing, same as a 401(k), 61,000. Not too long ago, the rules governing 403(b) relaxed a bit, making it so that now 401(k) is also an option that these institutions can take advantage of. But there are some specific differences. And if you are a government agency, an educational institution, a non-profit, sometimes the 403(b) becomes the better choice. And it's important again to understand that working with individuals within the space that have expertise in this arena will help you determine which one of these plans is the right plan for my organization.

Polling question, what is the current contribution limit for eligible participants of a 401(k) plan? I'm softballing this one for you guys. We spent a good amount of time on a prior slide. So right here we have some options. Please do submit your answers. 18,500 and a 50 or older a catch up contribution of 5,500, 19,000 with a catch up of 6,000 or 20,500 and a catch up contribution of 6,500 or none of the above. Okay, we're at 50% right now. Wait a little bit longer, see if we can get a few more people answering on this one. All right, I think we've hit the max there. The meter's no longer moving, so let's take a look at how you guys did.

All right, so we've got 8.7% at 19,000 with 6,000 catch up, 73.9 with 20,500 and 6,500 catch up and we've got 17.4 saying none of the above. Congratulations to the 73.9%. In a 401(k) the current maximum contribution limit, the 2022 limit, is 20,500 pretax salary deferral. And if you are age 50 or older, you can add up to an additional 6,500 from your salary, again on a pretax basis into your 401(k) plan. So well done there.

Let's move to the next slide. Considerations for defined contribution plans. Why would you as a business owner consider putting together a defined contribution plan? Well, one is that defined contribution plans have lower administration costs than a defined benefit, as an example. Participation is both voluntary and self-directed. There's no way to know how much a defined contribution plan will ultimately give the employee upon retiring, but it is important to note that the employer inside of a defined contribution plan also has reduced their liability and obligations when you are looking at the voluntary benefits that come through a defined contribution plan. There are lower contribution limits in some defined contribution plans as we evidenced earlier, like in the IRA, the SIMPLE, the SIMPLE 401(k) specifically. And there are tax deferred contribution options that you can look at.

That money that goes into your 401(k) plan, it's top line, guys. So if I am a participant in a plan, I am deferring my salary, Uncle Sam is not touching that salary. So if I'm putting 20,500 in, it's going in pre-tax into my 401(k), there's immediate tax savings. If I'm an employer and I'm making a contribution that is a tax deduction off that match and/or profit sharing that I'm providing to the participants. So these are things you would consider when thinking about a defined contribution plan.

Oops, excuse me, hit the wrong button there. There we go. All right, considerations for defined benefit plan. Now I do want to say that the defined benefit plan of yester year, the traditional defined benefit, is not that common any longer. But there is a new type of defined benefit plan very similar to the traditional defined benefit, but with some really interesting differences that make it much more palatable for a business owner to consider a defined benefit, specifically known as a cash balance pension plan.

So what are some considerations? Well, it requires involvement of an actuary. We learned that from the polling question earlier, right? Employers make the contributions. It allows for higher contribution levels, significantly, at the employer level, so individuals get larger contribution buckets. You need to consider the age and income levels of your employees. Investment selections need to be relatively conservative. You are marking to a specific rate, right? Substantial benefits can be provided and accrued within a short time, even with early retirement. Employers can contribute and deduct more than under other retirement plans, and by other would mean define contribution. And that's a simple reckoning, right? If I can provide a larger contribution into this plan as an employer contribution, I've got more money that I'm deducting. Plan provides a predictable benefit. You're going to get X amount per month at retirement when you cash out of your defined benefit plan. The problem though with these two is that they are the most costly type of plan from a point of contributions to administrative expense, et cetera, so forth and so on.

