Practice Management February 18, 2022

Industry Inclusion and the Role of Informed Mentorship

One lesson about mentorship can be summed up by a quote from the tennis great Billie Jean King; she says it is hard to understand inclusion unless you have experienced exclusion.
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Lexie Bishop, a director at UBS Wealth Management Americas, recently sat down with PLANADVISER for a broad-based discussion about the positive results mentoring can have on both an organization and those directly involved, and about how the advisory and wealth management industry benefits in turn.

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Bishop has more than 20 years of experience in the financial services industry and, in addition to her role as a director at UBS, she serves as the branch manager for the firm’s Boston South Shore office. In that role, she works with financial advisers and support staff members to build efficient, streamlined practices.

Along with the rest of the financial services industry, the events of the past several years, which have seen the collision of a pandemic with an impassioned and rejuvenated social justice movement, have increased the focus of both UBS and Bishop on the critical topic of diversity, equity and inclusion in the financial services industry.

She credits her firm for long being engaged with this topic and for already having taken real and concrete steps in the right direction, but, as recounted in the Q&A discussion that follows, Bishop says the broader financial services industry has some way to go before it more truly reflects the increasingly diverse and dynamic fabric of the U.S. society as a whole.

PLANADVISER: Can you please tell us about your own entrance into the financial services industry and what role mentorship might have played?

Lexie Bishop: Absolutely, and mentorship did play a big role. I started out in college studying physical therapy, but in my junior year I ended up doing a marketing internship at Smith Barney [now Morgan Stanley Wealth], which really changed my life’s trajectory. That internship was a hands-on learning experience that was so valuable for me. I was working with a large financial adviser and his team, and he ended up hiring me out of college. I was with that team for two years before moving to UBS.

Something I want to point out is that I have had multiple mentors and advocates over the years, and they have been both male and female. A lesson I have learned is that it is important to get those different perspectives. I credit the mentoring that I received for helping me to understand that I am capable of doing more than I thought I could when I first came into the industry. My mentors and leaders were willing to trust me and put me into situations where I could learn in a hands-on capacity. That’s a characteristic of a great mentor, in my opinion.

PLANADVISER: What other lessons about mentorship and inclusion do you feel you have learned in your time in the industry?

Bishop: One lesson can be summed up by a quote from the tennis great Billie Jean King. She says it is hard to understand inclusion unless you have experienced exclusion. As a young woman or as a person from a minority background entering this industry, it can be very challenging to see yourself in an elevated role if you don’t see someone that looks like yourself. In my case, early on in my career, it was hard to envision becoming a branch manager.

Another clear lesson is that representation and inclusion starts at the top. There needs to be full transparency on how leadership is committed to changing the demographics of this industry.

In 2019, UBS released it’s first Diversity & Inclusion Impact Report for the Americas Region. This annual report provides transparency on our D&I priority areas of focus, our strategic goals and our approach to achieving them. Knowing where we’re heading as an organization and how we all play a role in that journey is critical to succeeding. 

PLANADVISER: Can you speak in more detail about how DE&I considerations can and should fit into the hiring process? This has become an important point of discussion both in the financial service industry and in our society at large, as we can see with the debate about the Rooney Rule in the NFL.

Bishop: Absolutely. One thing that is clear is that we need a much broader candidate pool than we have traditionally sought out in the financial services space. In this sense, I think it is great that UBS mandates that there be diversity in the interview process [like the NFL]. Of course, that is just one step forward, but it is a concrete step.

At the end of the day, when you think about organizations that continue to be successful and relevant in an increasingly diverse world, it is because they continue to evolve and innovate.  Without diverse thinking and representation, it makes it extremely challenging for organizations to evolve or innovate. This is why I see inclusive mentorship as such an important part of the solution. It benefits the mentee as well as the mentor. Being a mentor can allow senior leaders to themselves learn a different perspective. If someone wants to develop their leadership skills, I always say that becoming a mentor is a great avenue.

The Rising Generation, those 40 years old and below, truly understand and embrace the importance of DE&I. They want to be a part of organizations that are defining high values and living up to them. For us to stay relevant in the eyes of our future talent and our future clients, we must execute on making our industry more inclusive and diverse.

