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Selecting a Qualified Default Investment Alternative (QDIA)

As an employer, you may choose to offer various benefits to help your employees build their own financial security, especially when it comes to retirement. One effective tool for this is a QDIA, or qualified default investment alternative. A QDIA is the default investment option offered inside an employer-sponsored retirement plan. If an employee contributes to the plan but does not specify how they want their money invested, it is automatically allocated to the QDIA.

QDIAs were created by the Pension Protection Act of 2006. This act was designed to get more people to enroll in employer-sponsored retirement plans and to protect plan sponsors when they choose investments on behalf of their enrolled employees.

A prudently selected QDIA can help provide plan participants with a well-rounded investment portfolio, even if they did not select it themselves. But not every type of investment can be selected as a QDIA, and those that are must meet specific requirements outlined by the Department of Labor.

There are three main types of QDIAs: target-date funds, managed account services, and balance funds. Each type has its own way of managing a mix of stocks and bonds and comes with its own benefits and considerations to understand.

When selecting a suitable QDIA for your participants, start by looking at the overall demographics of your workforce. Your employees ages, savings rates, and retirement balances can help steer you to the right type of QDIA.

Next, evaluate whether the mix of investments in that potential QDIA suits your employees’ needs. Comparing and contrasting multiple options can help you find the best fit. Consider factors such as risk, return, and cost. These aspects can have significant impacts on participant account balances and behaviors.

Finally, make sure to educate your employees about their QDIA. Explain what a QDIA is, the associated risks and benefits, and how they can choose a different option if they want. Clear information can help employees feel more confident in their QDIA and more informed about their retirement choices. Carefully selecting a QDIA is not only elemental to your fiduciary process, it’s a way to improve your employee’s retirement outcomes.

To learn more about selecting the right QDIA for your retirement plan, or to assess whether your current QDIA is appropriate for your employees, call CAPTRUST. We can help you make an informed choice.

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In personal finance, there’s a common misconception that diversification means having several accounts at different institutions or with multiple advisors, and so many people keep their assets spread out unnecessarily complicating their financial lives. In truth, diversification refers to the asset allocation of investments within your portfolio, not where you hold them. So, in general, it’s better to consolidate investments into fewer accounts with one advisor or investment manager. This is called asset consolidation.

Asset consolidation refers to the process of combining or merging various assets and accounts. The primary goal is to streamline and optimize the management of these assets, creating a more cohesive and efficient portfolio. Asset consolidation has four main benefits. First is improved planning instead of juggling too many accounts and investments, consolidation allows you to centralize control with everything in one place. It’s easier to see your full financial picture, which can help you make better financial decisions.

Asset consolidation also makes it easier to implement portfolio changes like buying and selling investments. And it simplifies record keeping because working with few institutions means fewer monthly statements and tax documents. Consolidating can also help reduce your total fees. In general, the more assets you hold with one provider, the more opportunities you may have to reduce or eliminate account fees, transaction costs, and administrative expenses.

Although the benefits of asset consolidation are compelling, the consolidation process can be intricate and time consuming. Transferring assets, updating legal documentation, and coordinating with various financial institutions require careful planning and execution. Before you make any moves, talk to a financial professional to discuss the best strategy. Asset consolidation will look different for each investor, and an advisor can help you determine the first or next steps.

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Donor development means creating and sustaining authentic connections with those supporting your nonprofit. By nurturing these relationships, you can build a strong, engaged donor community and help ensure your organization’s long-term financial stability. Donor development is crucial to nonprofits, and it’s the responsibility of all members of your organization, starting with senior leadership.

When evaluating your organization’s donor development programs, consider these five steps.

To identify potential donors, research the people, corporations, and organizations that align with your mission. One way to start is by consulting with your current supporters. Volunteers have the potential to be great donors as they see firsthand not only the impact of the work your organization does, but also how well it’s run. Sometimes, volunteers want to give their time and talent as a path towards later financial support. Community events, social media, and local fundraisers are also great tools to find more supporters.

To build authentic relationships, personalize your approach to each new donor or donor group by working to understand their unique interests and motivations.

Regular communication is important. Keep donors and potential donors well informed with periodic updates about your actions and impact. Invite them to events, offer behind the scenes tours, and show them how their contributions make a real difference.

Remember that potential donors may prefer different methods of communication, with some preferring email or social media and others a newsletter or personal note. Having several ways to engage with donors is another piece of the puzzle. Create in person and virtual volunteer opportunities. Or ask donors to participate on an advisory board. Recognize their contributions publicly through newsletters, social media, or at events. Your gratitude will strengthen their connection to your cause.