Polling question time. A defined benefit plan is commonly known as a blank plan? 401(k), pension, profit sharing, 403(b). Have at it folks. I've either lost the entire... Oh, here we go. All right, we're starting to get some people. I was getting worried, I thought I lost the entire audience. So again, a defined benefit plan is commonly known as a 401(k) plan, a pension plan, a profit sharing plan, a 403(b) plan. We're at 50% right now. Love the fact that you guys are engaged with me in this. I don't feel alone in this presentation, so thank you. All right, we have just a little bit of half the attendees responding. I want to wait just a little bit longer to see if I can get a couple more people answering this one. All right, a little more. If we get to 100%, I'll get you guys two gift baskets. Two gift baskets for this one. I think we've stalled. I think this is it. All right, we've got 57. Oh, a little more. There we go. We're at 62%.

All right, so 62% of you have responded. Let's take a look, see at how that worked out. Okay, so 4.3% answered 401(k), 91.3 pension, 4.3 went with profit sharing. So for the 91.3%, very well done. A defined benefit plan is commonly known as a pension plan. So excellent job there guys and thank you all for interacting on these questions.

Alrighty, 401(k) plan design options. This is when it starts to get real heavy and what I'm going to try to do is make it so that I don't lose you guys in the weeds, which can happen very quickly when we start to go into plan design stuff. But I do want you to have an understanding of exactly how flexible 401(k) plan design can be. How much you can do with a 401(k) plan as it relates to your corporate retirement plan program. So with that, let's go into the slides and start speaking about 401(k) plan design.

So options and features. You can merge a profit sharing plan and a 401(k) plan into one plan. So you have what is known as a 401(k) profit sharing plan. It used to be they were two separate things, but make them one. It creates efficiencies where you don't have to worry about having two separate plans to manage, two separate filings, two separate administrative record keeping and advisory services fees. It's all under one 401(k) profit sharing, right? You can utilize safe harbor options and we're going to talk about these a little bit through the presentation. You can do a basic match, safe harbor, an enhanced match safe harbor. Something known as I still giggle, this is years now that this has been out, but a QACA, which is a qualified automatic contribution arrangement. So these are three types of safe harbor contributions you can apply.

The benefit of a safe harbor is that it allows you to avoid specific year-end compliance testing, which would be very helpful for highly compensated employees if there were refunds coming out of the plan because of failure to that test, and for the non-highlys because it creates for a much more robust retirement plan, so it's a win-win for everyone within the entity if a safe harbor is utilized, if needed.

Advanced profit sharing solutions can be put into play like permitted disparity, which is also known as Social Security Integrated. And without going deep into the weeds of what that is, bottom line is if you're making a profit sharing contribution, and it's a pro rata one, meaning everybody's going to get the same percentage of salary across the board, by using a permitted disparity plan, anyone who makes above the Social Security Taxable Wage Base, which if my brain is working well today is $185,000 a year currently, they would get a supplemental or additional profit sharing percentage into their plan.

Then you have the most powerful advanced profit sharing solution inside of a 401(k) profit sharing plan, which is known as cross tested new comparability or age weighted. In this scenario, you create individual groups and you could provide different percentages for different individuals, owners, key employees, sales, operations. You could create all these different groups, so make them all individual groups and provide varied percentages to everyone in the entity depending on what would work best for your organization, right? Taking care of key people, as an example.

You have a QDIA, which is known as a qualified default investment alternative. This is something that helps add additional fiduciary protection to the plan sponsor, the business owner, the guys and gals that are working on the plan on a day-to-day basis. Those of you that have dispensation of plan asset. Anyone who would be deemed a fiduciary, the QDIA option protects you. It allows for further insulation from investment risk. 4

Then you have features like auto-enrollment and auto-escalation, which by the way, on this presentation, I am going to put my neck out and say that within the next five years, auto-enrollment will be a staple within 401(k). It's no longer going to be an option, it's going to be mandatory within 401(k). This is the interest and I think that it will be pushed through, it will be legislated.