I am proud to see that not only is UBS taking this seriously, but so are all the major wirehouses. There is a renewed commitment to making the industry a more equitable and inclusive environment.  There are always shifts or evolutions in our business and for those that don’t get on board early they often will get left behind. The shift our industry saw with advisers moving from commission-based to fee-based business is a good example. The early adopters benefited the most and those that resisted the change, well, some of them simply got left behind in that transition, and the same thing will happen to firms that are not open to engaging with this change.

Compliance February 16, 2022

Plan Design Approaches to Help Plan Sponsors With Nondiscrimination Testing

Advisers can assist plan sponsors wrestling with how to pass IRS testing for qualified employer-sponsored retirement plans by explaining the trade-offs involved between the costs of safe harbor contributions and the corrective actions that result from failing the tests.
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When plan sponsors fail IRS nondiscrimination testing, they must weigh the cost-benefit trade-offs of corrective action versus funding safe harbor contributions to an employer-sponsored defined contribution plan, industry experts say.

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For context, a recent study by Eric Droblyen, president and CEO of Employee Fiduciary, titled “401(k) Nondiscrimination Testing Study – What % of Plans Fail?” examined how often 401(k) plans fail IRS actual deferral percentage and actual contribution percentage nondiscrimination testing.  

“One thing I was surprised by: Automatic enrollment is held up as a way help pass the ADP test for when a plan isn’t a safe harbor, but what I found was [for] the percentage of plans without, I didn’t find that it helped,” Droblyen says.

All qualified employer-sponsored defined contribution retirement plans must submit to annual nondiscrimination testing to ensure that benefits under the plan are not unbalanced to favor officers, owners, shareholders, key employees and any employee categorized as a highly compensated employee. The actual deferral percentage test examines the average deferral rate of highly compensated employees and compares it to the average default rate of non-highly compensated employees. The actual contribution percentage test uses a similar method, except it looks at matching contributions or employee after-tax contributions.

Corrective measures for failing ADP and ACP tests include a return of excess contributions plus interest to highly compensated employees. The tests must be corrected within 12 months, but anything past 2-1/2 months results in an excise tax for late correction.

“The IRS has rules in place with regard to qualified plans that assess the extent to which highly compensated employees may disproportionately benefit from qualified plans,” says Amy Reynolds, a partner at Mercer. “To prevent that from happening, there are various numeric tests that have to be met in order to ensure that the disparity between the extent to which highly compensated employees benefit is not unacceptably disproportionate to … non-highly compensated employees.”

Testing Tacks

IRS tax-qualified employer-sponsored retirement plans can choose to be a safe harbor or non-safe harbor plan, depending on what is best for the business. Safe harbor plans allow business owners to avoid ADP and ACP testing requirements, in exchange for the employer providing, among other things, contributions to employees’ accounts that are fully vested at the time contributions are made.

Plan sponsors can select from among three safe harbor match types: a basic safe harbor match, an enhanced safe harbor match and a nonelective safe harbor.

“Through these designs, the IRS has created specific requirements on the level of employer contributions that an organization can make,” Reynolds says. “By virtue of doing so, they can eliminate the need to conduct that in testing. The first strategy, if there’s a potential for testing problems, is to consider a safe harbor plan design, and many organizations have done so and tailored their designs to meet those requirements so that they avoid the annual testing process.”

The basic safe harbor match requires employees to contribute to the employer-sponsored defined contribution plan to qualify for the employer’s match, and the employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%.

The enhanced safe harbor, which also requires employees to contribute to the plan, must be at least as generous as the basic match. A common formula is a 100% match on the first 4% of deferred compensation.

The nonelective safe harbor does not require employees to contribute to the plan, and the employer contributes 3% of their salary, which comes directly from the business. It is not deducted from employees’ wages.

A qualified automatic contribution arrangement, meanwhile, is a safe harbor plan with auto-enrollment, with two options available under the plan design. The QACA match for eligible participants requires employees to contribute to the plan, and employees will receive a 100% employer match of the first 1% contributed and a 50% match of the next 5% contributed. The QACA nonelective contribution is when employees are not required to contribute to the plan to receive a 3% employer contribution.

Plan sponsors that select safe harbor and automatic enrollment plan designs can limit testing headaches and mitigate the risk of having to take corrective measures to be in compliance, Droblyen says.   

“If you are a [plan that is] safe harbor, you automatically pass the ADP test, so you’re paying about the same amount of money to go safe harbor as you would if you failed testing,” he explains. “If you’re top-heavy and you get to the ADP, you get the free pass on the ADP test.”

