The Trump Effect: Small Business and Regulation with Mike Savage
Mike Savage, Retirement Compliance Manager at Paychex, and Gene Marks address some of the top questions surrounding retirement compliance, including the DOL’s Fiduciary Rule, state retirement initiatives, health savings accounts (HSA) as a retirement planning tool, and the future of retirement plans.
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Gene Marks: Hi, everybody. Welcome. My name is Gene Marks. I write every day for the Washington Post and I write weekly for a bunch of other places: Forbes, and Inc. Magazine, Entrepreneur Magazine. And I also run my own small business outside of Philadelphia. I have 10 people in my company. We're a financial management technology consulting firm. And I'm here today talking with Mike Savage. No, not that Mike Savage. You get that joke 8,000 times.
Mike Savage: Every day, once a day.
GM: So thank you. Not the political Mike Savage, but actually the Iron Man triathlon Mike Savage. Eight per year? You were in eight?
MS: I was for a period time.
MS: --the shorter ones, though.
GM: --triathlons per year, which is, again, because you did this before me. You swim for how long? Well, first of all, you run.
MS: You swim first.
GM: You swim first.
MS: About 1-mile swim, and then about a 28-mile bike, and then about a 6-mile run.
GM: Oh, of course straight flat grounds, right?
MS: Yeah. It's all really flat, yeah. Very flat.
GM: It's nuts.
MS: I stay pretty active, yeah.
GM: So, Mike, you are a compliance manager for retirement.
MS: That's correct.
GM: Am I saying it right? At Paychex. So your job is really to monitor all things and everything that's going on regarding your clients', your customers' retirement plans.
MS: That's right.
GM: First of all, how long have you been at Paychex?
MS: I've been with Paychex for a little over two years.
GM: Two years.
MS: I've been in the industry for about 17.
GM: Where were you in a prior life?
MS: Prior to Paychex, I was with a local company, a record keeper and third-party administrator in the retirement space. And I was there for about five years. And then prior to that, I was also at another local company, a registered investment advisor, where I was the chief investment officer.
GM: Cool. That is very cool.
MS: I've been on both sides of the retirement space, investment management and record keeping.
GM: When you were only 10 years old, 11 years old, were you, like, I just really want to specialize in retirement plans? Was that your thing?
MS: It's funny, my dad's in the business. So that was literally, exactly what I did not want to do. I did not want to follow in my dad's footsteps. I didn't even think about it, but look what happened. Look what happened.
GM: So you've been there for two years. You’re a client manager, so about how many people report in to you?
MS: Three. Actually, soon to be four.
GM: Got it. So what do you do all day?
MS: Well, the regulatory environment is pretty active right now in the retirement space. So that eats up a lot of our time. But then we also partner really closely with a bunch of our business partners to make sure that we understand how the regulatory environment is going to impact our current product and service offering to make sure that we're providing a really solid product for our clients and the client employees. And that's the biggest desire right now. And there's a lot of opportunity to create a great experience for our clients and help them prepare for retirement and help their employees prepare for retirement.
GM: So what is the product that you're selling? In other words, are you advising clients on retirement plans that they should be choosing?
MS: We do not. We are actually the record keeper and the administrator of the plans. But we work very closely with investment advisors around the country who actually are the ones who give investment recommendations and plan design recommendations to the client. And then we help with that. And we provide services and products that will help those advisors make it easier for the client. So we're purely there as the record keeper administrator.
GM: Got it. But you are the administrator. And I guess it's a pretty short step to take. I mean, if you're using Paychex for HR or payroll admin, I mean it seems like it's kind of a no-brainer if you're going to have a retirement plan.
MS: It is. And with the integration and ensuring data integrity, not only across payroll, but across into the record keeping system for 401(k) plan is paramount to accuracy of the administration of the plan.
GM: If a client already has like a 401(k) plan, for example, they can transition over to you guys to do the record keeping?
MS: Absolutely. It's very easy. We onboard startup plans, so plans that are brand new, and then we also onboard thousands of conversion plans every year. So that's an existing plan with another provider that onboards to us. So we do thousands a year.
GM: I was reading some report that there is a huge amount of small businesses, like half of small businesses, that don't have 401(k) plans in their business and kind of blows me away. Is that right?