To encourage continued support, regularly provide donors with clear information about how their contributions are being used. Transparency builds trust. Consider a donor recognition program to honor long-term supporters and major contributors.

And last, leverage technology. Use donor management software to track interactions, preferences, and donation history. This data can help you tailor your communications and engagement strategies.

Above all, you need to make it easy for donors to give. Have you explained your ability to receive non-cash gifts? Do you clearly state that you welcome gifts of stock by donor-advised funds or qualified charitable distributions? If not, how could you improve your donor education materials? Remember, donor development is a continuous process.

These steps help endowments and foundations create a sustainable donor base, ensuring that your organization thrives long into the future. Want to assess your current donor development programs? Call CAPTRUST. We’re here to help.

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As an endowment or foundation, an important aspect of fundraising is having a strategy around planned giving in addition to receiving regular donations of ordinary income.

Planned giving, also known as gift planning or legacy giving, is a donation to charity that requires a more strategic approach than simply writing a check. Unlike standard donations, planned giving can allow individuals to create a legacy, reduce taxes, and make significant gifts to the charities of their choosing.

Some forms of planned gifts even allow the donor to make a large gift to an organization and receive a monthly income too. Individuals will need to invest some time to determine the best way to make a donation that will be mutually beneficial to them and the charity. Because they are typically larger than the day-to-day donations that nonprofits receive, planned gifts can be life-changing for your charity and your mission.

Beneifts of Planned Gifts:

If an individual approaches your organization about a planned giving strategy, there are several ways they can think about giving. A really simple way is by changing the beneficiary designations on an IRA to a charity. Another easy way is through qualified charitable distributions or QCDs. For donors over 70-and-a-half who would like to make a charitable contribution a QCD can offer a simple way to give while taking a tax advantaged approach. A QCD also satisfies a donor’s annual required minimum distribution from their IRA, reduces income taxes, and reduces future RMDs. Donors can make a qualified charitable distribution of up to $108,000 per calendar year, or $216,000 for married couples. But it’s important to note, QCDs can only be made from IRA assets.

Another planned giving strategy involves a donor giving a non-profit a gift of a long term appreciated property. The non-profit benefits from the gift and the donor typically won’t pay capital gains when the asset is sold by the non-profit. The donor, in turn, can deduct the fair market value of the gifted asset. Donors may lower estate taxes by giving money, assets, or property at their death to charity. Donations given through a will, beneficiary designations, charitable remainder trusts, or remainder interest deed will not be included in the donor’s estate for estate tax purposes. Donors can even lower their heirs’ income taxes by gifting tax-heavy assets, such as traditional retirement accounts, to charity.

If a donor wishes to make a gift and lower their income taxes, they might consider using a popular vehicle called a donor advised fund or DAF. With a DAF, a donor contributes to a private fund and then can distribute the funds to their chosen non-profits over several years while maximizing the charitable tax benefit in a single year. DAF assets can also be invested and continue to grow tax-free until they’re ultimately gifted to charity. There are other strategies to consider here too, so make sure you talk to professional advisors about what’s best for your donors.

If a donor wants to make a gift but is concerned about needing income, they might be a good fit for either a charitable gift annuity or a charitable remainder trust. Both allow the donor to make a sizable gift to the charity and receive an income tax deduction. The charity then pays an income stream to the donor, their spouse, or even other beneficiaries. At the end of the term, the charity gets to keep the balance of the gift. Another planned giving strategy is through a charitable lead trust or CLT. A CLT does the opposite and pays an income stream to the charity, or charities, of the donor’s choice for a certain term, and the remaining amount pays out to the donor’s beneficiaries. However, the donor still gets an income tax deduction upfront for the gift to the charity.

As always, donors should speak to their tax, legal, and financial advisors before making any type of planned giving commitment. Planned gifts are an important component of a long-term fundraising strategy and can have a major positive impact on your endowment or foundation. Ready to engage your donors? Then call CAPTRUST. We’re here to help.

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To download a copy of the transcript, click here.

Your retirement can be 20 to 30 years or longer. Do you know how you’ll make your money last throughout those years?

During your working years, you’ve had the goal to grow your assets in preparation for retirement. As you get closer to retirement, it’s important to start thinking about how you want to spend that money or said in another way, the withdrawal strategies that best align with your personal goals. One approach is called the bucket strategy.

It involves allocating your retirement savings into three buckets:

The difference between the three buckets is the time horizon for when you’ll need to access the money and therefore, the level of risk you are able to take with those funds. The shorter your time horizon, the less room you have for error with riskier investments because you need that money to be available to you sooner rather than later. The longer your time horizon, the more risk you can take.