When you are auto enrolling someone, you're essentially saying, "Okay, Mary or John, we know you're busy. We know you would ,in all likelihood, want to do a 401(k) plan, you'd want to participate, but because you're probably not going to get to it, which can take care of you, we're going to put you in the plan automatically." All right? And then you can do an auto-escalation, every year you kind of increase the amount that they defer into the plan. Please know that auto-enrollment is not something that locks the participant in. In an auto-enrollment plan, you can also opt out so you get a notice as a participant saying. "You're going to be auto enrolled. And by the way, Joe, Mary, if you don't want to do this, no worries, just check this box. We won't do it.' But I will again put my neck out to say that within the next five years, auto-enrollment becomes a standard within 401(k), not an option.

And again, as we said at the top, you can couple, at the top of the presentation, you can couple a 401(k) profit sharing plan with a cash balance pension plan. You want to talk about supercharging retirement savings, for the right company, for the right circumstances, when you put together a 401(k) profit sharing and a cash balance plan, they are both standalone plans, but they work together, you supersize the contributions. And because cash balance, as I said earlier, is a little bit different than what the traditional pension plans were like, it is sometimes a very palatable solution for business owners.

All right, let's ask a question here, shall we? True or false? A Roth feature allows participants to defer the maximum amount on an after-tax basis. True or false? And forgive me guys, this polling question I see it has kind of been put out of place. It should have been a little bit further in the front of the presentation. So for those of you that are going to be brave enough to answer it, go for it. I'm not going to stand long on this one. I'll just wait a couple of seconds because I see some people putting money out there. Roth is fairly common though, right? We've known about it for a while. So I'm assuming, and looking at the participation right now, we've already got over 50% who have answered this. And of course I'm going to, I'm sure that all of you have shut down your Google, right? No one is Googling the answers, right? We're doing this on the honor system guys or no baskets. There will be no delivery of basket to anyone. All right, not bad, we're at 70% answering this one. I'll wait just another second or two.

Okay, so let's see how you guys did on this one. True or false? A Roth feature allow participants to defer the maximum amount on an after-tax basis. All right, kind of split here. This is almost rounding error. 57%, 57.7, true. 42.3 false. The answer is true, right? Because remember a Roth is an after-tax contribution. When I'm putting money into my Roth, and I know we touched on it very briefly at the top of the presentation, this should have been moved up there. But the reality is that Roth allows you to deposit after tax dollars. It is an after tax contribution. You dump that money in after tax and then it grows for you tax free. Roth features are allowed within a 401(k) plan, so you could have a 401(k) with a Roth option, which means that you could either put the money in traditionally pretax or after tax in your Roth bucket. Thank you guys for participating in this question as well.

All right, 401(k) savings plans. Let's go through a little bit more on design. Provides a vehicle for employees to defer. We kind of went through this initially at the beginning, but I think it's a good idea to repeat because it is a lot of data. You can defer 20,500 pretax for 2022 if you're 50 or old, you got that catch up contribution, 6,500, up to 6,500. It can include a Roth feature that allows participants to defer the maximum amount on an after tax basis. Salary deferrals are a function of payroll, so everything comes out of payroll when it comes to deferring money into a 401(k) on the employer side. The employer can match employee deferrals on a discretionary basis and we can apply a vesting schedule to the matching contribution. So the employer who's putting money in, and this is kind of used as a retention tool, you apply a six year graded schedule. If you left the company before you are fully vested in that six year graded vesting schedule, you would not be able to take all of the employer money with you. But once you're fully vested in that money, it all comes with you. It helps to keep people with the firm versus just kind of flying out in the building.

401(k) profit sharing plans afford the employer with an opportunity to make a non-elective contribution for all eligible participants regardless of participation. Remember we can couple, these can be one plan, 401(k) profit sharing. So if I'm doing a non-elective contribution, aka profit sharing contribution, I, as the employer, am providing that to everyone in the plan, regardless of their participation. It is just a matter of eligibility. The maximum contribution is 61,000 for 2022. You can also apply a vesting schedule to profit sharing contributions.

