Navigating Secure Act 2.0 and 401k Retirement Plan Design Challenges | Ask My Man Manny Podcast

Join us on a transformative journey through the evolving world of retirement planning with Ricky Taylor, Director of Retirement Planning at CEP Consultants. From his beginnings at Prudential to mastering the art of employer-sponsored retirement plans, Ricky shares the pivotal shifts from generic solutions to sophisticated strategies that take age and tenure into account. Discover the intricacies of new comparability profit-sharing plans, which offer personalized benefits for business owners and key employees while catering to the entire workforce. As changes loom over Social Security, Ricky underscores the critical need for strategic planning to secure and sustain financial futures.

Our conversation illuminates the powerful role of financial advisors in shaping balanced investment portfolios and why understanding your investment philosophy matters more than chasing volatile market trends. We delve into the educational aspects of asset allocation and recent legislative innovations like the Secure 2.0 Act, which revolutionizes how young professionals balance debt and retirement planning. With tax incentives for retirement plans and student loan-matching contributions, the landscape is changing. This episode is a treasure trove of insights for anyone looking to navigate the complex but rewarding world of financial and retirement planning.

Chapters

• 0:03 Evolution of Retirement Plan Designs
• 15:27 Retirement Plan Investment Advice
• 30:11 Financial Planning and Professional Advice

Transcript

Speaker 1: 0:03

Yeah, I mean a lot has changed. You know, gone are the days but technically they're still here of the cookie cutter design whereby, you know, a company would just throw in some type of match, whether it be discretionary match or even a safe harbor match for that matter. The way I'm operating and what I'm seeing and the evolution is essentially creating, you know, sophisticated plan designs whereby you might pay attention to somebody's age, somebody's tenure with the company.

Speaker 2: 0:38

The content presented and discussed is purely intended to be general and educational in nature and should not be construed as specifically tailored investment, financial planning, tax, legal, psychological diagnosis or other professional advice.

Speaker 3: 0:54

Hello everybody, I want to thank you for joining us for another podcast episode of Ask my man. Manny and I have an extra special guest with us, a good friend of mine. We've been working for a few years with business clients and this is Ricky Taylor. He is the Director of Retirement Planning at CEP Consultants. Ricky specializes in employer-sponsored retirement plans, partnering with financial advisors to enhance their services for business owners. He brings expertise in plan design, administration, record keeping, fiduciary services to deliver CEP's retirement solutions and he just makes things that sound very complicated very easy to understand.

Speaker 3: 1:40

I think that's kind of what I like about Ricky and that's why I think that's kind of what I like about Ricky and, you know, that's why I think it's important to kind of bring him into our conversations, because all this stuff is very. You know, you have the big law passed last year, k plan or some type of retirement plan and all the days where you would work for pension and just tell your employer when you're going to leave and just forget about everything else. Those are gone. And then you have perhaps in the next couple of years, some discussions around Social Security being either means tested and so the personal responsibility part of retirement is going to fall more so on our business owners, our participants, and I'd love to hear your perspective, because you see it all the time. What is it that for you? That kind of brought you into this industry and said, maybe I wanted to be a part of helping people bridge that gap when it comes to retirement planning.

Speaker 1: 2:49

Yeah, man thank you so much for having me. You know, like you said, long time friendship, partners and all that good stuff. I mean, personally, I actually fell into this backless. You know, I started in the industry in 1999 as a registered representative for Prudential, and if you know anything about the industry back then, it's kind of like you have to create your top 100 list of the 100 people that you want to sell life insurance to or annuities, and, funny enough, I didn't know anybody that was ready to buy life insurance, let alone invest in annuities.

Speaker 1: 3:27

Once my team left Prudential, jumped over to New York Life, I went with them and that's where I got my first foray into retirement plans, operating on the retirement plan desk like an internal wholesaler per se. But the funny thing is I didn't know anything about that, right, I mean, I didn't really understand wholesaling until about 10 years ago. You know where I'm already, 15 years into my career. But I think playing around in retirement plans was a niche opportunity and, if I'm being honest, I knew what a 401k was. I just didn't know how it was. You know it was a firm that I went to in Philadelphia that really allowed me to, you know, broaden my horizon on the different concepts of 401k plans, 403b plans, 457s, you know, cash balance and the five benefit plans. So now I kind of I kind of see it as like the only thing that I would ever want to do outside of cooking, of course. But now I'm in year 26 of retirement plans and this is all that I know.

Speaker 3: 4:32

That sounds like a lot of people's story. You know, when I first came in the industry, I got exposure through the insurance industry as well, and then I realized, you know, maybe that's not what I want to do and I'll focus on it. And so retirement planning became a natural transition for me. And so what do you think has changed since that? You know, the late 90s, early 2000s to now when it comes to plan design, things that employers are looking at when it comes to the 401k market.