The idea with a three-bucket strategy is to secure one to two years of cash or liquidity needs in a more conservative, low-risk capital preservation bucket, one that is likely to maintain its value in the short term. You would then place the next three to five years of living expenses in your income bucket, which is a portfolio with moderate risk. The remainder of your portfolio would be allocated to a longer term, higher risk growth bucket designed to maximize market returns.

To leverage the three bucket strategy, you must first calculate your annual retirement spending. Look at your spending history. How much do you need to cover your essential expenses like food, shelter, healthcare, utilities, transportation, and taxes. Next, identify your discretionary expenses, including hobbies, travel, entertainment, memberships, gifts, and any charitable giving. It’s important to have a realistic picture of how much you’re spending each year. If you don’t already have a budget that you stick to, start by tracking your expenses for a few months.

Next, identify your sources of income in retirement. Some are considered lifetime income. Those you can expect to pay you as long as you live, such as:

The next type is variable income sources or sources that have a finite amount of money in them and could run out if not managed well. These include:

The last categories, any other assets that could serve as additional income sources like rental property income or receiving an inheritance. Once you have a full picture of your retirement income and
expenses, you can then allocate your retirement savings to each of the three buckets. Matching your different types of retirement income to your expenses can be helpful. Lifetime income sources like social security and pensions are often best matched with your essential expenses.

Knowing you can reliably provide food, housing, and medical expenses can ease your anxiety. But if your lifetime income sources are inadequate to cover your essential needs, you’ll have to determine how much you need to draw from your retirement plans, IRAs, or other savings that you may have. If you’d like to get started on the bucket strategy, but need guidance, then call CAPTRUST. We are here to help.

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As defined contribution plans continue to evolve. An increasing number of plan sponsors are now turning to 3(38) investment managers for help with their retirement plans. But before you can decide whether this type of relationship might be right for your organization, it’s important to know what it entails.

To better understand the role of a 3(38) investment manager. Consider what it’s like to move to a new home. When you move, you have three options:

  1. You can choose to do all the work yourself.
  2. You can ask friends and family for help.
  3. You can hire a moving company to handle the process for you.

If you choose to do everything yourself, you’ll be fully responsible for the entire process and the outcome. If you ask friends and family for help, that can handle some of the work and can offer useful suggestions on how to pack and move things, but ultimately, the decision-making and responsibility are still yours.

This is similar to hiring a 3(21) investment advisor, but if you choose to hire a moving company, that company assumes full responsibility for moving everything efficiently and for the care and safe transport of your items. Unloading this burden onto professionals gives you time and energy to focus on all the other elements of your move. This is what it’s like to hire a 3(38) investment manager.

A 3(38) investment manager is an advisor, asset manager, or trustee appointed by a retirement plan sponsor to assume responsibility for the investments in its retirement plan. The 3(38) manager can assume responsibility for managing a single fund, or can be responsible for selecting and monitoring all of the investments in the plan menu for single fund 3(38) services. Investment managers will typically handle underlying investment selection, asset allocation, rebalancing, and trade execution.

On the other hand, 3(38) services covering the entire plan menu usually include in-depth investment manager research fund selection, ongoing investment monitoring, fund change management with record keeping partners, and signing paperwork for all investment changes within the plan. This is different than a 3(21) investment advisor because 3(38) managers have the discretionary authority to make the investment changes on their own. They can pack and move all the boxes as they see fit, and they have the expertise necessary to do this effectively and efficiently.

A 3(21) advisor can only give guidance and make recommendations when serving in a 3(38) capacity. The investment manager absorbs the investment fiduciary risk from the plan sponsor for the selection and monitoring of the funds in the menu. Given the increased frequency of litigation in the retirement plan industry, this can be a meaningful delegation of risk for many organizations. Importantly, though, hiring a 3(38) does not absolve plan sponsors of all fiduciary responsibility.

Sponsors still have a fiduciary duty to monitor the firm hired as the 3(38) investment manager to ensure the manager is enacting a thorough and appropriate process. Another potential advantage is saved time for the retirement plan committee. By delegating investment monitoring and decision-making committee members can spend less time making investment decisions and more time focused on other initiatives to improve their plan.

But the decision to engage a 3(38) investment manager may not align with the needs of every sponsor. For instance, sponsors with a robust internal investment team might not require these services, and sponsors that like to have direct control over their investment decisions might find the 3(38) approach less appealing.

For sponsors that do decide to hire a 3(38) manager, due diligence is critical. Research multiple firms and evaluate their fee structures investment, selection, process, and experience serving in a 3(38) capacity.

