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Your Next Steps to Building a Retirement Plan for Your Business

In this episode, Royal Standley shares what business owners need to know when they’re evaluating a retirement plan for their business. Royal walks you through the roles that go into a 401(k), underlying investment options for employees, and what role a financial advisor should be playing in the process of structuring and implementing a plan.

Episode 33 Transcript

Intro: Royal Standley of Oregon Pacific Financial Advisors offering securities through United Planner Financial Services, member FINRA SIPC, shares his planning approach to help people toward a place where they may be at peace regarding their financial goals. In this dynamic podcast, Royal will share his insights on how to design a retirement plan to help you plan for your future. Now onto the show.

Aric Johnson: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Today is part two of a two-part podcast. Royal started, of course, two weeks ago on the first podcast about retirement plans, but it's from a totally different viewpoint. So Royal, why don't you tell the audience again, kind of remind them what we're talking about today.

Royal Standley: Yeah, absolutely. What we're talking about today and what we kind of started talking about, two weeks ago was from the business owner, the plan sponsor's perspective, what are the things they need to know when they're evaluating their retirement plan for their business? You know, what are the basics that you need to kind of understand about 401(k)s 403(b)s. simple IRAs.

Aric: Mm-hmm.

Royal: How all of those different features, kind of, come together and work and how best to structure a plan to benefit both the business owners, as well as the employees. So I was talking with a business owner, and one thing that we have here in Oregon is we actually have a state mandated retirement law that basically says that if you have employees in your business, you're required to offer your employees some sort of retirement plan. And here in Oregon, we call that the Oregon Saves Program. Basically what it is is a payroll deduction, Roth IRA. You can run into some issues there depending on whether or not you are actually able to contribute to a Roth IRA based on your income.

Aric: Mm-hmm.

Royal: So, you know, it's the government coming in saying, hey, this is what you have to do. I think it's an absolutely wonderful kind of sentiment to say we, as a nation, need to do a little bit more to help people provide for retirement. However, I think a lot of people don't like to have those things dictated by the government and therefore have come a natural pushback, if the government's offering a program where they say, we're going to take your money, we're going to invest it.

Now, the Oregon Saves Program is a program where the funds are invested by a registered investment advisor. You do have the safety of a custodian and that sort of thing, but the options are somewhat limited. It is absolutely a low-cost option, but for a lot of business owners, especially something that's been around for a while, you probably want to look at something a little bit more than what the Oregon Saves Program offers.

And that's really, you know, I think who we're talking to today.

Aric: Mm-hmm. All right. And we spoke a lot or you spoke a lot on the first podcast and went over a ton. Do you want to give just a brief recap of what you touched on so people can go back and listen to it and then start in with what we need to cover today.

Royal: Yeah, absolutely. I think in the first part, we really spent some time defining the basics of how a 401(k) works. 401(k)s 403(b)s are fairly similar defined contribution plans. That's the way we kind of designate a 401(k) versus a defined benefit plan, which will be more like a pension. You know, pensions are much more complicated vehicles for the business owner as a 401(k) is really designed for the employee to take a lot of that investment risk, whereas a defined benefit plan or pension plan, the employer is taking that investment risk on behalf of the employee. So, the vast majority of what we see for retirement plans now are in that defined contribution space. Like the 401(k), like the simple IRA. So we really kind of dug into the basics there. Today, what I want to spend probably the first half of our podcast talking about are the different roles that go into a 401(k): who those people are, what responsibilities they have, how they get paid. And help people kind of understand that landscape at a 30,000-foot view level.

Aric: Perfect.

Royal: So, first off you have one term we are throwing around quite often which is plan sponsors. Really that's just either the business owner or business owners, or if we're talking about a nonprofit or publicly traded company, the board of directors who ultimately have the responsibility for setting up the plan. They're taking on some fiduciary responsibility there, to set up the plan for the benefit of their employees.

Aric: Mm-hmm.

Royal: They're ultimately the person or persons who are going to be responsible for all of the decisions that are made in the plan. They're ultimately the people that are in charge of the plan and are responsible for what happens there. They're also going to be responsible for hiring and firing all the different parties to the 401(k).

Aric: Okay.

Royal: From there, you're going to have like a couple of different pieces here that come into that equation. Number one is the custodian or the investment platform. So where is actually the money being invested? Oftentimes what we'll see is, you know, that could be a platform like Fidelity or Charles Schwab. It could also be a platform like the Transamerica or Principle, which is more of an insurance, uh, insurance company based 401(k) platform. There's a lot of different companies that do this. We're also seeing a lot more, low-cost options coming out into the market, where maybe you have a very limited lineup of investment options. Everything's done online. There's not usually an advisor attached to the program. You're really just kind of doing everything almost online. There's very little education, very little interaction with an advisor who can help you, or the participants, kind of determine what's the best course of action for them. From there, we have the financial advisor. That's really where we come in. The financial advisor oftentimes will be in charge of evaluating the plan, helping the plan sponsor know what their duties and responsibilities are, help them kind of design the plan, evaluate the plan on an annual basis. A financial advisor should be helping with employee education, sitting down with employees either in an individual or in a group setting, and helping those employees with, their own planning for the future.