Safe harbor. Let's speak now a little bit more deeply about safe harbor. This design is incredibly useful when a plan has difficulty passing that test I mentioned earlier, right? The year end non-discrimination test, ADP/ACP, or the top heavy testing. ADP/ACP stands for actual deferral percentage and actual contribution percentage, right? For our purposes, what you need to know is that if a plan fails specific year end compliance testing, I have an example two here, you would end up getting a refund at the end of the year. And that refund goes, it's a refund on the salary deferrals mind you, that refund goes to the highly compensated employees and that's anybody who's making over $135,000 a year or a greater than 5% owner, or a spouse of an owner or a child of an owner. Even if you're paying them a dollar a year, they are considered owner through family attribution. So this really does help avoid the application of these safe harbor, pardon of me, of these year end discrimination tests. It is a mandatory contribution and it is fully vested.

So why would this be of interest to a business owner? Well, if a plan fails, ADP/ACP or top heavy, one or two remedies are going to be applied. You're going to refund the highly compensated, as I mentioned a moment ago, or you're going to provide non-elective contributions to the non-highly compensated employees. How do you avoid that? You avoid it by providing a safe harbor contribution. You no longer need to apply that year end test. There's no worry about having to satisfy or remedy the failure of those tests. Safe harbor avoids the application of these compliance tests and makes plan management a little bit easier.

So what are some safe harbor arrangements, right? What's it going to cost you to avoid the application of this test? It's give and take, right? You're not getting it for free. If we're avoiding the application of these year end non-discrimination compliance tests, safe harbor arrangements are as follows. The employer is obligated to match employee deferral based on the following formulas if we're using a safe harbor match. The basic match is you're promising 100% on the first 3% of salary elected for deferral plus 50% on the next 2% that a participant elects to defer into the plan. So what does that mean? That means your maximum employer obligation is 4% of eligible employee salary. How does that happen? Well, if I as an individual am deferring 5% of my salary into the plan, you're going to match me 100% on the first three, right? And 50% on the next two, which comes out to 4%. So the maximum obligation would be 4% of salary. Contribution is subject to immediate vesting, 100% owned by the individual when you say harbor.

So the trade off is that you're going to provide this more robust matching contribution. It's going to be fully vested, but, you, the business owner and the other highly compensateds who are getting refunds that could potentially be thousands a year coming back to you. You avoid that. Now, you could put in the maximum without concern about passing or failing the ADP/ACP because you are avoiding it by utilizing safe armor. Also, keep in mind, any time you make an employer contribution to your 401(k) plan, to the 401(k) plan, you, the employer, get a tax write off. Whatever your corporate rate is, that's the benefit. You get to deduct those contributions.

Then there's also an enhanced match. It has to be as generous at every tier as the basic match. A typical formula is to match 100% up to the first 4% of salary deferred and that way you know you've essentially covered the same as the basic match. Sometimes plan sponsors opt for this, it's a bit easier to explain and they're okay with that 4%, so they just go for the enhanced match option. You have option is what I'm saying.

Also QACA. Let's talk a little bit about the QACA. The qualified automatic contribution arrangement includes an auto-enrollment feature, and I really like this one because it does help participants get into the plan, which guys, for all intents and purposes, why are we putting a 401(k) plan in place? To help people retire successfully. To help them retire well. Sometimes people don't go into a plan. Bunch of reasons why they might not: Afraid, they don't know what to do, they feel like it'll never amount to anything, they can't save enough. There's tons of reasons why people don't participate, but if you do an auto-enrollment, what you'll find, and there have been tremendous studies to this end, the opt out rate is minimal. So you're essentially helping people eat their vegetables.

If you use a QACA, which includes an auto-enrollment feature, the other pieces of QACA you have to concern yourself with is that it is a match. So you're matching 100% on the first 1% of elected deferral plus 50% on the next two to 6%. The maximum employer contribution in this scenario is a total of 3.5%. So it's a little bit less expensive than the basic match safe harbor or the enhanced match safe harbor at that maximal level. And it also includes the auto-enrollment feature, which if I put my 401(k) consulting hat on, or if I look at it paternalistic, the idea here is that we are helping individuals get into this plan. We're going to auto enroll them. We're going to provide some matching money on their contribution. We're going to help them get to healthy retirement.