Think you might need help moving the boxes for your retirement plan? Call CAPTRUST. Our team of institutional advisors can help you determine the best solution for your plan.

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What are Institutional Asset Pools?

Businesses and nonprofit organizations often have large asset pools, like cash or reserves, that aren’t yet designated for a specific goal or need. Typically, these rainy-day funds have grown over time and can represent a significant component of an organization’s overall financial structure. When properly managed, they may be a healthy source of capital growth.

Institutional Asset Pools, or IAPs, are usually managed by an internal investment committee or a third-party investment advisor. Some of these pools are managed conservatively with the goal of capital preservation. In other cases, the portfolio manager will aim to maximize an IAP’s earning power, which can serve to backstop an organization’s outstanding debt. A few examples of IAPs are:

Investing Institutional Cash and Asset Pools

Depending on the type of organization and the state where it operates, each institution may be subject to different regulations regarding fiduciary responsibilities. But even if the organization is not defined as a fiduciary, companies still have an ethical responsibility to manage assets prudently. Here are a few best practices to follow when considering whether and how to invest an IAP.

First, remember to keep your organization’s specific goals and needs in mind. Capital preservation in a highly conservative strategy may be the right choice, or it may be a good idea to explore opportunities for growth. What’s important is that leaders and committee members understand both the upside potential and the risks involved in investing an IAP, so that the organization can make informed decisions with appropriate short- and long-term perspective.

Second, consider how quickly your organization might need to deploy the capital. Will it need access to this money in the next month, in the next one to three years, or on a much longer time horizon? Understanding the organization’s cashflow needs and vulnerabilities will help determine which asset pools may be good candidates for investment.

Third, make sure to manage risk over time. Work to understand how the organization may be impacted by changes in IAP values before making any investment decisions. Many organizations seek to maintain certain internal capital or financial ratios. Others may be required to do so through bond indentures or covenants. Regardless, understanding how
IAP investment decisions will impact the organization’s financial risk will help its leaders make better decisions.

And fourth, take time to document key investment decisions and the reasoning behind them. For organizations that do not have a formal investment policy statement, this is a good time to write one. And for those that do, remember to review it at least once a year. These checkups will help ensure that current policy still aligns with the organization’s needs and objectives. At times, an investment committee or financial advisor may be managing institutional assets that have liabilities attached. In this case, organizations should create models that explain the conditions under which it may be appropriate to take risk, and when it is best to remain conservative.

By following these practices, organizations that are independently managing their IAPs can deliver on their fiduciary responsibilities, whether legally mandated or not. However, for organizations that want assistance, managing institutional asset pools is an easy add-on to a trusted relationship with an existing financial advisor. Whichever path you choose, organizations that manage their IAPs well are better positioned to not only protect their assets but also potentially grow them over time.

To learn more about institutional asset pools, call CAPTRUST. We’re here to help.

As financial advisors to retirement plan sponsors across the country, we know the value of financial wellness for employees. CAPTRUST at Work is designed for employers who want to help their employees reach their financial wellness goals and maximize their employee benefits. Learn more by watching this video.

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To download a copy of the transcript, click here.

Understanding your priorities is the foundation of working with a financial advisor. Your advisor should understand what is important to you and why. This knowledge will allow your financial plan to be tailored around your priorities. As your life and goals evolve, your advisor’s responsibility is to adapt and refine your financial plan.

Let’s take a closer look at how clearly identifying your financial aspirations can help you achieve your goals. To begin, consider what’s important to you. What makes you excited about planning and what keeps you up at night? Write down the top three to five areas of focus for you right now from this list:

If you have a partner, it’s a good idea to name your goals separately, then compare and try to find agreement on which categories matter most to both of you. Once you understand your general priorities, it’s time to dig deeper. For example, perhaps one of your top priorities is covering the cost of your children’s or grandchildren’s education.

If so, you need to consider the details. Do you want to cover just their tuition or all of their living expenses? Is it important to you that they work through college? Or would you prefer them to immerse themselves in their studies without having to work at all? What if a child doesn’t want to go to college?

Will you help them pay for a gap year instead, or pay their living expenses for a period of time while they begin working or take on a trade? These sorts of clarifications can help you define and stay aligned with your values. At regular intervals, you should revisit and clarify your goals with a financial advisor.

Each person’s situation is unique, and the aim is to provide tailored solutions that meet your specific needs. When done well, the wealth planning process meets clients where they are, financially and emotionally. By exploring your financial priorities, you’ll not just have a clear plan and a better chance of meeting your goals, you may also uncover goals you didn’t know you had.

For help, call CAPTRUST. Goal setting is one of the very first steps in every one of our client relationships.