Speaker 1: 5:07

Yeah, I mean a lot has changed. Gone are the days but technically they're still here of the cookie-cutter design whereby a company would just throw in some type of match whether it be a discretionary match or even a safe harbor match, for that matter in a pro-rata profit-sharing plan. Pro-rata meaning everybody gets the same exact percentage. So if the business owners wants to put 10% away for themselves, then they have to get 10% to everybody else. The way I'm operating and what I'm seeing and the evolution is essentially creating, you know, sophisticated plan designs whereby you might pay attention to somebody's age, somebody's tenure with the company. Specifically, I'm talking about new comparability profit sharing where the consultant or the administrator will be able to create different categories or groups, to isolate different packages of people, if you will. So if I'm giving you an example, if you have a business owner in category A, maybe you have the office manager or another important person in category B, and then you have the rank and file in category C, we're able to carve out different profit sharing percentages through the different categories. Another example business owner might be at 20%, the office manager might be at 8%, the rank and file might be at 5%, something like that. Now, with what we're capable of doing in terms of, again, the customized plan design. It's a lot better.

Speaker 1: 6:45

Typically the contribution amounts go up by like $500 every year. I can slightly remember when I started in this industry. I want to say the contribution amounts were like 15,000 or something like that, and today we're at 23,000, with deferrals right, if you're 50 and older you can do a catch up so another 7,500, now we're looking at 30,500. So a lot has changed in the way of how the plans are designed, how you structure the eligibility, how you play with the investments. I don't recommend it.

Speaker 1: 7:13

I'm not a financial advisor, let me be clear about this. But when people are stockpiling their retirement accounts with self-directed brokerage account options using stock, that's not probably the best idea because if that stock tanks, so does your retirement account. So when I'm speaking with my advisor partners, I'm trying to explain hey, listen, even though you can do it, you don't want to stockpile a lot in it. So, to answer your question, there's a lot that's happened again, from contribution amounts to plan design, sophistication, to now we're talking a lot more about tax credits and even bigger tax deductions. So again, I know you said in the beginning there's a lot of information. I mean you let me know how deep in the weeds.

Speaker 3: 8:00

You want me to go? Yeah, no, I think a lot of people get confused and overwhelmed. What is the typical cadence? So your employer and I get this a lot employers. They have the bookkeeping, they get the CPA and now they're thinking about getting a 401k. What is the order of events that they typically have in their end of the year? They figure out they have this cash, you know, surplus, so to speak. What do you think is kind of that order of events and conversations for them?

Speaker 1: 8:37

Well, I think everything starts with the CPA or the tax preparer. You know they're typically like the quarterback of this whole situation because they're working on the business owner's finances, the taxes, right? So at the close of the year, when that person is preparing their taxes and you know they're looking at what is in luck for the government, meaning what taxes they're going to be paying, if it's a huge tax bill and there's no retirement plan in place, that's the first thing you're going to want to tell the client is listen, have a conversation with your financial advisor, let's find a solid retirement plan that we can build and structure to alleviate some of these taxes. If there's a plan already in place, maybe the design is not adequate enough to tackle this huge tax bill, right? So that's where somebody like myself would come in and like literally comb through the adoption agreement, looking for, you know, planned design inefficiencies, right? So I mentioned adoption agreement.

Speaker 3: 9:36

Just to define that for people who are not familiar yeah, yeah, of course my apologies.

Speaker 1: 9:41

The adoption agreement is the document, the legally binding document between your business, company's business and the government, stating that you can actually have this qualified tax retirement plan. It states all the do's and don'ts, the things that you can do, the things that you cannot do, within the retirement plan. So again, as I'm combing through that, I'm just looking for inefficiencies, ways that I can make the plan design better, for larger contributions for the business owner and the employees, which is going to relate to a higher tax deductibility opportunity and again, that's how we're going to save on taxes. So from the CPA or tax preparer then comes somebody like you, mitty, a financial advisor, who have relationships with people like me, right? So the business owner is not going to go from the CPA directly to a TPA third-party administrator and say, hey, my CPA told me to set up a plan.

Speaker 1: 10:40

Most TPAs are not licensed financial advisors so we cannot give investment advice. So we actually need to partner with folks like you and vice versa, so that we can provide the greatest solution for the client. The way I typically explain it to the client is we're a team. Okay, again, the CPA or tax preparer is the quarterback I like I like, using football analogies, since I played like 16 years. Right, they'll be the quarterback, you take your pick. Football analogies, since I played like 16 years. Right, they'll be the quarterback, you take your pick. You can be the running back, or the receiver, or the tight end, I don't really care right, we are on the on the offensive side. Receiving from information from that cpa, I will that makes sense.

