FMi Retirement Services

2017: A Good Year for Participants

Auto Features Contributing to Participation, Average Balance Increases

It was a good year for individual account plans, including 401(k)s and 457s. In fact, 2017 may go in the record books as the first year the number of plans with an average auto-enrollment deferral rate of 6% exceeded the number of plans with a default deferral rate of 3%, as it has commonly been.

This change, along with market appreciation, may well have factored into the significant increase in average 401(k)/457 account balances during the year. Account increases in 2017 averaged $9,583, compared to average increases of $2,502 in 2016. Participants aged 60-64 experienced the most dramatic account balance increases, from $150,736 in 2016 to $168,725 in 2017 — a difference of $17,989.

The same report from which these findings were culled found additional positive impacts on employee retirement plans stemming from auto-enrollment. Average participation in plans using auto-enrollment was 42 percentage points higher than their non-auto-enrolling counterparts; 87% of employees participated in plans with auto-enrollment, compared to 45% of those without this feature.

Automatic deferral increases also showed remarkable success. In plans requiring participants to opt out of automatic increases, about a third of participants opted out while two-thirds allowed their deferral rates to increase automatically. When required to opt in, just 13% did so.

This strategy may be partly responsible for the uptick in deferral rates overall in 2017. Employee pre-tax deferrals reached 8.3% for 2017, the highest ever reported for this survey.

Roth Popularity Continues

Roth accounts have increased in popularity among the surveyed plans. Employees between the ages of 20 and 40 took particular advantage of the availability of Roth accounts in their plans. Roth contributions were allowed in 67.4% of plans in 2017, compared to 60.3% the previous year. All but the very youngest participants — those under 20 years of age — contributed more via Roth contributions in 2017 than in 2016. Taking the most advantage of these post-tax contributions were employees aged 30-39; their Roth contributions increased by 1.4% over 2016.

Participants Pick a Few Investments from a Large Array of Choices

The number of investment options available in the plan for 2017 increased, for the fifth year in a row. On average, plans offered 16.2 investment options, up very slightly from 16.1 on average the year before. Participants, however, seem to be concentrating on just a few investment selections for their individual accounts. The average number of investments in a participant’s account in 2017 was 2.5, compared to the high mark of 3.0 in 2008.

Target date plans had been adopted by 94% of plans by 2017, the highest number yet in this survey. In fact, since 2011, the number of plans offering target date funds rose by more than 9%.

See more results from Reference Point, T. Rowe Price Defined Contribution Plan Data as of December 31, 2017, at https://tinyurl.com/TRP-DC-Data.

How Student Loan Debt Impacts Retirement Savings

The Financial Wellness/Student Debt Connection

If your workforce includes recent college graduates, it’s likely that some of them have debt associated with their college years. Student debt may play a large part in the finances of these young (and even not-so-young) employees; that’s why a complete picture of employee financial wellness should consider it. In addition, carrying student debt may play a role in how much workers are saving for their eventual retirement. Both of these are good reasons for employers to take an interest in the impact of student debt on their workforce.

The amount of student debt nearly tripled between 2005 and 2017, according to a recent study. While employees and employers alike may benefit from a workforce with more education and a higher percentage of college degrees, each may also experience negative results from the debt that often accompanies a degree.

Among individuals studied for the report there were two important, and perhaps obvious, findings. First, college graduates are better off financially than are peers who attend college but do not graduate. And second, those who graduate without debt experience better financial outcomes than those who have debt.

Little Impact on Participation, but What About Account Balances?

What is the effect on 401(k) savings for each group? On the surface, it appears the answer is “not much,” at least in terms of 401(k) plan participation. Young workers with student loans tend to participate in available plans about as frequently as do those without such loans. Even the size of the student loan does not seem to impact participation much.

However, for those at the age of 30, there was a difference in the amount of retirement savings between the groups. Individuals with loans but no degree had saved less in a retirement plan at age 30 than did the group who graduated. (In fact, this was the case for people with no college debt, too, whether or not they had graduated; retirement plan assets at age 30 for graduates without debt reached $18,200 on average, compared to $5,400 for those without a degree and no student debt.)

For workers with the smallest amount of student debt — those below the 25th percentile — retirement savings averaged $9,000 for graduates and $5,100 for non-graduates. Across the board, the numbers were similar for workers who had graduated: those in the mid-range of student debt had saved $9,100 for retirement, and those with the largest amount of student debt had put aside $9,300. Non-graduates had not saved as much. Those in the middle had set aside $3,600 and those with the greatest amount of student debt but no degree had saved just $2,200 for retirement.

Based on those savings figures at age 30, it appears the amount of student debt has less of an impact on retirement accumulations than does the mere presence of the debt. This suggests that workers are often mindful of their debt, and that it factors heavily into their decision to save — or not. Employers can use this information to educate employees about financial wellness, paying close attention to communicating about how to pay off debt.

Learn more about student debt and its impact on 401(k) savings in the paper from the Boston College Center for Retirement Research, https://tinyurl.com/CRR-Student-Debt.

Web Resources for Plan Sponsors

Internal Revenue Service, Employee Plans

www.irs.gov/ep

Department of Labor, Employee Benefits Security Administration

www.dol.gov/ebsa

401(k) Help Center

www.ebri.org

PLANSPONSOR Magazine

www.plansponsor.com

BenefitsLink

www.benefitslink.com

Plan Sponsor Council of America

www.psca.org

Employee Benefits Institute of America, Inc.

www.ebia.com

Employee Benefit Research Institute

www.ebri.org

Plan Sponsors Ask...

Q: What are the risks of losing track of a plan participant? There are a few people who remain “on the books,” in spite of trying many times to reach them.

