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Hardship Distributions – What is your responsibility as an employer?

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When an employee requests a hardship deduction, it can seem to be a great deal of work for an employer. Recent changes requiring more specific substantiation will go into effect on February 23, 2019.

Use these three steps as a quick guide to ensure you are meeting your responsibility as an employer.

Step 1: Ensure the 401(k) plan has language that includes  hardship distributions. (If it does not, see here how to make changes.)

Step 2: Determine if the hardship of the employee fits the definition of a hardship.

A hardship, as defined by the IRS is “made on account of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.”

The need can be one of the following (for employee, spouse, dependents or non-dependent beneficiaries):

  1. Certain medical expenses
  2. Costs related to buying a principal residence
  3. Tuition and related educational fees
  4. Payments necessary to prevent eviction or foreclosure on principal residence
  5. Burial or funeral expenses (for employee’s deceased parents as well)
  6. Certain expenses caused by damage to a primary residence

Once these two criteria are met, you can use this simple checklist to complete the process:

Step 3: Checklist

  1. Notify the employee
    1. Hardship is taxable
    2. Distribution amount cannot exceed cost of hardship
    3. All records related to the distribution must be kept and available
  2. Collect general information
    1. Reason
    2. Cost
    3. Amount requested
    4. Certification of truth and accuracy of information
  3. Gather the specific documents listed HERE
  4. Ensure documentation substantiates the hardship distribution
  5. Determine if the employee has taken advantage of the hardship distributions in the past
    1. Has the employee received more than 2 hardship distributions in a plan year?
    2. If yes, did they have an adequate explanation?
    3. If no, request more documentation on past distributions
  6. Clarify that the employee has no other financial means of alleviating the hardship
  7. Check the amount distributed is not greater than the financial need of the hardship
  8. Keep a record of all information used to determine if the employee was eligible for the hardship

For more detail on the recent changes to the hardship distribution rules, click here.

Find other do’s and don’ts of hardship distributions here.

FAQs on hardship distributions.

Plan Sponsor of the Year Finalist

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Each year, the editors of PLANSPONSOR magazine recognize leaders in retirement plan best practices—plan sponsors that aim to provide more secure financial outcomes for U.S. workers.

We’re so happy to announce that one of our clients, Wheelabrator Group, Inc. has been nominated and made it as a finalist this year! 

Click below to see the changes the company made to increase participation and average deferral in a company with primarily Spanish speaking employees:

PLAN SPONSOR OF THE YEAR Finalists | PLANSPONSOR
PLAN SPONSOR OF THE YEAR Finalists | PLANSPONSOR
2017 Plan Sponsor of the Year Finalists Categories

Read more about the Plan Sponsor of the Year award here:

PLAN SPONSOR OF THE YEAR Finalists | PLANSPONSOR
PLAN SPONSOR OF THE YEAR Finalists | PLANSPONSOR
2017 Plan Sponsor of the Year Finalists Categories

Positive Thinking – Fiduciary Rule

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Despite the news that advisers may not be legally required to provide advice that benefits their clients more than themselves (in the form of commissions and kickbacks) we’ve seen a lot of good come from the fiduciary rule already.

These are the four major benefits we’ve seen:

1. Many major investment companies are making changes to their fee structure. Several of them have said they will maintain these changes even if the rule is postponed.

Take a look at the following list of brokers who are changing their practice whether or not the Fiduciary Rule goes through:

A Complete List of Brokers and Their Approach to ‘The Fiduciary Rule’ - WSJ
A Complete List of Brokers and Their Approach to ‘The Fiduciary Rule’ – WSJ
Some brokerages have already rolled out a number of changes to comply with the fiduciary rule and are sticking with plans to improve disclosures to investors—regardless of the rule’s fate.

2. Investors are taking the time to educate themselves rather than blindly trust their advisers.

The following two articles are great examples of how investors are educating and empowering themselves to work with fiduciaries rather than commission based advisers.

How the Benefits of the DOL Fiduciary Rule Have Already Taken Root | IRIS
How the Benefits of the DOL Fiduciary Rule Have Already Taken Root | IRIS
When Linda and Bill came into my office, I could sense their hesitancy right away. And when they told me their story, I could understand why they were so apprehensive about meeting with a financial advisor. They had, quite simply, learned not to trust.

Ask your broker/adviser about the Fiduciary Rule

I thought it might be worthwhile to email my financial services company (Schwab) and ask them if they were planning to adhere to the standard of the proposed fiduciary rule despite Trump’s delay of its implementation. The answer I got back was polite,…
via: dailykos.com

3. Outlets are providing more and more education for investors.

Individuals are encouraged to arms themselves with information rather than trusting their adviser is always putting their best interests first:

The 21 Questions You’re Going to Need to Ask About Investment Fees - The New York Times
The 21 Questions You’re Going to Need to Ask About Investment Fees – The New York Times
Are financial advisers trying to part you from your money in ways you don’t understand? Ask them this set of questions.

4. Hundreds of advisers are coming out of the woodwork to declare themselves “Fee Only” and “Fiduciaries” whether or not the rule goes into place.

Take a look at some of the hashtags on twitter: #FeeOnly#Fiduciary and our personal favorite (our new hashtag) #FiduciaryDefender

As new information pours in daily, we’ll continue to do our part to defend the Fiduciary Rule and fight for applicability.