You can also apply vesting schedule to a QACA, by the way. QACA contribution vesting schedule can be up to two years, so essentially two year cliff vesting. It's not fully vested. It's one of the reasons why I really like QACA. It incorporates all the good things that we can do inside of a plan design and helps get everybody to where they need to be, which is healthy retirement.

The auto-enrollment feature is applied as follows, guys, minimum of 3% year one, if you want to use an auto-enrollment feature, right, you increase it by 1% per year until that 6% of salary is being deferred. You cannot go above, in an auto-enrollment if you're just using an auto-enrollment feature, you cannot go above 10% for the first year of plan participation. Secure act, which is some legislation recently passed, has raised the maximum to 15%. Reality is that everyone is recognizing retirement savings, getting people ready for retirement, we got to bump up the amount that people are saving for them to get to healthy retirement. So that 10% number, which used to be the standard number that people will tell you to save for retirement, starting to inch up to that 15%, which is why secure act has raised the minimum. So if you were just doing an auto-enrollment feature, no QACA, nothing, just an auto-enrollment, minimum 3% year one, you increase it 1% per year until 6% of salary is being deferred, so you allow auto-enrollment with auto-escalation.

Opt out feature, when you're looking at auto-enrollment you have the benefit of an opt out feature. Eligible employees are not forced to participate. We spoke about that a couple of slides back. If they don't want to be part of the plan, they can opt out. So you're essentially notifying them, we're doing this auto-enrollment and they don't want to do it, they say no. But again, you'd be surprised, the opt out rate is minimal. It is in single digits. Most people want to be in the retirement plan. Sometimes it's a thing of inertia. You got to kind of give them that little bump to get them in. And auto-enrollment is a feature that allows you to do that.

Advanced profit sharing solutions, we were speaking a little bit about permitted disparity. This kind of goes into detail on permitted disparity, how it actually works. And forgive me, it's 147, I was wrong on the Social Security Taxable Wage Base for 2022. All participants receive a uniform contribution, that's the base percentage. So as an example, we are all employees of company XYZ. We are all going to get 3% of our salary dumped into the plan as a profit sharing contribution. And then all participants making above Social Security Taxable Wage Base, they're going to receive that supplemental uniform contribution which cannot exceed the lesser of the base percentage or 5.7%, so that's where Social Security integration comes in it. It's something that was very common and used often before new comparability age weighting comes along because that really is something that provides a bit more flexibility and a lot more opportunity for increased benefit.

Look at that, new comparability, that's our next slide. Let's have a conversation about that, shall we? New comparability, age weighted right, also known as Cross Tested Plans. This discretionary design will allow the employer to maximize specific employees within the retirement plan. You customize the non-elective contribution on an individual basis. With this plan design, guys, you have to keep in mind there is other compliance testing that goes into account. There are some actuarial assumptions that need to be made when you are age weighting a plan, when you are doing new comp. You have to cross test it. You have to make sure that you are not violating discrimination rules. Who are we concerned about when we violate rules? It's not the highly compensated, it's the non-highly compensated. It's not the business owners and people making more than 135,000 a year. It's everyone else, right? ERISA, the Employer Retirement Income Security Act of 1974, the body of law that determines what we can and cannot do in the defined contribution space. All they care about is ensuring that the non-highly compensated employee is not taken advantage of. So this kind of a plan which can provide some really robust contributions for specific individual, targeted individuals, it also cannot be discriminatory and the actuarial assumptions is how we avoid discrimination. So it works best when you are working with a group where the favored individual or individuals are older than the rest of the employee base and that's where the actuarial assumption comes in. It's time in the market. If I'm 60 years old and someone else is 20, I got five years, assuming I retire at 65, where I'm going to have to start drawing on that money. I only got five years to get to healthy retirement. The 20 year old has got 45 years to get there. So because I have less time in the market, I offset that by having a larger profit sharing contribution than the 20 year old. That's the general idea behind new comparability.

