Is your company doing what is best for YOU?
Being a “Fiduciary” quite simply means acting in the best interest of another – period.
We’ve heard a lot of talk about this concept, and with good reason. It’s not just “noble” or “thoughtful” to act as a fiduciary, it’s really a necessity, and in many respects a legal obligation. At Dashboard, we manage our client’s entire financial life, and both our ethical fiber and practice standards of being a CFP® and a CPA require this level of Fiduciary care. This standard helps ensure that all decisions made are truly the most beneficial for our clients.
What we see all too often is the Employer, whether through simple laziness or possibly even gross negligence, putting their employees at a decisive disadvantage.
While this Fiduciary Standard between Clients and Advisors receives the lion’s share of the spotlight, there is a growing focus of a similar responsibility or “Fiduciary Duty” in the relationship between Employer and Employee. Unfortunately, without opening Pandora’s Box on Corporate Governance and Business Practices, mandating a “Fiduciary Standard” between the Employer and Employee doesn’t exactly work. Employers have created a business to generate a profit for the owners, while providing a fair and safe working environment for their employees. However, what we see all too often is the Employer, whether through simple laziness or possibly even gross negligence, putting their employees at a decisive disadvantage.
Over the last 15 years, we’ve worked with numerous business owners to help focus on some simple and cheap ways to enhance the lives of their employees. Being a business owner ourselves, we understand there is always a cost/benefit relationship between such decisions. However, we’ve compiled a list of benefits that have VERY LITTLE COST, but are often done wrong, or not done at all...
Roth 401(k)’s allow employees to direct a large amount of funds into vehicles that will never be taxed again. They are not right for everybody, but it truly costs a grand total of NOTHING to add this feature to a 401(k) plan. EVERY SINGLE 401(k) PLAN IN NORTH AMERICA should have this option. Even if only one employee might decide to use it, it costs nothing and is a good planning tool for some. If your 401(k) does not currently have a Roth component, it is truly a matter of either ignorance or negligence and should be addressed immediately.
This is a feature that allows an employee to convert existing traditional 401(k) dollars into Roth 401(k) dollars. Even though a 401(k) may allow Roth 401(k) contributions, we’ve found that a great many have not added the In-Plan conversion option as well. Again, this feature should cost a grand total of NOTHING, and should be added.
In-Plan Roth Conversions allow for two distinct planning opportunities for employees. First of all, it lets an employee choose to convert some or ALL existing traditional 401(k) balances into Roth 401(k)’s. Secondly, in many states, including Illinois, although federal tax is owed on converted amounts, state tax is NOT owed. Therefore, plans with a Roth 401(k) component that do not allow for in-plan conversions are basically mandating that the employee pay additional state tax that could be avoided with the stroke of a pen………sure doesn’t sound like that’s looking out for the employee’s best interest!
Many employers offer long-term disability coverage as an added benefit to employees. These plans are incredibly cost effective, often less than $50 per month. However, the vast majority of employers allow their employees to pay for these policies with pre-tax dollars. This sounds great until the day that one of these policies is actually needed. Given the policy was paid with pre-tax dollars, ANY AND ALL payments from these policies will be considered taxable income. THIS IS ALMOST CRIMINAL. On numerous occasions, we’ve seen employees become injured and not realize that the entire amount of their disability payments is now taxable since they paid for the premiums with pre-tax dollars.
WE STRONGLY BELIEVE THAT ALL DISABILITY PAYMENTS SHOULD DEFAULT TO POST-TAX PAYMENTS, WITH THE EMPLOYEE BEING FORCED TO OPT OUT OF THIS should they feel that the tiny tax break on the premiums is worth the potential immense tax burden on the payments! Check your pay stubs and see how you’re paying for your Long-Term Disability!
Not many people know this, but the maximum amount that can be put into a 401(k) far exceeds the “employee contribution limit”. In 2019, the employee contribution limit is $19,000 for someone under 50 years old. However, the maximum amount that can be placed into the 401(k) is actually much higher - $56,000. Let’s assume both the employer and employee put the maximum amount of pre-tax dollars into a 401(k). Employee contribution - $19,000 plus Employer Match - $11,200 equals $30,200. This means there is another $25,800 ($56,000 max less $30,200 contributions) that can also be added to the 401(k) on an after-tax basis. To do this simply grab your checkbook, write a check to your employer for $25,800, and have them deposit it into your 401(k) on an after-tax basis. THEN THE MAGIC BEGINS.
If not already in place, your employer can write an amendment to the 401(k) plan to allow for in-service distributions of after-tax amounts in the 401(k), and……………WAIT FOR IT……………WAIT FOR IT………………these amounts can then be placed directly into a ROTH IRA!! Yes, a Roth IRA, which will grow tax free forever. There are a few more rules and testing requirements involved with this feature, but it is most definitely worth inquiring about if it isn't currently offered – which I am almost certain it is NOT.
This has been such a hot topic over the last 5 years - 401(k)’s and 403(b)’s with excessive investment costs. These costs have come down substantially for larger plans, but we still see many smaller to mid-sized companies with “fee heavy” retirement plans. Take a look at your plan, and if these costs seem high, ask your owner or your HR representative "What gives?!".
These plans allow employees to defer, on a non-qualified basis, some or at times all of one’s salary. We’ve historically NOT been fans of this type of employee plan, as there are many potential pitfalls and some decent costs associated with a plan like this. However, given the new push to increase state taxes in many states as well as the ongoing rhetoric of increased tax rates on the wealthy, adding a plan that allows for the flexibility of income planning might be a good topic of conversation.