Don’t forget, there is still hope! This was definitely our favorite headline from last week:

Ask your broker/adviser about the Fiduciary Rule
I thought it might be worthwhile to email my financial services company (Schwab) and ask them if they were planning to adhere to the standard of the proposed fiduciary rule despite Trump’s delay of its implementation. The answer I got back was polite,…
The 21 Questions You’re Going to Need to Ask About Investment Fees - The New York Times
The 21 Questions You’re Going to Need to Ask About Investment Fees – The New York Times
Are financial advisers trying to part you from your money in ways you don’t understand? Ask them this set of questions.
DOL Wins Fiduciary Rule Case in Texas
DOL Wins Fiduciary Rule Case in Texas
Congress “gave the DOL broad discretion” to protect retirement investors, the decision says.
Until we hear differently, we’re going to continue thinking positively and counting down to the April 10th date!

Access Denied? Download DOL Fiduciary Rule FAQs Here

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Hoping to read the Consumer FAQs that the DOL published? Unfortunately, they are no longer available on their website. The page that used to host the FAQs now simply says “Access Denied.” Don’t worry, we have you covered! You can download the FAQs below.

 

Ding Dong Kickbacks

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“The [fiduciary] rule is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” This quote came from Gary Cohn, the White House National Economic Council Director as a reason to repeal the Fiduciary Rule.

This statement sounds like a great reason to rescind the Fiduciary Rule. Until you realize that the statement is completely erroneous.

Rescinding the Fiduciary Duty Rule isn’t at all like adding unhealthy food to a menu as Gary Cohn suggests.

It’s like your dietician recommending you eat Ding Dongs rather than eating healthy food because Hostess offered the dietician kickbacks and incentives to recommend those Ding Dongs.

Can you imagine your doctor getting away with that kind of behavior? Then defending it by claiming he or she didn’t want to limit your choices or infantilize you by telling you what you could or couldn’t eat?

Cohn’s quote is no different than that doctor being quoted saying “Why should a dietary recommendation be limited to healthy foods? A calorie is a calorie, right?”

Retirement investors pay advisers to recommend investments, just as your dietician is paid to provide nutrition advice. 

It’s pretty simple. If you want a conflicted adviser that puts their interests ahead of yours we can certainly recommend some firms for you to talk to.

If you would like a fiduciary with no conflicts to advise you, give us a call at 303.725.7086. Or email Michele Suriano at MSuriano@CastleRockInvesting.com. We will be happy to provide advice that puts your interests first and we don’t accept payments from Ding Dongs.

How do Financial Advisers Make Money?

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Do you know how much you’re paying your adviser in fees?

Historically, financial advisers have earned money in two ways. The first is by receiving commission on products they recommend, such as insurance. The second is by receiving a percentage of the wealth they are managing for the client.

These two pricing structures cause several problems.
Financial advisers are frequently offered financial incentives to recommend one product over another. This leads them to recommending a product that benefits them more than their client. Over the course of the client’s life, they end up losing tens of thousands of dollars because of this conflict of interest. This study, done by the President’s Council of Economic Advisers shows that in 2015, working class Americans lost $17 billion due to these conflicts of interest. That was just from retirement advice, not any other type of investment advice!
(Sidenote: The Department of Labor adopted a new rule that will make this against the law on April 10th. Unfortunately, it is expected that President Trump will postpone the rule.)
The second way of charging is referred to as AUM, or Assets Under Management. If a client has $10 million dollars in investments, and a financial adviser charges 1% of that amount, they are paid $100,000 a year to manage that money. This works well for individuals that have a great deal of money to invest, but not so well for individuals just starting out. A financial adviser is unlikely to work under this model with someone who has little to no money invested.
At Castle Rock Investment Company, we think financial and investment advice should be available to everyone, even if they are just starting out and have no money already invested. We also believe that our clients’ financial interests should ALWAYS come before our own.

Because of these values, we’re introducing a new pricing structure so we don’t have to rely on commissions or percentages to keep the lights on. We also want to make sure financial advice is affordable to even someone who is just getting started.
We’re calling this pricing structure Onward, because it’s meant to move you onward in meeting your financial goals. It is a subscription based model, where you pay each month for financial and investment advice.
If you are just starting out on your financial journey
Click here to read more about Onward.

Will Trump Repeal the Fiduciary Rule?

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We’re currently watching the inauguration and wondering what changes will be made today. As a fiduciary, we’re particularly curious about whether or not Trump will repeal the Conflict of Interest Rule. 
 
We received a text from a friend a week ago saying:
 
“As an investor I am worried that Trump is going to repeal the Fiduciary Standard. I heard a show on NPR that said all someone has to do is ask their advisor do you follow the fiduciary standard. If they do, great. If they don’t walk away. But I wonder if it’s really that easy. “

We’ve wondered the same thing; if it will be that easy. It is easy for a Financial Adviser to explain away why they are not a Fiduciary. It’s easy for them to represent the Fiduciary Standard as too complicated, something that will make their jobs too difficult, and an idea that isn’t good for our economy.
 
But really, all it comes down to is that anyone providing retirement advice will be required by law to put the client’s interests before their own. For example, if they would make a larger commission by recommending investment choice A, but they know it isn’t as good of a recommendation as investment choice B, they will be required to recommend B. 
 
Trump recently announced his pick for the head of the SEC, Jay Clayton. Clayton has long represented big names on Wall Street, and is expected not to advance the law that says all advisers must put their clients’ interests first. We are waiting to find out if the law that will go into affect April 10th, 2017 will eventually be repealed by the Trump administration. Trump’s picks indicate this is a possibility.
 
If the law is repealed, it will be your responsibility as a consumer to ensure you are working with someone who follows the Fiduciary Standard, and not be swayed by arguments about why the standard doesn’t matter. (Ask your adviser these questions)
 
We’ve always upheld the Fiduciary Standard at Castle Rock Investment Company, even when it wasn’t required by law. If the law is repealed, we will continue to follow the Fiduciary Standard. We will always put your interests first!
 
Call Michele Suriano at 303.725.7086 or email MSuriano@CastleRockInvesting.com today to meet with a Fiduciary Investment Adviser you can trust!