MS: It's pretty startling. And when you look at the top three or four benefits that most employees are looking for when they join an employer, number one is, typically, insurance. But then number two is always retirement. And it's been that way for years. So for small business owners not to take a closer look at adding a 401(k) plan, it's going to be a challenge from a talent acquisition and even a talent retention standpoint. And there's a lot of measures in place right now to make it more accessible for small business owners. And you're seeing a lot of activity on the state level. So with the data that you just quoted with a huge amount of small businesses that don't have workplace retirement programs, many, many states now are introducing or proposing legislation to sponsor their own private sector retirement plans to help expand coverage.
GM: So it would be like a state-run plan.
MS: It would be a state-run plan. And there are going to be payroll deduct IRAs, which is a little bit different than a 401(k). So the contribution limits are quite a bit lower. It's an interesting starter program, I would say, for a small business owner to consider for their employees. But at the end of the day, if we're really going to tackle the retirement crisis in the U.S., the defined contribution 401(k) plan is really the best option for small business owners and for their employees.
GM: I guess business owners don't realize that if they're not helping their employees with retirement — I've actually seen it for real — sometimes employees, they don't stop working. Or if they do and they have financial issues, a lot of times, they come back to their employers for help.
MS: They do. They do, and a lot of people tend to rely on Social Security, which is also well-publicized that there's challenges — with the solvency issues by, I think, it's 2027 now, the new actuarial tables are showing. So that's a significant issue that we're going to be facing in our society soon. So that's why the states are trying to jump in. And they're doing that because there's no federal mandate. With no federal mandate in place to make private sector employees save for retirement the states now have to jump in because they want to expand coverage, but they also want to try to positively impact their budgets in future years. Because if people aren't prepared for retirement, they're eventually going to need services. So there's a lot of efforts in the private sector, and then in the public sector, to battle this crisis.
GM: Have any states actually passed this yet? I know people are talking about it.
MS: The two states that are probably the closest are Oregon and Illinois, probably Oregon being the closest. And they're beta-testing their program starting in July. And it's a payroll deduct IRA program, kind of a Roth IRA. So it's an after-tax contribution. And it's a mandate. So small business owners will be mandated to have their employees participate. But most of the programs have an opt-out provision where the employees can opt out of the program.
GM: Do you think that these plans themselves, if they start becoming more popular among states, could that be a benefit to business owners? I have a 401(k) plan. But say I'm not, for whatever reason. This is at least theoretically forcing employees to put money away through a payroll deduction. It's not costing the employers anything, right?
MS: That's right.
GM: Because it's a payroll deduction. Don't you think it's a good thing?
MS: I do think it's a good thing. I think it's great, just from a coverage standpoint and getting everybody in that habit of saving for retirement. And I think, as small business owners get used to some of the administration and providing data to the states to help their employees save, eventually, if the education and awareness is good enough that they'll realize that a 401(k) is probably the best solution for them. And it's going to be better for them because there's tax incentives as a small business owner as well.
GM: It's pre-tax, whereas the states, they are after-tax.
MS: And with 401(k) plans, there's nuances that allow you to do both. You can do both pre-tax contributions. And then, if the plan has a Roth provision, you can do after-tax contributions as well. So depending on the individual participants, tax landscape, they can choose, and tax planning strategy they can choose to make whatever contributions they want.
GM: Well, you brought up a good point before is that employees today expect this kind of thing. It's standard. So it's a tight workforce now, as you're competing for good people. And you have the guy down the street that's offering a retirement plan and you're not. And that could be the difference to hiring a good person. Setting these things up are pretty inexpensive.
MS: They can be. They can be pretty inexpensive. And based on — a lot of providers are being very creative with how they are allowing these plans to be funded. A lot of times it can be funded from the plan's assets. And a lot of times small business owners choose to fund the entire fees associated with it. But there's a lot of different nuances to how that can work. But there's just a ton of potential in that space that small business owners really need to look at.
GM: One of the biggest advantages of a 401(k) plan for employers is that the more that your employees contribute, the more you can contribute, right?
MS: That's exactly right. The way the regulations and laws are set up is the more your non-highly comp participants contribute, the more the highly comps can contribute. So there's a lot of benefit to providing education and awareness to the participant base about the importance of saving for retirement. And that helps benefit small business owners.
GM: It's crazy. It does amaze me that so many companies that I know, they don't have a 401(k) plan. It just seems like there's no downside to doing it. It's very minimal cost. You mention highly comp employees or lower comp employees. There's this discrimination test that these plans need. So the government requires that you run through those calculations. In other words, you can't have no contributions being made by your employees, but then all the executives are throwing their money into the plan. It's got to be sort of balanced.