A: That’s an important question because there are serious potential consequences. Losing track of a participant can be considered a breach of fiduciary duty, according to a 2014 Field Assistance Bulletin from the Department of Labor. Plan sponsors must be diligent in their attempts to contact participants with a vested account using a variety of tools, including certified mail, checking all plan and employer records, sending an inquiry to the designated beneficiary, and using free electronic search tools. In cases where the participant remains missing, the plan must consider additional methods of locating them, such as a commercial locator service, crediting reporting agencies, and investigation databases. If the plan fails to locate a participant and hasn’t taken proper steps to do so, there is a potential for the plan to be disqualified. We suggest you read more on this topic in the DOL’s Field Assistance Bulletin mentioned above (https://tinyurl.com/DOL-FAB-201401) in this IRS Employee Plans Memorandum (https://tinyurl.com/IRS-EP-memo), and in this letter to the DOL from the American Benefits Council (https://tinyurl.com/ABC-DOL-letter).

Q: We had two participants leave our company this year with outstanding 401(k) plan loans. We’ve heard the tax law passed in December 2017 may impact those loans. What can you tell us?

A: You heard right; there is a provision in the Tax Cuts and Jobs Act passed December 22, 2017, that affects plan participants who terminate employment with an outstanding loan. Before passage of the law, the loan would have been due immediately. Former employees who could not repay the loan within 60 days would have the outstanding balance deducted from their account balance and treated as a taxable distribution. The Tax Cuts and Jobs Act included a provision extending the repayment due date. Now, to avoid inclusion of the outstanding balance in taxable income, the loan must be repaid by the date the participant’s federal income tax is due. There are a few important housekeeping items associated with this change. If your plan allows loans, be sure to update the plan document, the plan’s loan policy and the required notice of rollover eligibility so they reflect the update.

Q: Sometimes employees ask us for advice about how much of their income they should be saving for retirement, how much they should already have saved, and how much they will need. Of course, we don’t give blanket answers. But we would like to pass along some resources, either directly or through our plan communications, so they can educate themselves. Can you suggest some?

A: We’re glad that you aren’t trying to give one-size-fits-all answers to these important questions, and that you’re interested in helping participants learn more. There are some great resources available online, and you may want to share them with your participants as you communicate about the plan. Be cautious in your communication, though, because the ideas presented by one provider or expert can vary widely when compared to another source. You do not want it to appear that you are endorsing any particular source — unless you have the backing of the plan’s counsel and a full understanding that that’s what you’re doing. In a quick online search, we turned up resources from www.investopedia.com, www.nerdwallet.com, money.cnn.com, www.aarp.org, and The Motley Fool, among many others. Your plan provider likely has calculators available for participants, along with a variety of other tools. Take advantage of them. Even the IRS has resources that can help, at https://tinyurl.com/IRS-resources.

Finding the Right Balance with Company Stock

Including company stock among the investments in your 401(k) plan can be powerful. It gives employees a voice in the firm’s direction, pride of ownership, and a direct correlation between their job and company performance. At the same time, employees should understand how to use company stock wisely as a 401(k) plan investment.

A few widely publicized corporate bankruptcies in the early 2000s taught lessons about over-investing in company stock. Federal law limits the amount of employer stock in defined benefit plans to 10%, but has no corresponding limit for 401(k) plans. In spite of past lessons, some plans hold a significant percentage of assets in their own company’s stock. According to the Brookings Institute, Sherwin Williams has 62% of their 401(k) plan assets in employer stock, with Colgate Palmolive close behind at 56%. Companies with substantial employer stock holdings in their retirement plans may be risking participants’ retirements if the business takes a downturn, as has occurred for General Electric. They were recently removed from the Dow Jones Industrial Average as business results slipped.

If you haven’t done so lately, it could be advisable to examine the percentage of assets invested in company stock in your own plan. And make it the subject of employee investment education. By doing so, you can help employees make informed decisions about company stock investments, and at the same time, maintain the benefits of employee ownership.

Read this op-ed from the Brookings Institute for more information: https://tinyurl.com/employer-stock-caution.

The Importance of Financial Wellness

Surprising employer response in 2018

It’s interesting to compare changes year by year, but over time is when real results emerge. That’s often true in retirement plans; while there may be small, incremental changes in enrollment, investments and plan design one year to the next, comparing decades can be much more illuminating.

One example is the popularity of target-date funds. These are funds which gradually shift emphasis from more aggressive to more conservative, based on their target date, which is generally the year one intends to retire and leave the workforce. Examining their data, Vanguard found a gradual uptick, usually 3% to 4% each year, in the number of participants holding a single target-date fund for most years between 2008 and 2016.1

Yet, by the end of 2017 these small increases added up significantly when compared to the previous decade: the percentage of participants invested in a target-date fund had reached 75%, and 9 of every 10 plan sponsors included them among the available funds.2

It isn’t often that plan sponsors and industry professionals who watch the trends are startled by year-over-year changes in benchmarks such as matching contribution levels. To the contrary, participation levels, Roth provisions, and auto features in 401(k) plans continue to gain modestly, while plan fees creep downward.

However, there was a surprise in 2018. In a longtime, industry-standard benchmarking survey, companies seemed far more willing to claim responsibility for employee financial wellness than they were a year earlier. Typically, when asked whether their organization had responsibility for employee financial wellness, the response from employers was about 25% saying yes, 25% saying no, and 50% remaining neutral. But for 2018, 58.4% said yes, 1.8% said no, and 39.7% remained somewhat neutral.3

Nearly half of employers auto enroll at 3%+ initial deferral rate

Employers continue taking practical steps to reach the goal of financial wellness for employees, whether through plan features or through tools and education (or both). The same study found that by 2018, 47.5% of plans automatically enroll employees in their 401(k) plans at an initial deferral rate higher than 3% of pay. Six years earlier, 35% of employers enrolled automatically at a rate higher than 3% of pay.

The most popular means of bringing financial advice to employees is offering one-on-one meetings with financial advisers, the survey found, with 46.5% of employers doing so. Most commonly, the types of financial education or guidance offered were savings strategies (43.5%), investing basics (35.8%), and credit/debt management (17.9%). Fully 27.8% offered access to help for new hires rolling into the plan and 26.3% offered help for newly separated employees rolling out of the plan.