It will work very well if you are interested in maximizing employer contributions for owners or executives, key employees, the favorite group, as I said, is older than the non favorite group, there is sufficient cash flow to sustain the additional contributions being made and you are interested in maximizing the total contribution from all sources, which is 61,000 for 2022. Here's another thing I want you to keep in mind. This is discretionary. You are not obligated to make the contribution. Every year you determine whether you want to or not and to what degree. This year I got a hundred thousand that I can use for my profit sharing contribution, let's assign it to new comparability. Next year I have 300,000. The year after I've got nothing. We're not doing it. Fully discretionary, at the end of the year you determine what the budget is and how it will be allocated across the individuals. So incredibly flexible, incredibly robust, and something that many plan sponsors who look to maximize, if the demographics work, take advantage of because it does provide for maximum benefit with minimized expense.

The QDIA, the qualified default investment alternative. 2008 is when this was legislated and what it said basically was that we got to help people get them into a fund if they don't make a choice, if they don't make a choice, that will provide them over time with a significant and meaningful rate of return allowing them to hopefully retire healthy. That's the whole idea behind QDIA. There are all three options that will satisfy QDIA. A life cycle or a risk-based fund, when you buy a moderate fund or a conservative or an aggressive risk-based fund that is considered lifecycle. Or a target date fund, which have become the sweethearts of 401(k) plans. In a target date fund, if you're not familiar with what that is, a target date fund essentially has a specific target date on it.

Let's say I, Mike Abate, am going to retire in the year 2055, I would buy the XYZ 2055 target date fund. What that fund does is it will automatically be aggressive. It's already pre-allocated, right? All taken care of for me. It's like a set it and forget it option. It's more aggressive when I get into it and as I get closer to retirement, as I approach that 2055 target date, it automatically becomes more conservative, so it's adjusting for me. It does all the work for you. It's a set it and forget it option. All right?

The other option is you can buy into a balanced fund, which is a mutual fund split between stocks and bonds. Typical allocation, 60% equity, 40% fixed income, 60% stocks, 40% bonds. Or a firm like ours, a registered investment advisory firm sometimes creates model portfolios and that model portfolio is considered a professionally managed account, which you can use as a QDIA.

I will say to you that the preponderance of QDIA option falls into the target date fund because it is a set and forget it option. And it's so easy to understand if I'm going to retire in 2055, I buy that fund, simple and done, you select it and off you go.

Auto-enrollment, auto-escalation. Again, I like this a lot guys and I want to talk about it just a little bit more here. This feature makes it so that when a participant's eligible to participate, they're automatically put into the plan predetermined percentage of salary. The sponsor can also apply an auto-escalation. Every year we bump them up a percent, right? So let's say we started at three next year at four, next year at five, and at any time you could say no more of this, you could opt out of it, right? Never are we locking them into anything. We're simply allowing them an opportunity, we're helping them prepare for retirement. They will determine if they want to take advantage of it or not. They can opt out always.

The 90 day thing. I want to talk a little bit about that. When you initially get enrolled into an auto-enrollment plan, if you opt out within the first 90 days of the auto-enrollment, any dollar that was deferred into your retirement plan from your salary will be put back into your paycheck, okay? If you opt out after the 90 day period, the first three months, you can still opt out, but any money that was deferred into the 401(k) plan remains within your 401(k) account, your individual account.

Coupling a 401(k) profit sharing plan with a cash balance pension plan. You've heard me allude to this a couple of times during the presentation. Cash balance plans are a modern day version of a traditional pension plan. They are portable, like a 401(k) account, you can take it with you when you leave, you take your account balance and you go, the vested portion of it, of course. It works very well when a company has significant cash flow, can sustain the annual contribution obligation for a minimum of three to five years. The reason why we say that is that in a cash balance plan, it is not discretionary.

