Many financially stressed employees confess to spending 3+ hours of their work week distracted by personal finances, that’s 156 hours per year. This means you could be losing up to $5,260 per employee!
So, what can employers do? Here are three ways employers can help employees manage financial stress:
Recently, I went to cheer on a friend running in her first marathon. The excitement of watching thousands of people accomplish such an amazing goal was an experience like no other. I waited at the last bend before the finish line so I’d have a good vantage point for cheering my friend on. What I did not expect was the wave of emotion that washed over the faces of each runner as they saw the finish line for the first time. There were people from all walks of life, from young athletes trying to beat previous race times to cancer survivors celebrating their health by completing an exhausting 26.2-mile race. No matter their reason for running, they all had obstacles to overcome in order to make it across that finish line.
Training for the Financial Marathon
For many people, their ultimate financial goal is to reach a comfortable retirement with enough energy in reserve to enjoy it. Like running a marathon, this is a long-term goal that takes preparation and persistence.
As the plan sponsor of your company’s retirement plan, you play a crucial role in helping your employees reach toward their long-term financial goals. Imagine yourself as a trainer: you are there to build a training regimen to help your employees work toward their goal and keep them motivated along the way.
Setting Attainable Goals
A good trainer will assess their athlete’s health and ability before committing to a race. It is important to align goals and position your employees for success. If they’re not yet ready to run a marathon, that’s fine; they may need to start with a 5K or 10K instead.
If retirement is not your employees’ most pressing financial concern, consider offering financial counselling, wellness programs, or plan design options that address whichever issues are causing the most stress, such as:
If emergency savings is a common concern, your employees are not alone! Many have little to no money in savings: 45% report having less than $25,000 saved, and 26% report having less than $1,000.
The Federal Reserve reported $1.4 trillion in student loan debt at the end of 2017. This is a huge concern for younger employee! Eight out of ten Millennials that carry student loan(s) say that debt has a moderate or significant impact on their ability to meet their other financial goals.
Three out of five employees consistently carry balances on their credit cards, and 40%of those folks are finding it extremely difficult to make their minimum payments on time each month.3 This kind of debt is extremely common for Millennials and Gen Xers.
Healthcare is one of the largest expenses in retirement. A vast majority of workers (81%) haven’t even tried to calculate how much money they would need to cover healthcare costs in retirement. As it turns out, the average couple will need a staggering $280,000 for medical expenses in retirement, excluding long-term care.
Talk to any marathon runner and they can tell you all about the walls they might hit during a race. For some, that wall might be a soul-crushing hill; for others, it’s the 13.1 split; still others may even experience injuries that make them question whether they can push themselves to reach the finish line.
Even if your employees do save for retirement, hitting obstacles can force them to take out loans from their 401(k) plans. 44% of employees think it’s likely they’ll need to take money out of their retirement plans to pay medical bills, credit cards, education expenses, or unexpected costs. 3
401(k) loans can be a difficult obstacle to overcome. You may consider tightening loan provisions to deter employees from using their nest egg as a rainy-day fund.
The Real Trick
Athletes and trainers alike will be happy to offer tips and tricks to make finishing the marathon easier, from Vaseline on your feet to fancy supplements, but at the end of the day, the only way you can finish the race is if you start running in the first place.
As a plan sponsor, make sure that the 401(k) enrollment process is simple and designed in the best interests of your employees. At our firm, we are dedicated to helping our clients pursue their financial goals and can help you build a plan that will help to keep your employees on track to reach toward the finish line of their retirement.
Locating missing plan participants can be a headache for any employer, but simply ignoring them is not an effective solution. Regulatory agencies in previous years have published guidance on this topic relating to missing “retired” employees. With the increase in the number of “pre-retired” missing plan participants, governmental bodies are now taking additional measures to provide solid guidance and solutions to help streamline this arduous process for plan sponsors.
Plan sponsors must understand why locating missing plan participants is important. First, ERISA requires that plan fiduciaries (e.g., plan sponsors, employers) have a duty of prudence and loyalty to all plan participants and beneficiaries—regardless whether the participant is actively contributing. In 2014, the U.S. Department of Labor (DOL) published Field Assistance Bulletin 2014-01 (FAB), which explained that these duties require plan fiduciaries of terminated plans defined contribution plans to make a reasonable effort to locate missing plan participants. Therefore, failure to make any efforts in locating missing plan participants is viewed as a breach of fiduciary responsibility.
Second, per Internal Revenue Code 401(a)(9), the entire plan could lose its tax-qualified status if a participant fails to take his/her required minimum distribution (RMD) (usually at age 70 ½). This scenario could likely happen: a retiree, who has money left in the plan, subsequently becomes “missing”, and the employer is unable to locate and deliver information on the retiree’s upcoming RMD.
While the 2014 FAB published DOL guidance, it only addresses locating missing participants for a terminated defined contribution plan (e.g., 401(k), profit sharing, money purchase pension). Despite this narrow application, one could opine that plan fiduciaries follow the same requirements as an on-going, active defined contribution plan.