Learn more about the 2018 PLANSPONSOR Defined Contribution Survey: Plan Benchmarking at https://tinyurl.com/PlanSponsor-2018-DC-benchmark.

 

Traditional Accounts Continue Sharing the Stage with Roth Accounts

Tax diversity among the benefits

As employers continue looking for ways to help employees retire securely, the Roth account has become a regular plan feature. In the five years starting in 2014, in fact, inclusion of a Roth account feature had increased 18.1%, so that by 2018, 72.7% of 401(k) and 403(b) plans included one. In the largest plans, those with more than $200 million in assets, nearly 8 in 10 plans now include a Roth feature.4

A key reason for the Roth’s popularity is diversity — but not the kind typically discussed in retirement plan circles. Instead of investment diversity, the primary reason to include a Roth is tax diversity.

Lower taxes today…or tomorrow?

Find a balance

Taxes are one of the key reasons to encourage employees to contribute to their 401(k) plan. After all, current-year income may be reduced by the amount an employee contributes to the plan. However, as the discussion around income strategies at retirement heats up, awareness is increasing about the role of income taxes during the decumulation, or withdrawal, phase. Retirees whose savings are entirely tax sheltered may be hit with tax bills that are larger than they expect — at a time when every penny counts.

Investing part of one’s retirement savings in a Roth account is one way to provide balance. True, Roth contributions are made with after-tax money. Any investment earnings in the Roth account accumulate tax-free just as they do in a traditional 401(k) or 403(b) account. Unlike the traditional accounts, though, withdrawals from the Roth account are tax-free at retirement. now include a Roth feature.

Tracking the details

There are several questions employers that want to add a Roth feature to their existing 401(k) plan should ask themselves or their providers:

  • Does our plan document allow for a Roth option, or will it need to be updated to include this feature?
  • Is our payroll provider capable of processing both pre- and post-tax contributions?
  • Can our record keeper track both types of contributions?

If your plan includes auto-enrollment, new participants are typically enrolled in the traditional account. If you want to enroll them in the Roth account, you should require them to affirmatively sign up to do so. Employees who contribute to both the pre-tax and post-tax accounts in the plan need to know that the maximum deferral amount considers both.

As is the case with any qualified plan, there are a lot of details to address when making a change of this kind. It’s always wise to speak with your plan’s counsel. In the meantime, you can read more about Roth accounts in 401(k) plans at the IRS website, https://tinyurl.com/IRS-Roth.

This article is for informational purposes only and is not intended as tax advice. Employees should be encouraged to consult a qualified tax professional before making investment decisions.

Web Resources for Plan Sponsors

Internal Revenue Service, Employee Plans

www.irs.gov/ep

Department of Labor, Employee Benefits Security Administration

www.dol.gov/ebsa

401(k) Help Center

www.ebri.org

PLANSPONSOR Magazine

www.plansponsor.com

BenefitsLink

www.benefitslink.com

Plan Sponsor Council of America

www.psca.org

Employee Benefits Institute of America, Inc.

www.ebia.com

Employee Benefit Research Institute

www.ebri.org

Plan Sponsors Ask...

Q: One of our 2019 goals is to provide financial education to our employees. There are many companies and individuals providing this kind of education; how can we pick the right one for our company?

A: Congratulations on making the decision to move ahead with financial education! When employees have a better grasp on budgeting and other financial basics, they may be better equipped to save for retirement and the other big financial demands we all face. To find the best provider for your needs, we suggest creating a list of questions to ask each candidate. You will want to ask how the provider will be paid, i.e., is it through commissions? Is the content they will present objective? And will the vendor be collecting contact information from employees? You will also want to make sure you understand the background and experience of the candidates, asking questions such as: Have educators had training in the areas they will discuss with employees? What is their track record in providing this kind of education? And, if there will be one-on-one counseling with employees, are the trainers certified to do so? The International Foundation of Employee Benefit Plans has created a comprehensive list of 23 questions to ask when you’re selecting a vendor for financial education. https://tinyurl.com/IFEBP-education.

Q: When moving our office, we came across some old retirement plan records. That sparked a conversation about what we need to keep with regard to our 401(k) plan. Can you provide any guidance?

A: Just as you do with your personal income tax documents, you need to maintain records related to the plan. This is for a couple of reasons, one of which is being ready to defend actions and decisions if the plan is ever audited. We suggest you review the IRS and the DOL websites for complete information about what you need to keep and for how long. In the meantime, here are some items that come to mind. Keep the original and signed plan document, along with any amendments, the adoption agreement (if any), the Determination Letter from the IRS, and all trust records and investment statements. Make sure you maintain records of all notices to participants, like the Summary Plan Description, the Summary Annual Reports, notices about blackout periods, and fee disclosures. You should also keep proof that the notices were sent and any proof they were received or opened. Of course, keep the plan’s 5500 reports and audits of the financial statements.

You can find a discussion on this topic in the Journal of Pension Planning & Compliance, Volume 43, Number 4, available online at https://tinyurl.com/JPPC-records.

Q: We offer a wide variety of funds in our 401(k) plan. Employees sometimes get so stressed trying to understand the funds that they give up and “just pick one.” We are working on simplifying the offerings and helping them understand those we have available. Any suggestions?

A: You are wise to put thought into the plan’s investment offerings. The first suggestion is to work with your plan’s advisor to develop an IPS, or Investment Policy Statement. It will help guide decisions and to document the reasons each was chosen, which could serve to protect the plan’s fiduciaries should any litigation arise. It’s also a good idea to make sure participants understand how fees are charged. The Pew Charitable Trusts has come up with a calculator that clarifies the impact of paying too much for investments. In an article on their site, they illustrate the difference for someone saving $200 per month at 6% with fund expenses of 1.5% (sum of fund expense ratio and advisory fee) compared to someone in the same situation paying just 0.5%. At the end of 40 years, the person paying the higher amount would have saved $268,700, while the investor paying the lower fees would have $349,600 — a difference of $80,900, even though the difference in expense is just 1%.