Speaker 3: 11:21

This makes a lot of sense. Who's your team right now? Who are you liking? I'm a diehard Green Bay Packers fan. They got something behind them.

Speaker 1: 11:45

No-transcript Is this easy to do on your own. Yeah, it's really really easy to get into a situation. Some of the things that I've seen and have helped with improper filing. So maybe the 5,500 wasn't filed and the 5,500 is the tax return for the retirement plan. So you think about you as an individual if you don't file your taxes, there's a penalty for that right. Same premise with the retirement plan. If that $5,500 is not filed in a timely fashion, before the deadline, there are monetary penalties associated with that.

Speaker 1: 12:34

I would even say, a lot of times plan sponsors neglect what is going to need the census information, which is every single employee who was employed during that year, their demographic information, name, date of birth, date of hire, compensation, how much they've actually deferred it to the plan. That information and we run it through various compliance tests to make sure the plan is operating efficiently and in accordance with the adoption agreement. And all of the compliance testing are passing in the eyes of the Department of Labor and the IRS. But if we don't receive it, we can't do the work. So that's where things get crazy because, again, we understand business owners are operating their business to fund their success.

Speaker 1: 13:19

But having a retirement plan is a really big deal because again, it could be some devastating consequences. So that would be number two. I would say number three is not really understanding how the plan works. Really understanding how the plan works. Okay, these plans are exceptionally intricate. If I'm using an example of structuring a plan to really max out the business owner. And the business owner says well, you know what? I only want to put $7,000 in this 401k plan, but the maximum is 69,000, right, you're not taking advantage of what the plan can actually offer you. Now, if it's an affordability thing, that's one key factor right. But if they can actually afford it but they're just not understanding how beneficial it can be, that becomes a problem, okay. And then, of course, I would say that's the responsibility of the advisor, as well as the tpa, to educate the business owner on, again, how beneficial the plan design, the plan itself can be, so that they can take full advantage of it makes sense.

Speaker 3: 14:28

That makes sense and a lot of kind of change. With regards to investment options you talked about before you, how engaged do you think plan sponsors should be with picking and choosing investments and understanding how the markets work and, you know, using their knowledge to go ahead and make their own decisions?

Speaker 1: 14:50

Yeah, I would say the plan sponsor should not be involved. Okay, again, utilize the team. Okay, you have the CPA, you have the financial advisor. That's exactly where the financial advisor is going to come into play, because I mean, how much time have you guys put in understanding, getting licensed up, understanding the markets, understanding investments, understanding how to help a participant allocate their funds, right? So the plan sponsor is always the fiduciary. That means they have the final decision-making authority because it's their plan, right?

Speaker 1: 15:27

But if a plan sponsor says I'd like one fund family over everybody else and they only ask you as the advisor, to select that fund family, well, that fund family may not be the greatest diversifying fund family. So now participants are getting even more savvy and understanding the market and investing and they say, well, wait a minute. I mean, I need some diversification in this portfolio that you're offering me. Then they reach out to the Department of Labor. The Department of Labor opens up an inquiry. Now there's a potential liability against the plan sponsor for selecting only that one fund fan, right? So if you're following what I'm saying, the sponsor should never be the person selecting the investments. That's where you, as the advisor, comes in and you help them understand the whole array of what's out there, you know, ranging from different asset classes, categories the whole nine, so that you can create a balanced portfolio amongst everything that's available.

Speaker 3: 16:38

That's key. You know, there is an occasion where I see clients and you know I've been doing this for 17 years and I can tell where people are chasing performance and they'll just hit a sort button on a list of funds and whichever ones are the top performers, that's the one that they'll go ahead and put the money in and then they'll sort, or they'll just go ahead and they'll pick every single fund and they'll just evenly put the money in those, or they'll have a friend and they'll say, well, my friend did this. And you ask them, why did your friend do that? And they say I don't know this. And you ask them, why did your friend do that? And they say I don't know. You know, you got to know why you do the things you do, or why they do, why your friends, who probably care a lot about you, you know why they did the things they do.

Speaker 1: 17:29

You know, yeah, but here's the thing with that, matty you know and again I've said it earlier I am not a licensed financial advisor. I do not and cannot give investment advice, but I know some stuff you know. And what I do know is each person's investment philosophy is different. You should not follow what somebody else is doing just because either they're having success or that's what they believe in. You know, you certainly want to understand your own investment philosophy before you start allocating your dollars into these different investments, because, god forbid, the market go down and you start freaking out and now you're yelling at the business owner, you're yelling at the financial advisor, but you're in an investment category that you have no business being in because, again, that's not your investment philosophy.