Survey Says

Droblyen’s study aimed to provide insight to plan sponsors on the benefits and drawbacks of automatic enrollment and safe harbors, and to “put some numbers to it [from] some real-life plans to convey the point, hopefully a little bit more effectively,” he explains.

The study, which examined 3,217 businesses, includes specific insights for small business plans, as small plans’ demographics are more likely to result in failures—because business owners can comprise a high percentage of plan participants at small companies, he explains.

The study shows that 32% of traditional 401(k) automatic enrollment plans failed ADP testing, and 3% failed ACP testing; among traditional 401(k) plans with no automatic enrollment, 26% failed ADP testing and 5% failed ACP testing.

“The point I’m trying to make is there’s a really good chance that you’re going be on the hook for a 3% top-heavy minimum contribution anyway, and there’s a good chance you’re going to fail the ADP test,” Droblyen says. “For the same price as that top-heavy minimum contribution, go safe harbor, fund the safe harbor contribution and get the free pass on both the ADP and top-heavy test.”

For background, Droblyen’s study explains that a 401(k) plan is considered top heavy for a plan year when the account balances of “key employees”—i.e., certain officers, owners and highly compensated employees—exceed 60% of total plan assets as of the last day of the prior plan year.

The study also found that 12% of 401(k) plans without automatic enrollment failed top-heavy testing, compared with 3% of plans with auto-enrollment; among safe harbor 401(k) plans without automatic enrollment, there was a 57% failure rate for top-heavy testing, and for safe harbor plans with auto-enrollment, 40% of plans failed top-heavy testing. 

Many plans with a safe harbor that don’t include automatic enrollment also failed top-heavy testing, says Droblyen.   

“What we’re finding—irrespective of their automatic enrollment status—[is] about 30% of plans fail,” he says. “That’s a function of the test.

“By failing a test, the HCE [highly compensated employee] average is just higher than the non-highly compensated employee average by more than the allowable amount, so it just boiled down to deferral rate,” Droblyen adds.

Test Tips

Failing ADP, ACP and top-heavy testing is not the end of the world, or an immediate and resounding grounds for the small business plan to be disqualified, as some plan sponsors have thought, Droblyen notes.

“You don’t have a problem if you fail these tests; you have a problem if you don’t correct the test,” he says.

Education on testing is key to help plan sponsors, he adds. Plan sponsors have one surefire option available to help with ADP and ACP testing, but tactics for other tests are more muddied, he explains.

“The slam dunk is to go safe harbor, but if you don’t want to fund that contribution, it’s getting your not-highly-paid people to defer at high rates—a high enough rate to support the HCE rate,” Droblyen says. “Then there might be nothing you could do about being top-heavy because—say you’ve got a really small plan with five participants and three of them are business owners, unless your nonowners are really pumping in the dough, you’re probably going to be top-heavy.”

Reynolds agrees with Droblyen’s tactics to avoid failing testing and explains that there are corrective measures for plan sponsors that don’t pass the test.

“The next thing that they can consider is to try to encourage the lower-paid population to participate in the plan,” which can be achieved through automatic enrollment, she says.

Reynolds adds, “If all of those things don’t work, and at the end of the day the organization fails testing, then there are a number of strategies that can be used, that must be used, in order to correct the disparity.”

Plan sponsors must choose from among two options to resolve the issue. The employer must either give money back to the highest-paid employees, “because in order to meet the test, they may have to decrease the average contributions made by the highest-paid individuals,” Reynolds says.

Sponsors can also choose to correct the plan imbalance by making contributions to the non-highly compensated population to increase their average savings rates.

“It’s one or the other,” she says. “If you’re not meeting the math of the test, then you either have to push down the average for the top group or you have to push up the average for the lower-paid group.”

Retirement plan advisers can also assist plan sponsors when it comes to nondiscrimination testing, Reynolds adds.

“Probably the biggest thing is [taking] more of a proactive stance,” she says. “You can’t change participation after the year has closed, right? You have to be forward-thinking about that, so organizations that are challenged with testing really need to think ahead, do projected tests and think about what changes they can implement during the current year that are going to have a positive effect.”

She adds, “Otherwise, it could take a fair amount of time before any of these strategies necessarily move the needle.”

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