You can read the article, which was originally published in Forbes on November 16, 2018, here: https://tinyurl.com/Pew-fee-impact.

Pension Plan Limitations for 2019

401(k) Maximum Elective Deferral $19,000* (*$25,000 for those age 50 or older, if plan permits)

Defined Contribution Maximum Annual Addition $56,000

Highly Compensated Employee Threshold $125,000

Annual Compensation Limit $280,000

Getting the Holdouts into the Plan on 2019 Agendas

Wondering where plan sponsors will be focusing their interest and efforts in 2019? We turned over a few stones on the Web and found some ideas. Here are two of them:

Getting those holdouts into the plan

The low-hanging fruit, aka employees with a lot of interest in their future and the ability to save, joined the 401(k) plan right away. The next wave took some persuasion, in the form of applying the principles of behavioral economics including auto-enrollment. But now, what to do with employees whose financial situation has rendered them unable to visualize themselves ever retiring — let alone saving to pay for it? A recent article says financial wellness strategies, like budget and debt management, may help them. This is where many plan sponsors will be focusing this year.

Bringing back the lost sheep

2018 saw lots of plan sponsors focused on missing participants, and 2019 promises to see more of the same. If your plan has missing participants, now is a great time to get cracking on finding them, because attention from the Department of Labor seems to be increasing.
Read more about Cammack Retirement Group’s predictions for plan sponsor attention in 2019 in their article, here: https://tinyurl.com/Cammack-2019

1 Vanguard Research Note, TDF Adoption in 2017, https://tinyurl.com/vanguardTDF. Please note the principal value invested in these funds is not guaranteed at any time, including at the specified target date.
2 How America Saves 2018: Vanguard 2017 defined contribution plan data, https://tinyurl.com/VanguardTDF-2
3 PLANSPONSOR 2018 DC Survey: Plan Benchmarking, https://tinyurl.com/PlanSponsor-2018-DC-benchmark
4 PLANSPONSOR 2018 DC Survey: Plan Benchmarking, https://tinyurl.com/PlanSponsor-2018-DC-benchmark

2018: Success ... and Turbulence

Results improve with thoughtful use of auto features

The assumption when plan sponsors began to include auto features in their 401(k) plans was that participation rates and deferral amounts would increase — but no one knew for sure. As time has passed, it appears the assumption was good: auto-enrollment and auto-increases have had very positive results overall.

Plans that include auto-enrollment enjoy an average participation rate that is nearly double that of plans not using this feature: 85.6% participate in plans that include auto-enrollment, compared to 43.7% for those without. Even better, more than one-third (37%) of plans using auto-enrollment have a default deferral rate of 6% or higher.

On average, 401(k) plans saw their pretax deferral rate increase to 8.6% of pay in 2018, up slightly from 8.3% a year earlier. Employers added to employee savings via an increased company match, perhaps due to the reduced corporate tax rate. In 2018, 11.8% of plans matched 100% of the first 6% of salary; 14.2% matched 100% up to 4% of pay; and 27.2% set their matching formula at 50% of the first 6%.

Further, Roth account contributions rose by 10% compared to 2017. Still, Roth accounts may be underutilized, with usage at just 7.6%. This may be due to a lack of understanding by employees, which suggests that education on the topic could benefit them. Young Millennials, between the ages of 20 and 29, contribute to a Roth account at a rate of 8.8%, compared to almost 10% by elder Millennials, between 30 and 39.

However, 2018 wasn’t all rosy. According to T. Rowe Price. In their December 31, 2018, Reference Point, the company saw a significant increase in the number of participants contributing nothing to their plan, from 33.9% in 2017 to 35.6% in 2018. This may have played a role in an overall decrease in account balances, from $92,402 in 2017 to $85,336 in 2018. The decrease was most pronounced among Millennials, who lost the highest percentage in account balances over the year.

Market fears seem to have been a deciding factor in plan participants shifting from stocks to cash within their 401(k) plan accounts. Overall, investment in stocks dropped 4.9% in 2018, whereas investment in money market or stable value funds increased just over 10%. Target date funds (TDFs) continue to be popular with retirement investors; investments in TDFs rose slightly in 2018, from 41.2% in 2017 to 42.2% — an increase of 2.4%.

Get more insights on 2018 plan participation in T. Rowe Price’s report, available for download at https://trowe.com/2yJnFg4

Clever Tactics to Help Employees Achieve Retirement Success

Behavioral finance strategies improve the odds

Applying a few innovative moves in your 401(k) plan could result in increased retirement savings for your employees. That’s because, when it comes to money, subconscious perceptions can torpedo a plan participant’s success.

Applying behavioral finance principles may help employees overcome obstacles that often keep them from making rational financial decisions. Here are a few financial behaviors that could be sabotaging employee retirement savings, along with ideas from the International Foundation of Employee Benefit Plans (IFEBP) that may serve to counter them.

Loss Aversion

People tend to dislike loss more than they like gains. As an employer, you can capitalize on this tendency with the language you use to communicate about the plan. For example, “Would you rather pay yourself or the government?” or “ Increase your retirement savings and cut your taxes,” is much more effective than “Stop missing out on your retirement plan match.” Although both communicate the same message, says the IFEBP, the former packs a more powerful punch.

Herd Mentality

We all like to be included, and that means we look to others to figure out our next move. As you communicate about your 401(k) plan, take advantage of this tendency by discussing what others are doing with regard to saving. For example, say something like, “80% of ABC employees contributed to their retirement plan last year.” Or get even more specific about the group you’re targeting with this message: “Nine out of every ten new hires say “yes” to saving 15% of their pay for retirement.” The IFEBP says that breaking down the message to specific groups — such as new hires, people over age 50, or those working at a specific location — can be most effective.