In my opinion, the financial advisor brings a whole lot of value to this process. Just from the standpoint of keeping the plan up to date on an annual basis, helping the plan, sponsor, evaluate all the investment options that go inside of a 401(k). One thing we talk about quite often in the 401(k) space is what are those underlying investment options? We talked a little bit about the qualified default investment alternative last time, target date funds.

Aric: Mm-hmm.

Royal: All of these are just the different investment options that are offered to plan participants. So, a good financial advisor, who's doing the correct amount of work there really wants to make sure that on an annual basis those investment options being evaluated. And if there's a change that needs to happen there, that those changes are happening. Oftentimes what we see as a 401(k) plan hasn't been updated and they have some very old mutual funds in there that were popular or good performers, 5, 10, 15 years ago, but have struggled in recent years. And oftentimes what that leads us to think is maybe there hasn't been a review done on these, maybe this hasn't been brought to the plan sponsors attention that maybe there's some potential liability there that they're not doing an annual review and going deep enough into the investment options to make sure that they're offering their participants a good quality lineup of funds.

Aric: Yeah. Royal, I don’t - the first option that you mentioned, which is basically a lot of it's done online and there's just no, you know, education for the plan participants, that doesn't sound like a good option to me. And the funny thing is that, you know, you and I have talked about this before. My first 401(k), I think was when I was 22 or 23 years old in a company and somebody came in, so that would, I'm assuming it would be the advisor sat all of us down. All of us guys that worked out in the warehouse area and the truck loading area and all that, and just sat us down and said, here's three things to pick from, and really didn't educate us. Really. Didn't tell us what we're looking for. At your age, you should be aggressive, at your age you should be moderate, at your age you should be conservative. That was really all the education, there was. So, on this scale, you've got advisors like yourself who know what their due diligence or it's their responsibility to really educate people and bring them topics up that people need to consider. And then you've got the folks that, like you said, the advisor that maybe is not reviewing on an annual basis. They're not doing their due diligence. They're not doing their job, in my opinion. And then now, I mean, they didn't have online back then when I was younger. But now this online thing, that brings up a whole lot of issues or questions that I would have as far as what is their responsibility? If they're going to introduce a plan, how do I even know or take those first steps to be able to invest wisely or set my 401(k) up wisely? So when you're looking at this, around your area, specifically in your state, what does that look like? How many people are actually bringing in an advisor to do a good job of helping the plan participants.

Royal: Well, it's funny that you mentioned that. So I had a conversation just last week with a client of mine. You know, she's approaching retirement and she has done a phenomenal job saving for retirement. She had a conversation with the person who is a financial advisor for her work retirement plan. And my client was relaying what this financial advisor told her. And it was amazing. Because the advice was the complete opposite of what you would actually want to do to the client. The client was told oh, you're saving too much in your 401(k) because the market's going down. And this was during the, kind of, March decline that we saw. So she told her because the market's going down, you shouldn't save as much. You should lower down that percentage to just what the match is and then wait for the market to come back before you raise it up.

Aric: Oh, good grief.

Royal: Anyone who has even had just the basic investing, education, I think can just understand, that's terrible advice.

Aric: Yes.

Royal: That's literally just saying, I don't want to buy when the market's slow. I want to wait until it goes back up higher.

Aric: Yeah. Yeah, exactly.

Royal: Completely counterintuitive. And I just had to laugh at that because you know, that, that almost felt like malpractice to me, you know, as a financial advisor. So, what I will say is, there's a lot of great financial advisors out there. You kind of want to evaluate and almost kind of listen in to make sure that what they're telling clients, you know, is the right thing and in the client's best interest, I'm not sure how that advice really benefited anyone. So, you know, there's a lot of financial advisors out there attached to plans, but if they're not coming in, and doing education, and if they're not available to do new education, that's probably something where you can make a major improvement on a plan.

Aric: Yeah, absolutely.

Royal: Yeah the other interesting thing, since we've just gone through this, you know, the recent, COVID-19 decline in the market is having a conversation with a plan participant and just explaining the basics of how markets function. I got a call from a couple. The wife was a client in a retirement plan that we work with. The husband was not. The husband had just moved all of his money into cash to protect it from the decline. Mind you, we had already lost 25% in the market and I just kind of walked, both of them through, hey, this is what we're seeing. This is how markets react. You know, you're still a ways off from retirement. You know, the way I would look at this as a long-term investor and you know, the big question is when you sell out of an investment, when do you get back into the market? And oftentimes human beings are absolutely terrible at determining when they should jump back into the market.