GM: And you guys do that, right, I'm assuming as administrator.
MS: We do. We absolutely do. We run many different nondiscrimination tests on our plans. And the spirit of 401(k) plans, it's really in the benefit employees of the employer, the participants of the plan. I mean that's how the regulations are set up. So it's to protect the interests of participants of plans. And that's what nondiscrimination tests, they test that, any discriminatory activities in the plan.
GM: Well, I'm a business owner, I've got a 401(k) plan. I do. My understanding is that I have a fiduciary responsibility over that plan. Meaning that, I guess if I approve the wrong investment advisors, if I have the plan not set up the right way, and it's a cost to my employees, they lose — I could be responsible or my company could be responsible.
MS: Both. Your company and you personally. So being a fiduciary is an important role, as far as sponsoring a retirement plan. And at the end of the day, as a small business owner, your duty is to monitor whether it's service providers or the investments in the plan. In partnering with service providers that understand the industry and understand the regulatory landscape is extremely important.
GM: How do I know that, by the way? I mean I don't know. What do I know if this guy knows what he's doing or if he's got his qualifications or whatever? Do you advise clients on that?
MS: We do not. Well, we do not advise clients on that. So we, as the record keeper and administrator, we partner with a lot of advisors around the country, but we don't recommend. If we did, then we would be a fiduciary to the plan. So we do not act in a fiduciary capacity. But with the new regulations — I'm not sure how familiar you are with the conflict of interest rule, the fiduciary rule.
GM: A little bit. Tell me about it.
MS: So the fiduciary rule is really big in our industry right now. And what it's doing is trying to establish regulations that eliminate conflict of interest, both in retirement plans and then also in IRAs. And the idea is to protect the interest of participants.
GM: Conflict of interest, meaning what? What would be a conflict? Like if I had my high school buddy become the investment manager type — is that a —
MS: Yes, and if he's making investment selections or recommending decisions to the plan that are more in his interests than the participants of the plan or the account holder. So these regulations are meant to address that and to make sure that decisions made related to the administration or in the investment decisions of a plan are in the interests of the participants. So it's reasonableness of fees, it's understanding proprietary funds. And if an advisor is recommending a proprietary product of any sort that has a detrimental impact to the plan or the participants, to have that disclosed, to make sure that everybody is aware of the impacts of that.
GM: Now these are existing regulations or proposed?
MS: That's a good question. So they are existing regulations, but they are under fire right now. So right now, because of the change in the administration —
GM: They consider it to be too regulatory, too onerous, right?
MS: Yeah. The fiduciary rule has both proponents and people who are not in support of it. So what they did was they encouraged the DOL to delay the applicability date until June 9th. So it gives the administration and the Department of Labor a little more time to understand the full implications of the rule.
GM: So that rule will be delayed. And again, say that rule happens. Say it then goes into effect. So how does that impact me as a business owner? What do I have to do then?
MS: That's a great question. So depending on how your plan is set up, and which service providers you partner with, there will be different obligations for the Investment advisors associated with that plan or anybody who maybe acts in a fiduciary capacity associated with the investments. So if you're working with, say, a broker-dealer or a registered investment advisor that provides investment advice, they're going to have different disclosure requirements to you now to understand if there's any conflicts of interest present, especially with the investments in the line-up of the plan. It's complicated.
GM: It is. And we work, in my company, like a lot of small businesses, I won't name names, but it's a larger financial institution, a recognizable name that's handling our 401(k), as it is. How do I know what they have to—they're supposed to be disclosing to me? But how do we know if they're disclosing it to me or not?
MS: It's a great question. So what the Department of Labor tried to do when they finalized the rule, is they released several rounds of FAQs. And one of those was directed at consumers. And within that FAQ was a list of questions that were kind of directed at the small business owner or plan sponsor, asking their service providers, do you act in a fiduciary capacity? Are there investments in the fund lineup that have conflicted advice? So that's a great question. Small business owners, really, as a fiduciary to the point, really need to have some awareness about these regulations and ask the tough questions of the providers. Because these plan are supposed to be in the best interest of participants. They are.
GM: Where do we go? Can we can we come to Paychex with those questions?
MS: Absolutely. Paychex is in a great position to help our current plan sponsors and then prospective plans sponsors navigate these waters right now. And it's a challenging time for the industry. And I think it's a good thing. The spirit of this rule is a really great thing.
GM: They're trying to protect the employees and us.
