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Ted Talks! The Benna401k Comes Alive

Ted Talks! The Benna401k Comes Alive
September 19
01:10 2017

Ted Benna doesn’t stop inventing. FiduciaryNews.com Chief Contributing Editor had the opportunity to sit down with him this summer for an exclusive 30-minute video interview that reveals the basic concept behind his new idea to make retirement savings available to more people at a lower cost. You can watch the full video by clicking here (it will be available for free to all registered members of FiduciaryNews.com until September 30, 2017. After that, it will only be available to Preferred Members.

While this interview is intended for the small plan sponsor audience, professional service providers might find it extremely useful to breakdown how Benna reframes an “old, boring” product (the IRA) into a dynamic re-imagining (with a barely detectable subtle twist) that solves very specific obstacles that confront small business owners looking for a retirement plan solution.

FN: Ted, good to see you again!
BENNA: Thank you Chris, how are you doing there?

FN: So, you have a new idea!
BENNA: I do as a matter fact. Amazingly, not all entrepreneurs are under the age of 25.

FN: What do you call the new idea?
BENNA: “Benna401k”

FN: “Benna401k,” that’s an original and I would never have guessed it. What inspired you to come up with this idea.?
BENNA: I actually was contacted by a guy I had done a lot of work with many years ago. He was launching something new, but looking at what he was planning to do, I realized there was a shortcoming to it. That kind of got my wheels spinning on this concept generally. Over the last three or four months, it kind of evolved from there in terms of putting pieces together and then coming up with some strategy for getting this thing on the marketplace.

FN: What were the deficiencies in the existing 401k savings vehicle offerings that you try to address?
BENNA: What this focuses on, Chris, are the almost 50% of the workforce for one reason or another, do not have access to employer-based retirement plan. They will have Social Security, so…

FN: Why don’t they have that access?
BENNA: Their employers haven’t made a program available to them. You know, the primary reasons for small businesses that you don’t do this are cost, complexity, and liability exposure. The traditional 401k plan has a lot of baggage rolled to those areas. It’s complicated. It’s definitely not easy. For local business of 10 to 15 employees that have so many different things they have to deal with, they just aren’t in position to want to have to deal with the baggage with the 401k plan.

FN: I never thought about this in the number of times that I’ve talked to you, but, in creating the 401k, you actually created a new whole list of job descriptions, not just within the industry, but within companies, especially larger companies who have specialists – benefit specialists – who handle all the 401k issues. Smaller companies don’t have the personal resources to do that, do they?
BENNA: Well, exactly, in legal and otherwise, I mean you got it. It’s quite a burden to put on them.

FN: If you wear a small business and you wanted to save for retirement, how difficult is it to do that now If you had, say, maybe 10 employees?
BENNA: You have to set up a plan document; you have a lot of other things that are needed to get the plan up and running; you’re going to have to get professional help, you’re going to have to pay some fees – typically $2,000-$3000 to set up plan for small employer; and then, at that size, you’re probably going to have to pay, maybe, $1,000-$2,000 or more annually as fees as well. This is the cost employers going to have to pay typically at that size.

FN: Then what happens if an employee leaves? They can leave their money in the plan, and then what can you do?
BENNA: Well you got a lot of complex paperwork. Certainly, one of the issues with the traditional 401k is when someone leaves you have to give them a stack of paper that explains their options. They may or may not take their money with them and, if they have more than $5,000, you can’t force them out. They leave the money there, and you’re required forever to give them a lot of information that have to be delivered to participants.

FN: So, when you start a business, and you are so excited about creating widgets, and you find, after you start the retirement plan, that you’re no longer creating widgets, you’re trying to figure out how to administer retirement plan. It doesn’t make being an entrepreneur that exciting.
BENNA: Well it doesn’t, Chris. One thing else for a small business that comes into play are the compliance issues. The first one is something called “nondiscrimination testing.” The way that works is, for the higher paid employees and owners, how much they can put in is governed by how much the average employees put in the plan. So, they have that issue to deal with. Okay. Now, they think they get away from that problem by doing what’s called a “safe harbor plan.” They avoid that baggage, but to do that, they have to contribute your 3% or more pay for their employees. There’s another gotcha for small businesses called “top-heavy.” You’re top-heavy if more than 60% of the assets in the plan belong to what are called “key employees.” Well, if you’re a little business starting up, almost as a gotcha, 60% or more of the assets are going to be owned by the owners and key employees. Your gotcha on that one is you have to contribute lease 3% for older employees who aren’t part of the ownership structure. So, you got all that to contend with, with the 401k as a small employer.