Order for Advantage

Faced with a long list of choices, most people hone in on entries at the top. Unless the list is particularly long, they may recall only the last few items. When providing a list, consider the order in which you include entries. For example, if you present a list of investment funds available in the plan, the tendency may be to list the choices from least risky to most risky. As a result, you may find the majority of participants select very conservative investments or, if the list is long, very aggressive ones because they only remember the last few funds on the list. Instead, consider reserving the top of the list for investments that are likely to be appropriate for most participants, such as target date or balanced funds.

There are many more principles of behavioral finance that may help in your 401(k) plan communication efforts. Find out more about the IFEBP’s suggestions at https://tinyurl.com/ IFEBP-Beh-Fin.

Web Resources for Plan Sponsors

Internal Revenue Service, Employee Plans

www.irs.gov/ep

Department of Labor, Employee Benefits Security Administration

www.dol.gov/ebsa

401(k) Help Center

www.ebri.org

PLANSPONSOR Magazine

www.plansponsor.com

BenefitsLink

www.benefitslink.com

Plan Sponsor Council of America

www.psca.org

Employee Benefits Institute of America, Inc.

www.ebia.com

Employee Benefit Research Institute

www.ebri.org

Plan Sponsors Ask...

Q: We keep hearing about participant lawsuits against 401(k) plans, and strive to do our best to avoid situations that could lead to one. Part of that is using prudent processes in the plan. We have asked our advisor and done some searching on our own, but haven’t been able to define what processes are truly prudent in this context.

A: Since the inception of the Employee Retirement Income Security Act of 1974 (ERISA), the prudent person rule has provided a good rule of thumb. To paraphrase, it states that an appropriate decision is one that a prudent person, with similar skill and circumstances, would make. You are correct that it lacks precision, and that’s why process is so important; the Center for Retirement Research at Boston College studied the major causes of 401(k) lawsuits, and determined that they often hinge on whether or not a prudent process was followed. The study found that the most common reasons for participant legal action are excessive plan fees, poor investment options, and self-dealing behaviors. To illustrate: some plan sponsors fear incurring the higher fees associated with actively managed funds, so they offer only passive funds. But courts don’t automatically consider higher fees to be excessive, as long as they are clear and provide value in exchange for the fees. In fact, a too-conservative approach may also be detrimental to participants. A prudent process for selecting the funds may provide a satisfactory defense if a participant decides to sue. Our best suggestion is to thoroughly review all processes in the plan with prudence in mind. Read more at https://tinyurl.com/CRR-Prudent-Process

Q: I overheard a surprising conversation between two of our employees. In short, one told the other that his 401(k) account at his former company just goes back to his ex-employer. I brought the employee in and gave him the contact information for our plan’s advisor so he can get correct information. But it made me wonder how we’re really doing in educating employees about our plan.

A: Communicating with employees about the plan is at least a two-part process. Part 1 is providing the education, and part 2 is determining how well it works. You are fortunate to have stumbled upon Part 2. Don’t feel bad if your education efforts are falling short, though, because you aren’t alone. Fisher Investment 401(k) Solutions found some holes in participants’ understanding of their 401(k) plans, through their 401(k) Wellness in the Workplace Survey, covered in 401kSpecialist Magazine, https://tinyurl.com/Fisher-Workplace-Wellness. The knowledge gaps uncovered by Fisher may help you determine the next topics to address for your employees. A few subjects on which you may want to educate employees include loans, taxes, and asset classes. One-third of Fisher’s survey respondents thought that most plans don’t allow loans, 23% did not know their contributions reduce their taxable income, and 77% could not accurately define “mutual fund” when presented with a list of descriptive statements.

Q: Our 401(k) plan has decent participation and contribution rates. Unfortunately, we also notice a lot of loan activity. Informal discussions suggest that employees are using their retirement savings to fund emergencies. Any ideas for how to help?

A: Lots of Americans are finding it difficult to fund even small emergencies from their bank accounts, as demonstrated by the proliferation of payday loans and — as you have discovered — early withdrawals and loans from 401(k) plans. One way to help may be the sidecar IRA, an account to which employees can direct after-tax money through payroll deduction. Once the account is funded to the extent desired by the employee, the payroll deductions can then be directed toward pretax retirement savings. Check out related statistics and more information from studies by Transamerica Center for Retirement Studies, Prudential, and AARP by reading the MarketWatch article here: https://tinyurl.com/ Market-Watch-Sidecars

Auto-Features Accomplished; What’s Up Next?

Retirement income options may be coming soon

You can almost hear the retirement plan consultants ticking the boxes on their to-do lists: auto-enrollments? Check.

Auto-increases? Check. With widespread implementation of these features firmly entrenched, the next focus may be retirement income options in 401(k) plans. That’s one of the findings from recent queries of 238 consulting and advisory firms. Roughly two-thirds of the consultants who were asked about the future of plan design said they believe their plan sponsor clients want to retain retirees in their plans. One way to do that is to figure out ways defined contribuiton plans can provide income. They also favor adding distribution flexibility, access to education, and retiree-focused investment options.

Asked what they believe their clients’ priorities would be for 2019, 63% of the consultants placed a review of the plans’ target date funds at the top of the list. Second came an evaluation of investment fees at 44%, and evaluation of administration fees in the number three spot, with 28%.

Although interest in financial wellness programs remains strong, a large majority of consultants participating in the PIMCO DC Consulting Study (https://tinyurl.com/PIMCO- next-up ), released April 2019, are unimpressed. At least 74.9% of study participants said the results of such programs are only somewhat effective (74%), 9% stated that they are very effective, and 17% said these programs are not very effective.

Retirement Expectation Versus Reality: Communication Opportunities at the Crossroads

When expectation and reality differ, the results can be tough to take — especially when the subject is retirement. By communicating with employees in a way that recognizes both the perceptions and the realities, employers can smooth the transition from worker to retiree.

With this disconnect in mind, it’s important for employers to pay attention to key areas where worker expectations and retirement reality part ways. They may then be able to direct their communication efforts where they could truly make a difference.

When, where, how much?

Important points where worker perception can be different than retirement reality include when to retire, and how much income will be needed and from what source. Those were among the areas explored recently by the Employee Benefits Research Institute. These topics, along with the basics of managing a household budget, can form the basis of an effective communication program to guide employees into retirement.

