Pub. 17 2018-2019 Issue 1

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 37 new jersey auto retailer W W W . N J C A R . O R G guidelines, by making sure that employees have all the facts about the costs and long-term results of the two options, so that they can make an informed decision. Fund Selection Program – Qualified Default Investment Alternative (QDIA) Not all employees take an interest in their 401(k) plans. While they may enroll and start to defer part of their salary, they may neglect to select investment funds and will be invested in cash. If this went on for years, employees could make a claim that they missed out on potential stock market growth opportunities, because the company failed to properly guide them. The Department of Labor wants to avoid this scenario and, there- fore, requires that each plan offer a Qualified Default Investment Alternative (QDIA). If the employee fails to make a fund selec- tion, they are automatically invested in the QDIA. To meet this requirement, the most common solution is to offer a full selection of Target Date Funds. According to Vanguard, nine out of ten plans in 2016, offered Target Date Funds and 72% of all participants in 401(k) plans had a position in a Target Date Fund. Our research shows that many plans fail to offer this straight- forward and effective requirement. Not only is this a major red flag that can attract an audit and a fine, but it can leave business owners exposed to a potential lawsuit that might be very hard to defend. Target Date Funds Target Date Funds are a managed portfolio of mutual funds (either active or passive) geared to a specific retirement date. Employees pick the fund closest to their projected retirement date. The manager of the fund starts out with a predetermined mix of stocks, bonds and cash. As the participant gets closer to retirement, the mix gradually becomes more conservative, by decreasing the amount of stocks, and increasing the percentage of bonds and cash. It is basically a turnkey portfolio. The employee can “set it and forget it.” If an employee fails to make an election, they are automati- cally invested in a fund that targets the year they turn 65. They can always override this auto-selection later, if they choose. It is recommended that dealers offer a full suite of Target Date Index Funds, as your QDIA! (The target date is the approximate date when investors plan on withdrawing their money. Generally, the asset allocation of each fund will change on an annual basis with the asset allocation becoming more conservative as the fund nears the target retirement date. The principal value of the funds is not guaranteed by any time, including at and after the target date.) Risk Based Models Another, potentially effective, fund selection tool to offer em- ployees are Risk Based Models, in the fund line up. Risk Based Models are managed portfolios of mutual funds (either active or passive) geared to a particular risk tolerance. The fund manager creates five, predetermined portfolios, from conservative to moderate to aggressive, each with a varying blend of stocks, bonds and cash. Employees fill out a short Risk Tolerance Questionnaire, upon which the appropriate model is recom- mended. It is important for the company fiduciary to encourage employees to revisit their risk tolerance over time, and adjust their Risk Based Models accordingly. It is recommended that dealers include Risk Based Models built on stock and bond index funds. Kevin Ellman, CFP is the CEO of Wealth Preservation Solutions. He can be reached at 201-632-2022 or kellman@wpsllc.net. Contact Kevin for a complimentary copy of his new book, The 7 Biggest 401(k) Mistakes Business Owners Make And How To Avoid Them, or to arrange a complete review of your dealership’s current 401(k) plan and potential cost-effective alternatives. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Wealth Preservation Solutions, LLC is not affiliated with Kestra IS or Kestra AS.. The information contained in this article was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/ legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.