FN: The bottom line for small business owners is: its costly and you’re taking on a fiduciary liability that may be don’t want to. I think missing in all this is the sense that there is a missed opportunity for these employees and employers by not being part of the retirement plan.
BENNA: That’s definitely the case, and there’s also a problem for the employers. If you go to the want ads today and you see companies advertising to hire employees, you’ll notice “401k plan” predominantly. So here you are, your competing as an employer, and you don’t have that advantage. That’s a problem. As an employer, you also may have the retention issue. You are more likely to experience turnover, but then your employees don’t have the opportunity to be helped via an employer plan to save for retirement. All those things are issues.

FN: In the ideal situation, what type of vehicle could be used or should be used by small business owners to help address these concerns.
BENNA: What I’ve done is I’ve come up with three designs that eliminate the complexity and the cost of the traditional 401k. They remove the requirement to have a plan document, to have a summary plan description, to have to file 5500 form, to have all this paperwork when employees terminate. All that disappears.

FN: What I like about the name “Benna401k” is that it uses the term “401k,” yet, it doesn’t come with the baggage of a 401k. Can you explain how that works?
BENNA: Well, that’s exactly right. And the reason for it is, technically, it doesn’t come under the same section of the IRS codes. So, what I’m doing is I’m taking other things that are out there – and have been out there in the marketplace. You know, when I did the first 401k savings plan, Chris, that had been legally possible for almost a year. No one put together the idea of a matching employer contribution and being able to make pre-tax contributions to the program because it wasn’t in the statutes that you could do that. I’m doing the same thing here again. except in that instance there was a serious question about whether the IRS would agree to allowing those two things. In this instance, I’m taking things that are already there. I’m adding the elements to make the 401k plan and packaging them together in a way to make them a lot more attractive and appealing and useful for small employers.

FN: You have three different models. Are they designed for three different employer/employee situations?
BENNA: Exactly, Chris. The easiest, Model One, has absolutely no rules. I mean it could be offered to all employees. All employees to be given the opportunity to make contributions via payroll deduction. It could have an employer contribution, either match or otherwise, but it doesn’t have to. It has absolute total flexibility. Take an example of the employer contribution. It could be a match for all employees or maybe just for some employees. There are some companies may want to favor certain employees who have been around for longer period of time, but not necessarily everyone. Well they can do that. Another thing they could do for employees that tend to turnover a lot is, say, “Hey, look. If you contribute to this, I’ll add another $100 at the end of the first year that you’ve contributed, even if you’ve got about 1% your pay in. If you have somebody making $10,000 that puts $100 in, the employer says, “If you do that for a year I’ll add $100 to it. You do it two years, then in the second year I’ll add $200 to it. It’s not a lot, but it’s something an employer could do to say, “You know, you are valuable to us.” The smart thing for employers is your turnover cost money, I mean, hiring and training, so you’re doing something to give employees a reason to stick around. It makes good business sense.

FN: Yes. It certainly does. Tell us, what would employer have to risk if they do something like this?
BENNA: I can’t think of anything. I mean, the only thing that could potentially cost him is the contributions are going to have to be deducted from payroll and sent someplace. The payroll company is probably going to add some modest fee for that additional service if they’re providing for it. For little companies, it’s probably $10 or $20 a month or something like that.

FN: But that fee would theoretically be no different than if they would have had a 401k.
BENNA: Exactly. The same issue. Sure.

FN: Let’s talk about the similarities and differences between a standard 401k and Benna401k. What are the things that are the same?
BENNA: Employees can make contributions that they are going to get a tax benefit on. They have a Roth option available if they want to utilize that. You know, there’s a convenience of payroll deduction. There can be employer participation to encourage employee participation. Is totally portable. I mean, you leave your employer, it’s your account. You just will leave with it.

FN: That portability is a little different than the theoretical portability with 401k plans in that, are you required to rollover a Benna401k the same way you would have to be rollover an employer plan?
BENNA: You don’t have to do anything, Chris. When you leave, it’s yours. You can continue to add to it if you’re legally eligible to continue to make contributions into it. You own it. There’s no paperwork at the employer level. It’s “Goodbye,” “We’ll see you,” “It was nice having you here,” and it’s your account.