The big difference here, it's pension, it's an obligation, right? So you got to have good cash flow and you got to be willing to commit to whatever the contribution amount is that you determine for at least three years, minimally three years, right? Currently, if you are maximizing the benefit through a 401(k) share, a 401(k) profit sharing plan, and you are interested in deferring more than the maximum level allowed therein, 61,000, that's when you want to start saying, "Yep, this makes sense." I mean, bottom line, if you're not maximizing the 401(k) option, the 61k, why add another plan that creates complexity and obligation? Maximize the 401(k) first. If you're maximizing the 401(k) profit sharing and you still want to do more, then yeah, let's talk about adding a cash balance plan to your 401(k).

There are other scenarios where you might not be maximizing and in those particular situations, depending again on planned demographics, sponsor demographics, it could make sense to add a cash balance plan to a 401(k) even if you're not maximizing the amount. And that has to do with the fact that you can get a lot more contribution into a cash balance, up to a couple of hundred thousand per individual as an employer contribution, just to keep that in mind.

Maximum individual lifetime saving limit is approximately $3 million. It indexes up for inflation. So on an individual basis you, as a business owner, can put away a couple of hundred a year maximally. It could be less than that, right? It depends on what you're comfortable doing. And the maximum amount lifetime that you could put away is $3 million individually into your cash balance pension plan. So when a cash balance plan is used in conjunction with a 401(k) profit sharing plan, all of the year end compliance testing, all the stuff that that needs to be done to ensure that it is in good place has to be managed through an actuary. So again, we bring in the actuary to that thing,

Okay, we're going to skip through the polling question. Fiduciary obligations, we're running low on time. Who is a fiduciary? I want to take this real quick for you guys. ERISA describes a fiduciary as anyone exercising authority or control over plan management, assets, administration or rendering investment advice. Fiduciary duties, what do you have to do? Put very simply, you must act solely in the interest of plan participants and beneficiaries. You got to adhere to the plan document. You have to perform your duties with care, skill and diligence of a prudent expert, very important. You must provide disclosures, notifications, such as a summary plan description, et cetera. You must select and monitor all of the service providers. And part of what we do in our care process is help you manage all of that fiduciary obligation, how you can outsource it, et cetera.

Plan level fiduciary roles, the Big 3. You've got ERISA 3(16) administrative fiduciary services, which will remove the administrative fiduciary obligation from you, the plan sponsor, and onto a service provider. Then you have the investment advisory pieces, the which is known as ERISA 3(21), limited scope investment advisory or ERISA 3(38) investment management. The difference between these two is that 3(21) is co-fiduciary, meaning we are rowing the boat with you and 3(38) we are full fiduciary, or discretionary, investment managers rowing the boat for you. You're taking a ride and we'll get you from shore A to shore B.

You can outsource the fiduciary work and that's the important stuff. You can outsource the 3(16), You can outsource the 3(21) and 3(38). The 3(16) piece isn't as common as an outsourced option. If you're a larger entity with multiple HR and payroll sometimes it's a real value. If you're a smaller group and you don't want to deal with it becomes a real value. But the investment part of it is where we are really seeing a lot of outsourcing.

We, EisnerAmper Wealth Management, will sign on as an investment fiduciary under 3(21) or 3(38) for our clients. We are always acting in that fiduciary capacity and you, the plan sponsor, have the ability to outsource that work so that you're no longer taking the risk, we are, and you're just watching us making sure we fulfill our duties.

Apologies for having to rush through that last bit. I went a little long on our presentation, but I do want to open to you guys any questions regarding types of retirement plans, fiduciary service within the retirement world, how to outsource your obligation, your fiduciary obligation, plan design or plan management, any questions you guys might have, please feel free to enter them into the chat. We'll be more than glad to answer those questions for you.

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