And after getting done with it, the wife who's our client just said, yeah, I'm going to leave things just the way they are. Just having that person to bounce those ideas off with is extremely valuable. And I don't think you really can have that relationship with a website or with a call center somewhere where you're getting a new person every time you call in. 

Aric: Exactly. There's no relationship there and there's no - you invest into your clients, Royal. I mean that's any, any good financial advisor invests time, energy, emotion into their clients because they're human beings and you're relational. You just don't get that anywhere else.  

Royal: Absolutely. Absolutely. With the financial advisor, we talked a little bit about the custodian or the investment platform that holds the money. There's two other parties, and sometimes we'll see these bundled together,with the investment platform or the custodian. Sometimes it will be separate as well.  

The first is the third-party administrator. The third-party administrator is a third party from the plan sponsor, who does all the testing for the 401(k) plan, usually prepares and sometimes files the tax form, the form 5500 and their duty is to the plan and the plan participants to keep the plan compliant. 401(k) plans do require a lot of testing. We talked a little bit about Safe Harbors that you can build into your plan design to reduce some of that. But, there's always some ongoing annual testing that needs to be done there, in the 401(k). That's always an added cost that's built into a plan somewhere. It might be a third party that you hire to handle all of that, or it could be part of the custodian.  

The other is the record keeper. This can be a third party, but for a lot of the investment platforms that we see, the record keeper, which is basically the person who keeps track of all the transactions in a 401(k)'s, and then reports that to the plan sponsor and participants. Usually we're seeing that more often bundled with the custodian there to basically keep track of and make sure that all the dollars are getting to where they're supposed to be.  

Aric: All right.  

Royal: So oftentimes we, as financial advisors, are the people that are bringing a lot of these parties to the table to help the plan sponsor, decide how best they want to run their plan. Sometimes it makes a lot of sense to bundle everything together. Other times you just want a little bit more expertise or you're looking for a little, little different level of service or trying to do something more particular that doesn't work in such a bundled strategy. So that's where we bring in that third party administrator and record keeper. 

Aric: Gotcha. Royal, I know that you've covered all the different roles that are in a 401(k). I'm sure there's way more information that you could give us, but I know that the second part of this podcast is going to be something a little bit different. What else did we cover today?  

Royal: Yeah. What I thought I do is kind of go over how we work with plan sponsors. And we want to split this up in two different ways. Number one is if you don't have an existing plan, so you're just kind of starting either, maybe a new business or, you know, trying to get compliant with these new regulations where you need a new plan. And then also saying, you know, what happens if you have an existing plan and need to kind of maybe overhaul that. 

So, on a new plan, often, what we'll do is once a client reaches out to us to say, hey, I want to explore this, we'll start talking to them about what they're actually trying to accomplish. If the business owner is looking to put away as much money as possible into the plan for themselves, and they're highly-compensated employees that might take us down a different road than someone who says, well, I just want something basic that's good for my employees. I'm not looking to maximize this at all. I just want something that's easy and simple to do.  

Aric: Mm-hmm. 

Royal: We'll evaluate the population of the business. You know, who's inside there. How many employees do you have? What's the average payroll? How much does the employer have, for either a match or a contribution? And we'll start looking at all of that. Does the employer want to add in a profit-sharing element where they have the option on an annual basis to just contribute to everyone's  401(k) plan or profit-sharing plan up to a certain percentage or a certain dollar amount. 

Aric: All right  

Royal: From there, we'll, kind of, take that initial evaluation, go out and kind of start designing a couple of different options, for plan sponsors to evaluate. So, I just want to kind of take the example of a simple IRA versus a 401(k). So, a simple IRA is really a simplified 401(k) plan. It is an individual retirement account. It looks a little bit like a 401(k), but it's actually an IRA where you can only make contributions into it through a business or payroll. It does require a match or a contribution, but it has much lower deferral limits than a 401(k) does. So, if an employer is saying, hey, I just want to get something in there. I have less than a hundred employees and I just want to keep it nice and simple. A simple IRA could be the way to go. With the simple IRA, you don't, also don't have the cost of the record keeper and the third-party administrator.  