FN: Let’s go over some additional differences between the 401k and the Benna401k. How does it impact the plan sponsor or is there a plan sponsor in a Benna401k?
BENNA: There is technically no plan in Model One, so there isn’t a plan sponsor. The amount that the employee can get a tax break is less than what they can get with the standard 401k. These programs are designed primarily for businesses probably that have employees who max out, including earnings at maybe $50,000-75,000 or so. There are tons, I mean, shoot, millions of those businesses around the country.

FN: How about contribution limits. Are they the same? Are they different?
BENNA: They’re different than the 401k, definitely less than the 401k.

FN: Okay, so that is one thing. They’re less in terms of how much you can contribute.
BENNA: So that becomes a factor in terms of, if you want to sock as much money away as a 401k, well then, you’re looking at traditional 401k.

FN: That’s one of the cost-benefits analysis.
BENNA: Absolutely. Is it worth, you got to say, is the additional contribution level worth the added cost? Now, Model Three, it’s closer to the contribution level of the 401k, again, with a lot less expense and liability exposure, etc.

FN: But would you have to be a plan sponsor or sponsor a plan at Model Three?
BENNA: Model Two is a combination of a non-employer-sponsored and employer-sponsored plan. Model Three is all employer-sponsored but not as a 401k.

FN: Would they have to do 5500 reports?
BENNA: No.

FN: The reporting is a lot easier. What about independent audits Would they be required?
BENNA: No.

FN: There’s two questions: Is anybody doing any of this now or something like it?
BENNA: Not that I know of. The closest, Chris, is what the states are moving into doing with the mandated payroll deduction IRA programs. The State of Oregon is just putting in place requiring employers who don’t offer something like a 401k to do a payroll deduction program. State of California is certainly talking about doing it. Vermont recently passed legislation requiring it. That would be the closest fit. Those plans, from everything I’ve seen, are simply focusing on employee payroll money flowing into an IRA, no employer participation at all.

FN: No match. What about the cost?
BENNA: The Oregon plan cost a heck of a lot more for participants and what the of this will. Of course, the key with this is what the employer participants decide to do with their investments, but, as an example, if the Oregon plan is going to cost over hundred basis points, this can cost as little as 45 basis points.

FN: Does anything need to transpire in Washington in order for people to take advantage of the Benna401k?
BENNA: Absolutely not. That city, I mean, this time I’m not dealing with something with a cloud hanging over here where we have to get Congress to do something or we have to get an endorsement via regs out of the Department of Labor or Treasury notes… it’s all there.

FN: Is there any charge that you’re requiring people pay you in order to use these things?
BENNA: Well that gets in to how can you do this. I played around with different ideas and one that I came up with that I thought was going to be most friendly to employers was to put together a guide called “How to Set Up Your 401k” with the subtitle “And Save a Lot of Money.” What that does is it plays out clearly the differences between the plan, the advantages and disadvantages, and walks through exactly what you have to do in each of the models to set them up. It’s not complicated.

FN: Do they have to pay for this or do they get it for free?
BENNA: The guide is $18.99. I’m selling a guide. For $18.99, you can buy the guide and run off and set up your own program.

FN: How do you buy the guide?
BENNA: It’s on our website which is www.Benna401k.com.

FN: What if they can’t set it up by themselves?
BENNA: That will be an issue for some people. Some folks will probably want a little coaching relative to “Well, is this really the right model?” We have technical support will provide if employers want that available to them. Right now, there’s no one else out there in position to be doing that at the current time. I’m sure it will evolve as it catches its legs.

FN: Now if someone wanted to start this up and they wanted to use a certain mutual fund or custodian or broker or adviser, are there any limits to these plans?
BENNA: No, there are absolutely none. The nice thing about it is it can be set up without getting involved with an adviser, if the employer wants to do that. The advantage is that once you start to bring somebody else in the picture, you now are stepping up and taking on some fiduciary responsibility. One of the things I’ve written here that they can use with the participants is investment information for participants to kind of help and work through. In this this initial guide, Chris, I’ve focused strictly on Vanguard as a way of how to set this up if you’re going to utilize Vanguard. I’ve selected Vanguard because of the name brand and they are obviously noted for their low cost. If this catches I’m probably going to follow up and do a Fidelity guide, a T. Rowe Price, American Funds, or whatever, to help somebody. Obviously, a lot of people love Fidelity or they wouldn’t have all the money they have. It would be obviously wise, probably, if this begins to get legs to do a Fidelity one. Same thing with T. Rowe Price. The significance of that, by the way, I’ll just use Vanguard’s example, I had to make a number of calls and do significant digging to know exactly how to make these three models work with Vanguard. Vanguard, I found, had probably more support in place around these ideas than other places do. That’s a key part of the guide, at least at this point in time, is to say, well, okay, this is the plan design in which one of the three modes but the other is in carrying forward and implementing somewhere, terms of where the money is going to go. I’ve looked at some of the other sites and I know I’m going to have to go through a similar process of doing some significant digging so an employer who wants to use that organization doesn’t have to go through that process. This is one of the values of guides to make it easier for them with that organization to do what they have to do to get up and running.