Speaker 1: 18:18

So one of the key things that I do and I explain to folks when I'm doing education and enrollment meetings make sure you do the asset allocation questionnaire. That's going to tell you what type of investor you are. So now you can feel more comfortable investing in the things that associate more to your investment philosophy. Right, and it just works better that way. So that's the key thing that I would say to folks instead of trying to chase the market. Understand your investment philosophy.

Speaker 3: 18:50

And I would also piggyback on that is we have as business owners and I get it you have 10 things to do and all 10 of those things are number one and you're thinking we have something to set up. Our payroll person said they got it and it's all done, it's fixed and it's all on autopilot and they don't come around. They haven't looked at our funds, they don't talk to us about it, but it's there, it's probably all kind of situated and the market's going up and things are fine. But markets kind of work together right and so your business is performing well, the economy is going well, stock market is going well. What happens? Stock markets stop going well. Economy doesn't do well, your business may not do well.

Speaker 3: 19:34

Then you got to start reducing headcount. Your business may not do well, then you got to start reducing headcount. You know you start reducing headcount. The people you reduce headcount for. They start looking at their investments and then they start trying to think did I get a fair shake?

Speaker 3: 19:50

And then that's kind of when these things kind of get reviewed and looked at, and so it's not when things are great that you're going to see any problems. It's going to be when you got to start reducing headcounts or people are not prepared for retirement and you just didn't see something that just you know you should have. Yeah, so when it comes to last year, last December, there was a whole lot of changes with the regulations in Congress. I know you can now do a Roth with the SEP. You can do, perhaps, with a private letter ruling. Just last week we found out you can have your employer match perhaps go to your student loan. There's all these different things, but what do you think is kind of the cool thing that plan sponsors are looking for or participants are kind of considering with the recent law changes?

Speaker 1: 20:46

You know right away, we talk about tax credits, right? I mean, that's been around for a little while, but it is part of this whole secure 2.0. Tax credits for setting up a plan, tax credits for employer contributions whether you can take out of the tax credit or the tax deduction, the student loan matching, I think is going to be a game changer, right? Because when you think about young folks coming out of college saddled with debt, you know they get these jobs and they start making money. Yeah, it's great if you can start saving for retirement as early as possible, but with the student loans, young folks have to pay these loans back. So, being responsible and paying the loans back now with Secure 2.0, the businesses have an opportunity to match on those dollars. So I think, again, that's going to be a game changer.

Speaker 1: 21:37

One of the key things about a retirement plan that I've found over the course of the last couple of decades is typically the retirement plan 401k. 403b, whatever it is, is the first opportunity for somebody to invest with a professional investment advisor or even invest in general, right? But at the same time, when something happens, it's also the 401k that people want to turn to, you know, if there's some type of emergency financial emergency. One of the other key things is, you know, the emergency savers account that's also going to be offered. I mean, it's got to be written in the document, but there's an opportunity now to set aside some ancillary dollars outside of the 401k for access in an emergency situation. So I like that one right.

Speaker 3: 22:29

So you're saying this is a bucket of money that you can get without paying any penalties to get. You don't have to wait to 59 and a half to get as an emergency, essentially a real emergency fund right, and I mean I'm not saying it's a lot of money.

Speaker 1: 22:44

I think it's actually up to like 20, not a lot. That could be a lot for some people right, exactly, I mean it could replace a refrigerator, your stove or something like, and that's eligible for a match correct that is eligible.

Speaker 3: 22:55

So you don't have to make a decision if you're going to put money into your plan, whether you're going to get to get your full match, whether you're going to never have access to that or start with your emergency savings. Because that's the really big part. I get with a lot of people, A lot of young people, who are getting planning through me. They don't have any emergency savings and they have a full match, but they can't do both. Right, when does that next dollar go? Right, If you have that savers account, well, you're doing both because you're going to go ahead and get your match, which is 100% return on your money, and then you're saving for that emergency through that bucket. Yeah, that makes a lot of sense.

Speaker 1: 23:35

Yeah, I was going to say one more piece to you know, some of these changes is like the long-term part-time moves, right? So the normal average retirement plan eligibility let's use a 401k is you have to be employed with the organization for at least one year and during that one year you have to work at least a thousand hours and the maximum age is age 21,. Right, so we put that in place. If you were 18 years of age, even though you worked for the company for two years, you couldn't participate in the plan. Right? If you were 23, but you only worked part-time, youtime less than 700 hours a year, you wouldn't be eligible to participate in a plan.