Half of the workers who answered a survey expressed confidence that they know how much income they will need in retirement; half also believe they know how to withdraw income from their savings and investments. A higher number (two-thirds) of retirees say such withdrawals are relatively easy.

Just one-third of workers expect Social Security to play a major role in their retirement income. In fact, 50% said it will be a minor source of their retirement income, and 13% don’t consider it a source at all. Contrast that with the response among retirees, where two-thirds say Social Security is a major source of their income.

financial meeting

On time, early, or late

The timing of the initial Social Security claim is something employees think about, and they seem to believe that earlier is better. Many fail to take full advantage of the program by delaying their claim until they are able to receive their highest possible benefit. About half of employees say they think about the timing of their retirement and how it will impact them financially. But they still plan to claim their Social Security benefits at a median age of 65. Just 23% of workers said they chose the age at which they plan to claim benefits with their maximum available benefit in mind.

Read more about retirement confidence from workers and retirees in the Employee Benefit Research Institute’s latest survey, at https://tinyurl.com/EBRI-RCS-2018.

Squeeze Play: Gen Xers Especially Feel the Pinch

Saving for retirement can challenge the best of us. For one group of employees, the challenge seems particularly daunting. Your mid-career colleagues, those between 36 and 56 years of age, may sometimes feel the odds are stacked against them. They are squeezed by their own debt, financial obligations to children who are not yet grown, and often, financial demands of aging parents. How, they may wonder, will they ever be able to retire?

Here are a few statistics about this generation, according to information from an ADP Retirement report1:
  • More than 60% of Gen X workers have dependent children
  • 30% provide financial support to their parents or in-laws
  • 31% have outstanding student debt

About one-third of Gen Xers answering the survey reported concern about their ability to meet current monthly expenses. In fact, in 2017 38% said they used a credit card to afford necessities, up a startling 11% compared to one year earlier.

gen x financials

Meanwhile, Gen Xers appear to be more confident in their ability to retire on time than in previous years. 29% reported in 2017 anxiety about not being able to do so, compared to 37% who felt that way in 2016. And three-quarters of Gen Xers are, indeed, saving for retirement, although about one-third have used their retirement assets for something unrelated to retirement, and nearly half believe they will need to at some point.

Retiree healthcare costs cause concern

A significant point of concern for Gen Xers is the cost of health care in retirement, with 30% citing it as a top concern. (Running out of money in retirement (46%) and health issues (32%) were the worries topping the list). They are right to be concerned. One national provider of healthcare cost-projection software expects a healthy 65-year-old couple retiring in 2018 to need nearly $364,000 in their retirement years to pay healthcare premiums and expenses.2 Even so, only half of Gen X workers who have access to a Health Savings Account use it as a way to build a nest egg toward these expenses in retirement.

Push back with financial wellness education

To push back against the squeeze, many employers provide some form of financial wellness program. A solid financial wellness program should include education about managing debt, setting up and using a budget effectively, and finding ways to save for the future. Such a program can help solidify the relationship between employer and employees — for all ages and pay grades. It can help reduce financial stress on employees, which in turn may improve productivity — since, according to the survey, 34% of Gen Xers report being distracted at work over money. Among them, almost half say they spend at least 3 hours a week preoccupied with personal finance issues during the workday.

Web Resources for Plan Sponsors

Internal Revenue Service, Employee Plans

www.irs.gov/ep

Department of Labor, Employee Benefits Security Administration

www.dol.gov/ebsa

401(k) Help Center

www.ebri.org

PLANSPONSOR Magazine

www.plansponsor.com

BenefitsLink

www.benefitslink.com

Plan Sponsor Council of America

www.psca.org

Employee Benefits Institute of America, Inc.

www.ebia.com

Employee Benefit Research Institute

www.ebri.org

Plan Sponsors Ask...

Q: We like to keep an eye on trends that could impact retirement for our employees. Is anything new on the horizon these days?

A: Yes, there are some trends to watch, although some have been on our (and probably your) radar for the last few years. The American Retirement Association (ARA) identified seven of them in a September 2018 presentation for ASPPA. Take particular note of litigation over plan fees. Several factors have emerged among plans undergoing fee litigation, according to the presenter, ARA Chief Content Officer Nevin Adams. Plans that hold multi-billions in assets are often targeted, he said, especially those that include retail-class mutual funds. Also under scrutiny are plans with proprietary funds in their investment line-ups; plans that fail to regularly benchmark their plans and investments; those using assets as a basis for recordkeeping charges instead of per-participant fees; and plans that aren’t working with a qualified retirement plan advisor. None of these factors are illegal, of course. But if they apply to your plan, a thorough review of your processes and procedures could be helpful in maintaining the plan’s effectiveness — and keeping fiduciaries out of court. Learn about more trends identified in the presentation at https://tinyurl.com/ARA-7-tren

Q: Many of our employees are young and carrying debt related to their education. As we implement our financial wellness and retirement communications, we’d like to address the question we sometimes hear about whether it’s better to channel income toward paying off loans or into the 401(k) plan. What are your thoughts?

A: Like so many other choices in life, this one is complicated. The best answer is, of course, to do both. But you don’t want to overwhelm employees so they give up and fail to take any action. We all know that, when it comes to saving for retirement, the earlier the better. But carrying student debt into retirement isn’t smart, and paying if off can free up funds to save for the future. You’re on the right track by educating employees about their overall financial health. As you develop the program, these suggestions may help employees struggling with competing priorities. Tell them to: find out if your bank offers an interest rate reduction for automatic payments on your loan; check for tax breaks you could receive on your student loan repayments; pay down the balances of your highest-rate debts first; and watch out for pre-payment penalties if you do manage to pay your student loans ahead of schedule.

financial charts retirement

Q: Employees have been asking about including socially responsible options among the 401(k) plan’s investments. We want to be responsive but have some concerns. Can you share some of the basics of socially responsible investing? And how might it impact our fiduciary responsibilities?