But if you're an employer, who's saying, hey, I want to put a lot of money away. I want to have profit sharing. I want, kind of, maximum flexibility to do a lot of different things with a 401(k) plan. You know, that's really where kind of a full blown, Safe Harbor 401(k) with profit sharing can really do a lot of things for an employer. You know, there's other scenarios that we'll look at as, you know, how far is that owner away from retirement? Because a 401(k) gives you a lot more options than a simple IRA does. So, we'll start just looking at, kind of, all of those different factors. We're going to kind of take all that information. We're going to come up with a few different plans and plan designs to review with the employee, and then we'll help bring in that third-party administrator that custodian, help them get through all the investment options and really help design, set up and then sit down with their employees, and enroll them in the plan, get them set up and get them moving with additional education, someone to call when they have a question. And then from there we're doing the annual maintenance on the plan that you're required to do to keep up with your fiduciary duty as a 401(k) plan sponsor. Just to make sure that the 401(k) plan is meeting the needs, both of the participant, but also of the plan sponsor. 

Aric: Gotcha. Now when it comes, and I don't want to get too deep into the weeds and maybe this is entirely new, different podcast Royal, but how does a business owner know which one is going to be best for them? If they don't know all the positives? Let's I mean, cause you said a 401(k) that's pretty complex, but there's a lot more options for the business owner or the sponsor to get benefits from that. I would have no idea what benefits would come from a more complicated one. How does a business owner start that research? Is that something where you just meet with them and say what are you looking to do? What are you looking to accomplish? Let me show you the benefits of doing it this way versus this way. 

Royal: That's really where working with a financial advisor can save a plan sponsor a lot of time and heartache and blood, sweat, and tears here. Because if we get the plan design right, initially, then we can just do tweaks along the way. So the plan sponsor doesn't have to know all these different pieces. That's where they can hire a good, well-informed, competent financial advisor, who has been through this, who does this on a regular basis, to help guide them through all this help avoid the pitfalls, help avoid, you know, some of these issues that pop up and give them the kind of best designed 401(k) plan that we can for them. 

Aric: Yeah, absolutely. Well, it sounds like somebody needs to be calling you.  

Royal: Yeah.  

Aric: Yeah, definitely. I'm sure it's a pretty complex subject, so. All right. Where do we go from here?  

Royal: Yeah, from here, you know, if somebody has an existing plan. It'll depend on what platform they're on. You know, what they've done in the past, how the plan is designed. Sometimes it's as simple as sitting down with a financial advisor who knows what they're doing and they can make changes on the existing platform to meet that plan sponsor's needs. I've seen a lot of plans where an advisor set up a plan 20 years ago, never went back, may not even be in the business anymore. And all we need to do is sit down, kinda shine things up, make some tweaks, you know, do that investment review and then get it back up and running. Other times it might be the best thing to do to actually move it to a new platform, maybe bundle a plan or unbundle the plan, bring in a new TPA, bring in a whole new set of custodians to look at everything. Just to look over everything in the plan, and then also analyze how much is being paid in fees. There were a whole lot of laws passed over the last 10 years to make a 401(k) more transparent and disclose fees and all that good stuff. It still takes a while, I think, for a lot of people to understand where all the fees are going inside of a 401(k) plan. So once again, where an investment advisor or financial advisor can come in and kind of help, you know, kind of machete their way through that jungle of paperwork, disclosures, all that nonsense.  

Aric: Yeah. That's a great way to put it, I like that.  

Royal: The other thing is, we're going to bring in a whole new education program to clients. We're doing a lot of things online now, providing webinars for plan participants that they can either watch, after hours or on the weekend to really just give them that basic financial education, that most people just never got, either from their parents or from school.  

Aric: That's a good point. All right. Royal. I know we're running low on time for this part too. Do you have any final thoughts for today?  

I think the big takeaway that I'd like plan sponsors or business owners to walk away with is, you know, it's probably time to take a look under the hood of what you're doing to prepare for retirement, not just individually, but also for your employees, helping them make those decisions is exactly what we do. We can help you evaluate what's worked in the past. What might need to be tweaked. We can probably save you some money as well by doing a comprehensive fee review. So give us a call, our number (541) 772-1116. Happy to help, happy to consult and work with you to make sure that you're getting the most out of your retirement plan. 

Aric: Absolutely. You said it. Great. Royal. Thank you so much.  

Royal: My pleasure. 

Aric:  All right. And thank you all for listening to the Life by Design Podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe now button below. This way, when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends, family, and maybe your coworkers. Again, thank you so much for listening today. For everyone at Oregon Pacific Financial Advisors, this is Aric Johnson reminding you to live your best day every day and we'll see you next time.  

Outro: Thank you for listening to the Life by Design Podcast. Click the subscribe button below to be notified when new episodes become available. The views expressed are those of the presenter and may not reflect the views of United Planner Financial Services. Material discussed is meant to provide general information and is not to be construed as specific investment tax or legal advice. Individual needs vary and to require consideration of your unique objectives and financial situation. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning. Advisory services offered through Oregon Pacific Financial Advisors, inc. Securities offered through United Planner Financial Services of America, member FINRA and SIPC. Oregon Pacific Financial Advisors, inc. And United Planners Financial Services are independent companies. 

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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.