FN: It would seem that the payroll processor will be a key gatekeeper, if you will, in this type of relationship. Have you thought about approaching any of the major payroll processes to see if they’d be interested in putting together packages for their clients.
BENNA: Chris, I’ve thought about it. Paychex is an obvious choice – they’re in your neighbor right up there – I suspect I could probably get an audience with them. I’ve thought about it, but haven’t done anything at this point in time, largely because I know that they’ve got their own traditional 401k product that they’re driving. This doesn’t have the potential to be a big moneymaker for any one like Paychex or traditional providers. The biggest benefit this would be for Paychex, frankly, would be as a giveaway go to their small employers. Probably the money they could make in terms of getting directly involved is not significant, but, you know, they compete for those small payroll clients and being able to go to them and say, “Hey, here’s a way for you to do something you are not doing now” is probably, in my opinion, the best value that Paychex can bring to the table. If you’re starting with a 10-employee company – how much money a year? – it might only be ten, fifteen, twenty thousand a year. It’s marginal business, certainly, for the entities that have all the baggage of running the standard 401k programs.

FN: What would prevent a payroll processor, or any other sort of traditional financial intermediary from embracing this plan and charging a fee on top of what would normally be charged, to get it done?
BENNA: Nothing. Clearly Paychex could take it and add 25 basis points or whatever. We’ll see that happen, I suspect, potentially.

FN: However, it could become very competitive if someone does figure out a way to deliver it at a lower cost.
BENNA: Frankly, Chris, that’s why wanted a reason I didn’t go to a Paychex or something… I could have gone someplace – mayybe like I try to do with the 401k and say, “Hey, this is your baby, I’ll sell it to you for a price.” One of the reasons for me going around getting this guide out, frankly, is to set a benchmark pricewise. If dollars come behind it, then I’d say, “Here’s a way of being able to do this at really low cost. So those coming behind it are going to go down that route. They will be competing. Well, maybe I can be doing this without paying those kinds of fees. But, again, somebody who wants, for example, to bring in an advisor (like business owners). Business owners have advisors currently. They could do that with their own account here if they wanted to. A business owner who has an advisor relevant to bringing this in to their personal investing advisor. could do that without necessarily having to impose that on the whole plan and then have here the whole plan have that fiduciary liability.

FN: What about individual employees. Would they be able to hire their own adviser?
BENNA: Absolutely.

FN: Even at Model Two and Model Three where there’s a plan sponsor?
BENNA: Yeah sure. Hey, they could work with anybody they want to work with. There’s nothing preventing it.

FN: That’s actually little bit different. There are some 401k plans that allow that, but, having an infrastructure already in place that allows individual employees to identify their own service providers is a little new. It’s definitely different.
BENNA: Right. It could be a Robo advisor, whatever…

FN: And the corporate sponsors, if you will, would have no liability because it’s the choice of the employee.
BENNA: That’s the nice thing about it. As long as the employer’s stay away from engaging in that process, they are free from fiduciary liability. Now the key, and I stress this in the manual, if they’re going to pick a place where the money needs to go, it needs to be someplace where there are no strings on the participants moving. It can’t be front and load, back-end charges that take six years to disappear and so forth. You ought to put it someplace where the participant has free opportunity to move the money without any strings to avoid that kind of baggage.

FN: Do you have some sort of creative rights to the name “Benna401k” to prevent somebody from using your name to set up a vehicle that is not what you intended?
BENNA: Well, guess what, I explored that, once again, can I patent or copyright this thing and the answer was, I’m highly unlikely, in our current environment, so the only protection we’re getting is a service mark. This is a registered name so I can at least protect the brand in that sense.

FN: At the very least, that would be good. All right, well Ted, thank you very much – I don’t know if you had any other closing thoughts that you want to share with us.
BENNA: No. Not really.

FN: As always, it’s was very, very good to talk to your exciting and interesting fellow, and, man, I’m looking forward to, when I approach your age, to have your vigor. You are my Galileo!

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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