A: When people refer to responsible investing, they often refer to ESG — environmental, social and governance. You may be surprised to learn that ESG investing has been around for more than 30 years; however, its popularity and importance have increased dramatically in the last decade. An interesting statistic from RBC Global Asset Management shows increasing confidence in performance related to ESG. Their survey in 2018 found that 38% of respondents believe integrating ESG into their investing can improve results. That’s up 14% from one year earlier, and it goes a long way toward alleviating concerns about including ESG among investment choices. In addition, more than 50% of survey respondents say that incorporating ESG into their investment approach is part of their duty as a fiduciary, double the number who said so in 2017. There is more information on this topic here: https://tinyurl.com/RBC-ESG-2018.

Pension Plan Limitations for 2019

401(k) Maximum Elective Deferral $19,000* (*$25,000 for those age 50 or older, if plan permits)

Defined Contribution Maximum Annual Addition $56,000

Highly Compensated Employee Threshold $125,000

Annual Compensation Limit $280,000

Back to "normal"?

Young/new employees dive into stocks

Some benchmarks in the stock market have returned to where they were before the recent recessions, bubbles, and scandals. Others, though, may never be the same. Whether that’s good or bad you can decide for yourself.

Back in 2007, fewer than half of 401(k) plan participants then in their twenties invested their account balances in stocks. Flash forward to year-end 2016, when equities accounted for more than 80% of 401(k) plan balances for over ¾ of twenty-somethings.

The increase may be due in part to the proliferation of auto features in 401(k) plans, and the automatic investments that go along with them. As of December 31, 2016, about 2/3 of 401(k) plans included a TDF in their investment line-up, and 21% of assets were invested in them. For new hires, the numbers are even more impressive: by the end of 2016, 71% of new hires had a balanced fund among their 401(k) plan investments, with 38% of new hire account balances invested in a TDF.

Detailed information is available on investments, loans and more in the study from the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI) at https://tinyurl.com/ICI-EBRI-investments.

plan sponsor quarterly calendar

1 Generation X: The Most Financially Stretched and Financially Stressed Generation, ADP Retirement Services 2018
2 Healthview Services 2018 Retirement Healthcare Costs Data Report®, https://tinyurl.com/HVS-2018-retiree

Transitioning to Retirement: How the Plan May Help

For decades now the typical career has consisted of approximately 40 years spent working, an “on time” retirement at age 65, and perhaps a decade spent enjoying the so-called golden years. But with better health leading to longer life spans, retirement now may last much longer — and require much more money. Today, employers and employees alike recognize that four decades of saving for a retirement that may last four more decades is, to say the least, challenging.

That’s the reason many people plan to work more years than they would like to before they finally retire completely. When asked recently, 54% of workers report they plan to work either full time (14%) or part time (40%) in retirement, and their employers often (76%) acknowledge that expectation. In fact, 85% of employers agree with the statement, “My company is supportive of its employees working past age 65.” Fewer workers, 77%, see it the same way.

For 43% of workers, the transition into retirement would involve working fewer hours or in a different, less demanding, capacity. In fact, only 22% of workers say they plan to immediately stop working and retire fully.

Opportunity lacking for flexible and part-time schedules

While employers theoretically support workers taking a transitional approach into retirement (69% of them say many of their employees expect to work past 65 or do not plan to retire), just 38% offer flexible work schedules that could facilitate the transition. Fewer still (30%) allow employees to take a part-time schedule, downshifting from full time, or to take on jobs that are less demanding and stressful (21%).

What’s more, 75% of employers do not have a formal program that helps employees phase into retirement. Often, the reason given for the lack of a phased retirement program is that it’s easier to handle retirement transition requests on a case-by-case basis (39%). Thirty-seven percent say their employees aren’t interested in this kind of program, and 27% say operational and administrative complexities keep them from offering one.

More and better education could help improve retirement planning

Employers have opportunities through their retirement plans to assist workers with their transition into retirement, according to the cited study, the 19th Annual Transamerica Retirement Survey, “Employers: The Retirement Security Challenge,” released in October 2019 by the Transamerica Center for Retirement Studies. Simply sponsoring a 401(k) plan encourages employees to save more for retirement, according to the study. When their employer does not offer a 401(k) or similar plan, only about 50% of employees save for retirement. By providing more educational resources, including information about distribution options and retirement planning materials, they could use their retirement plan platform to help workers make better decisions for their retirement lives.

You can read study highlights online at https://tinyurl.com/TransamericaSurvey2019

Retirement Savings and Plans Don’t Always Align

Nearly half (48%) of retirement plan participants are either “confident” or “very confident” about achieving a secure retirement by the date they plan to leave the workforce. Yet, 55% of them have saved less than $100,000 toward retirement. The lack of saving doesn’t seem to have dampened their enthusiasm about retiring early, though: 36% expect to retire before age 65. It’s true, those could be among the small number of total workers who have saved at least $250,000 for retirement; perhaps the 22% who expect to work until age 70 (or more) are among those whose savings and confidence about retirement security are relatively low.

Many of the participants who were asked recently reported that they were saving at — surprise! — the default deferral rate their plan offers. With the typical default rate set low, this tendency toward inertia translates into a situation where a significant number of people (41%) say they are saving 5% or less of their pay toward retirement. That number has increased since 2018, when 34% were saving 5% or less. For 2019, just 21% of participants were saving more than 10% of their pay, and 33% fell between 5% and 10%.

Still, a solid 43% of participants report taking one very positive action in their retirement strategy during the last year: they increased their deferral rate. Seventeen percent said they changed their asset allocation strategy during the year, 16% rebalanced their retirement account, and 16% performed a retirement income calculation.

The most-preferred communication? One on one

When learning about retirement, participants seem to prefer one-on-one communication. Asked how they would prefer to receive information on financial wellness, 31% said they would like to meet with an advisor for 30 minutes. The next most popular option, reading a short brochure with 3-5 actionable steps, was selected by 18% of participants. Fifteen percent would rather browse an interactive, online library, and 14% said they would like to read a newsletter via email.