Speaker 1: 24:20

Now, with the new changes, it actually changed twice already the long-term part-time employees if you work two years and at least 500 hours each year, you would now be eligible for the deferral portion of participating in a retirement plan eligible for the deferral portion of participating in a retirement plan. So again, the deferral is the money coming from, you know, the employee paycheck going into the retirement account. That's all that they would be entitled to, unless the document said something else. But if you want it to make it more stringent, you could have the long-time part-time eligibility for the deferral and set a one-year wait on any employer contribution, whether it be match, safe, far-for-all profit sharing. So now, in this case, business owners really have to pay attention to how long their employees are working and how many hours they're working to allow them to participate as a long-term part-time employee.

Speaker 3: 25:17

Yeah, I think that's fair, you know, and yes, it's some administration costs for the employer side, but they're not saying you have to contribute employer. They're saying at least let them make their choice to go and get in and put their dollars in. That's going to help you out, the employer as well, because you want participation from people too. And I guess the last area that I always have people question, or I'm starting to see more questions about, is the mandates, state mandates. You have Washington State saying long-term care is going to be aaid. You have certain states saying that retirement plans are required for certain employers of a certain size and they're gradually rolling out because they're recognizing that people are not ready for retirement. And in a private sector, what is it? 25% of people covered by a 401k plan. Yeah, so we got a real big problem. And what are the rules now? Where do you think we're going towards in the next, say, five years or so?

Speaker 1: 26:24

Well, I mean, if we focus a little bit more about the state mandated plans, a lot of states I think last time I checked there may have been 18 states that have a mandatory plan in place Could be a little bit more. But I would say to the business owners take a look at your state's plan, because most of them are simply a glorified IRA that simply allows up to the IRA limits on the deferral side and it has no employer contribution opportunity. And it has no employer contribution opportunity. Now again, in my opinion, if I'm looking at, if I'm a business owner and I'm looking at what can I do to save on taxes, it is not going to be one of the IRA state mandated plans. I do know I'm pretty sure there's like maybe two states that actually have a 401k where you can have employer contribution, but if it's two states out of the 18, you have to be a resident of that state.

Speaker 1: 27:20

I'm not mistaken to participate. It just simply makes more sense to have a conversation with. You know somebody like you, manny, you know who has a relationship with me. Let's design a plan that's going to be, you know, really beneficial to the business order getting them, you know, the business owner, getting them the contribution opportunity as well as the tax deduction opportunity. I applaud the government for saying everybody should have a retirement plan, because we should, right. I mean we certainly need dollars in our later years, in our retirement years, to be able to support ourselves and fund our lifestyle, but it's just a matter of how you get there.

Speaker 3: 27:58

And for disclosures. Cep and Gannon Wealth Management are not the same company. I do full fiduciary analysis of my employers' plans and their goals and their experiences and what they want to accomplish, and so sometimes that might mean just doing what they're doing, going through one of the prototype plans like a SEP or simple, or sometimes I mean creating a 401k. So it's always based on what our employers need for their situations. Yeah, but this is this is all all good stuff. Any words? Final words of advice, ricky.

Speaker 1: 28:35

Well, I mean, it's November now, right, we're coming up on 2025. I would say, if you have a retirement plan currently, do your annual review, kind of comb through the details to see if what you intended for the plan to do for you is actually working right. I mean, there's an opportunity we might have to tweak it. Or you might have to tweak it, call me, I'll help you tweak it. If you don't have a plan, yes, certainly take a look at your state's mandatory plan situation. If you have a financial advisor, talk to your financial advisor. If you don't have a financial advisor, give Manny a call. Right, you certainly want to get in front of the opportunity before it's too late. Now again, with some of the rules, those deadlines have been extended, but why wait until the last minute? I would say that's essentially it, manny, take a look at what you're currently doing, what you have and what you could be doing, and just reach out to your team.

Speaker 3: 29:33

Thank you again, rookie. This is all good stuff. I think everybody probably learned something from some piece of what you said, and there's going to be a lot of changes. I might have you actually come up again if you see something that's interesting to talk about with people, and I really do appreciate it. That's it, folks.

Speaker 2: 30:09

Till next time, have a nice time. Financial planning tax, legal, psychological diagnosis or other professional advice. Any data cited is valid as of the date of presentation, but please know that such data are frequently subject to change. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained in this course should be construed as an offer to sell, a solicitation of an offer to buy or a recommendation of any security or other financial product or investment strategy. All investment tax and financial planning strategies involve risk that you should be prepared to bear. Investment, financial planning tax, legal and other professional advice is specific to each individual and entity.