GM: Our money is invested in there as well.
MS: Absolutely. Small business owners, there's a lot at stake right now. But there's a lot of people out there that can help, whether it's service providers like Paychex from a recordkeeping standpoint, an administration standpoint. There's a lot of excellent investment advisors in the industry as well that are trying to do the right things.
GM: Do you find most of your clients could use more education when it comes to their 401(k) plans?
MS: That's pretty widespread across the industry, I'd say. I mean, education is extremely important. I think the great part about our industry right now is that the improvements in technology are making education far more accessible, whether it's through mobile apps or tablet apps and push notifications and emails. There's just so much information out there that's available to participants. At the end of the day, the participant has to take an active role in preparing for retirement. And the expectation, I think, certainly from younger generations is that the small business owner is going to help them along the way and really feed them this information and almost do it for them in instances. So that's why plan design is so key, creating plans that run themselves and are void of conflicts of interest and really help people prepare for retirement.
GM: Let me talk about some of the other plans. So a lot of the business owners know that 401(k) plan is what it is. You said that you really don't see many other plans out there. It's primarily 401(k) plans. Do you foresee any changes to that in the next couple of years, do you think? I've heard—these are all just things thrown around. There could be potential plans for helpful tuition reimbursement. There could be plans for 529, which is for putting money away for education expense. After-tax money, but you could use it for tuition and education-related expenses. Do you hear any of those? Do you think any of those have credence?
MS: I think besides insurance and then retirement would be in the number one and two benefits that people are looking for. The third one seems to be student loan repayment. That's gaining a lot of traction right now with the younger generations coming out of higher education saddled with a tremendous amount of debt. They're looking for the employer to help with that. I think as legislation passes, whether it's through some legislation related to tuition reimbursement or whether it's through a 401(k) arrangement where, if an employee makes their loan payment, the small business owner will match on their behalf into the 401(k) plan.
GM: That's creative.
MS: Yeah. Which is all great stuff. And it really will help the debt crisis that we have too, the student loan debt crisis. So that's a big one that we see. Also another big thing that's coming through is there's a piece of legislation that's been proposed called the Retirement Enhancement Savings Act. And there's a couple of provisions of that are pretty interesting. But the most attractive ones are probably the tax incentives for small business owners with either sponsoring a retirement plan or adding certain provisions to their retirement plan where they'll get some tax incentives. And those are really around the auto features. So auto-enrolling newly eligible participants and then auto-escalating them.
GM: I think the rule is, and correct me, and we'll see if it's right or not, but you can auto-enroll your employees. But they do have the option of backing out.
MS: They always have that option. But I think most studies find that through inertia, they don't take any action. And they don't take any action when they're auto-escalated each year. So coupled with the auto- enrollment features is really choosing the right default investments that, once somebody is auto-enrolled, they're defaulted into a well-suited investment option, whether it's a target date fund or Life-Cycle Fund, something like that that helps them prepare. Another big thing that we're seeing is open multiple employer plans. They're now called pooled employer plans, which allows unrelated employers to, kind of, pool their resources together to sponsor a common 401(k) plan.
GM: Now what's the advantage to doing that?
MS: Well, there could be some administrative ease for the plan sponsors.
GM: So in other words, one administrator can handle all three, as opposed to three different administrators or three separate plans.
MS: And the concept is to have maybe one, 5500 filing, a single compliance test, that type of stuff. Another piece that's really interesting is because of some of the talk around tax reform and just the challenges in the industry about retirement security that health savings accounts are now being looked at far more attractively as a retirement planning vehicle.
GM: I've heard them compared to the 401(k)s for your health care costs. Right? You put money away pre-tax?
MS: Yeah. Well, it's triple-tax-advantaged. So contributions into a health savings account are tax-free. The account grows, interest, capital gains, it's all tax-free. And then, as long as distributions are taken for qualified medical expenses, they're also tax-free. So there's been a lot of talk about the benefits of contributing to those now. The challenge now is that you have to be enrolled in a high-deductible health care plan.
GM: They have to be coupled with like a bronze plan or a high-deductible.
MS: Exactly. And I think most employers now are shifting in a direction where they're offering a high deductible health care plan. So if you have a high deductible, access to one, you should also have access to the health savings account.
GM: Seems like a no-brainer.
MS: Yeah. I would agree.
GM: Mike, thanks very much. That was great advice. I really appreciate talking.
MS: Thank you. It was great meeting you.