Seeking counsel from a financial advisor may result in greater retirement savings. Thirty-six percent of participants whose retirement savings is greater than $250,000 use a financial advisor, compared to 10% of those with less than $50,000 in retirement savings.

“Now vs. later” results encouraging

Participants seem to appreciate long-term reward compared to smaller, short-term gains. They were asked whether they would choose a 6% matching contribution that vested after 5 years, or a 3% immediate match. Sixty-one percent of respondents said they would take the longer-term match. Similar results came when participants were asked if they would prefer a $2,500 employer contribution that required them to contribute some of their own money to the plan, or a $1,500 employer contribution that had no such employee contribution requirement. Just over half, 53%, said they would take the larger contribution.

To read more results from the 2019 Participant Survey from PlanSponsor, check out https://tinyurl.com/2019PlanSponsor

Web Resources for Plan Sponsors

Internal Revenue Service, Employee Plans

www.irs.gov/ep

Department of Labor, Employee Benefits Security Administration

www.dol.gov/ebsa

401(k) Help Center

www.ebri.org

PLANSPONSOR Magazine

www.plansponsor.com

BenefitsLink

www.benefitslink.com

Plan Sponsor Council of America

www.psca.org

Employee Benefits Institute of America, Inc.

www.ebia.com

Employee Benefit Research Institute

www.ebri.org

Plan Sponsors Ask...

Q: An employee has requested a hardship withdrawal from the 401(k) plan. We are relying on his statements to the plan administrator that he is in true financial need, but another person in the office says he actually does have money in the bank. Do we take the word of the person requesting the withdrawal, or demand documentation?

A: The pertinent point is whether or not the Plan Administrator has “actual knowledge” of the participant’s financial status. In the Final Regulations covering hardship withdrawals, released on September 19, 2019, the Internal Revenue Service (IRS) addresses that point. One requirement for the granting of a hardship withdrawal is that the money is necessary for an immediate and heavy financial need. The employee must provide a representation that he or she has insufficient cash or other liquid assets available to satisfy the financial need, and the distribution may not be made if the administrator has actual knowledge to the contrary. In the final regulations, the IRS states, “The requirement does not impose upon plan administrators an obligation to inquire into the financial condition of employees who seek hardship distributions.” Because administering hardship withdrawals is a fiduciary responsibility, we urge you to consult legal counsel before making a decision. Read the final hardship regulations in the September 23, 2019, Federal Register. For more information, see https://tinyurl.com/HardshipDistrFinal.

Q: Do you have any tips for forming a retirement plan committee? We recently implemented a 401(k) plan and want to get the committee off on the right foot.

A: Congratulations on the plan, and on seeking an optimal structure for plan oversight. There is no need to reinvent the wheel; a lot of good information has been published on the topic of retirement plan committees. In fact, Nuveen, a TIAA Company, included some interesting thoughts in its publication, next. Along with ideas such as selecting the right number of members for the committee, utilizing a committee charter, and thoroughly documenting actions and processes of the committee, the article discusses the benefits of considering diversity. After all, they suggest, diversity among juries and employees, on corporate boards and in academia results in better decisions — and they cite a variety of studies to support the claims. It would follow that retirement plan committees could also benefit from a more diverse committee. Among the factors to consider, according to Nuveen, are gender, race, religion, age, culture, socioeconomic background, education and functional expertise. Read the article in next issue no. 3, https://www.nuveen.com/dcio-next-fiduciary-perspective- issue-3.

Q:A soon-to-be-retiree asked our HR staff some questions about Social Security benefits. From her questions, it was apparent she did not understand the basics about the Social Security program. Is this a topic we should avoid, or should we include it in our retirement education?

A: By all means, include accurate information about Social Security, because for most Americans, it will make up a large portion of their retirement income. According to the Social Security Administration, it will replace roughly 40% of preretirement income for the typical retiree. Considering that many financial advisors recommend striving for replacement of 70% of preretirement income, Social Security may account for more than half of the total in retirement. Yet, misunderstandings about the program abound. When you provide education for preretirees, don’t wing it. Ask your plan service providers if they can offer specific materials about Social Security. It can be especially helpful for this group to have one-on-one meetings with a financial advisor when they have an estimate of their Social Security income in-hand. Among other valuable topics, preretirees need to understand the long-term impact of starting their Social Security benefits too early.

Confidence Comes with Knowing Who Is a Fiduciary

Plan sponsors may be unaware that choosing a 3(38) investment manager is in itself a fiduciary act. While the 3(38) investment manager does assume responsibility for selecting and monitoring investments, the plan sponsor retains fiduciary responsibility for the selection and oversight of the manager. Yet, in a recent survey, 25% of respondents incorrectly believe they retain no fiduciary responsibility.

Informed employers confident in processes and decisions

With a clear understanding of their fiduciary obligations comes more confidence in plan decisions. For example, 67% of plan sponsors who know they are fiduciaries are confident that they have an appropriate process in place to document investment decisions, compared to 59% of plan sponsors who do not know they are fiduciaries. As to confidence in an appropriate process to monitor investment decisions, 72% of plan sponsors that know they are fiduciaries expressed such confidence, compared to 53% of sponsors that do not know.

Plan sponsors that know they are fiduciaries are more likely to offer a target-date fund than those that don’t know (69% compared to 56%) and to use automatic enrollment (61% vs. 51%) and auto escalation (44% vs. 34%) in their plans.

Learn more about the findings in the 2019 DC Plan Sponsor Survey from JPMorgan Asset Management by visiting https://tinyurl.com/JPM2019PlanSpSurvey

Sign Up Now!

For updates and program notifications...

Click Here To Sign Up


Check out our blog for the latest company news and the retirement-industry developments.

Click Here


FMi Retirement Planning Services

Our retirement planner helps you estimate how well your savings program is preparing you for retirement.

Calculate Now!