The FAB lists minimum search actions to take when locating a missing participant:
Timothy Hauser, acting director of the DOL’s Employee Benefits Security Administration, at the August 24, 2017 ERISA Advisory Council in Washington, D.C. offered two additional no-cost search options:
These are the minimum, no-cost search actions that the DOL expects of plan sponsors. If still unsuccessful locating a missing participant, after considering the size of a participant’s account balance and the cost of further search effort plan sponsors might consider using additional options that will incur fees, such as using commercial locator services or credit agencies.
Once all these options have been exhausted, the 2014 FAB allows plan sponsors to transfer a missing participant’s account balance to a rollover IRA in the name of the participant. The challenge here is finding a financial institution that will establish an IRA in the participant’s name, without the participant’s affirmative consent or signature.
New Relief, Guidance and Resources
Regulators and lawmakers have recognized that more relief, guidance and resources are needed to help plan sponsors manage missing participants:
The Pension Benefit Guarantee Corporation (PBGC), an agency that helps ensure solvency of retirement plan benefits accrued in a defined benefit plan, has expanded a program initially designed to only help missing participants of a terminated defined benefit plan. Plan sponsors who terminate a 401(k) or other defined contribution plan effective on or after January 1, 2018, may now transfer missing participant account balances to the PBGC instead of to an IRA. The PBGC maintains a central repository for these funds and will pay out benefits to participants once they have been located.
The Internal Revenue Service (IRS) has provided its own kind of relief. IRS memorandums from August 2017 and March 2018 confirm that an RMD failure from a missing participant will not occur if the plan sponsor has engaged in the various search options similar to those prescribed by DOL.
The U.S. Senate has introduced the Retirement Savings Lost and Found Act of 2018, which would provide fiduciary relief and RMD safe harbor in regard to missing participants provided the plan sponsor adheres to a specific number of search options, borrowed from DOL’s list and records of missing participant account balances in a newly-established national lost and found retirement account database.
What to do now?
Until DOL provides formal guidance for locating and handling missing plan participants for an active, on-going plan, plan fiduciaries should consider utilizing the various search options outlined in the 2014 FAB. But merely performing these various search inquiries may not be enough. To protect oneself from a plan auditor inquiry, all search actions performed to locate a missing individual should be recorded along with supplemental documentation, such as returned, undeliverable certified mail, or printouts from an electronic database.
From a best fiduciary practice perspective, plan sponsors may wish to create missing plan participant procedures for the plan administrator to follow. This should help ensure a consistent process for locating every missing participant. The procedures should also list any final recourse of transferring participant’s account balance from plan to an IRA or central repository for unclaimed monies.
If you are a fiduciary to a traditional 401(k) plan, there’s a chance you might be inclined to annual non-discrimination testing. A Safe Harbor Plan can eliminate the need for annual non-discrimination testing.
Not sure if your plan qualifies? Check out this short video to provide some insight on Safe Harbor Plans.
As an employer that sponsors a 401(k) plan, encouraging your participants to make small changes in their spending habits can help them harness the power of compound interest!
Download and save our infographic to service your participants by giving them a 30,000-foot view of how compound interest may help their additional savings grow!
401K REFUNDS: NOT AS GOOD AS THEY SOUND
With tax season fresh on our minds, many hear the word refund and begin running down their imagery wish list of ways to spend this extra money. However, when it comes to 401(k) refunds, or corrective distributions, the excitement should be dialed back.
Corrective distributions are a headache for plan sponsors and employees alike. Essentially, these refunds mean that your plan has failed testing, and tax deferred money that key employees set aside for retirement has to be returned to them. This is an issue for both you and your employees, in this article we are going to discuss what to do if you fail 401(k) testing and options
HIGHLY COMPENSATED EMPLOYEES
Your workforce is made up of two distinct employee demographics: highly compensated employees (HCEs) and non-highly compensated employees (NHCEs), also known as “rank-in-file”. An HCE is one who owns 5% or more of the company, a direct family member of an owner, or earns more than $120,000 per year and NHCEs make up the remaining portion of your workforce.
These two groups share a common goal of reaching retirement, and although HCEs may be able and willing to contribute more, your plan should be designed with both parties in mind. The IRS requires that both highly compensated plan participants and rank-and-file plan participants contribute to their 401(k) plans at similar rates.
UNDERSTANDING TESTING REQUIREMENTS
If the idea of calculating and comparing percentages send you down a path of traumatic flashbacks of math class, don’t worry. Our goal is to simplify and educate not overwhelm, if you have more questions, we are happy to have that conversation.
ADP stands for actual deferral percentage; this test compares the average of salary deferral percentages for HCEs with the average of salary deferral percentages for NHCEs. The ADP test applies to pre-tax and Roth elective deferrals. The purpose of this test is to ensure that all employees are benefitting from the plan. To pass ADP testing, the average contributions of HCEs must not exceed NHCE contribution by a factor of 1.25 or 2 percentage points as illustrated in the chart below:
ACP stands for actual contribution percentage test; it is similar to the ADP test, only it tests employer matching contributions. So, ACP only applies to companies that offer a company match. It compares the average of the percentage of matching contributions and after-tax employee contributions for HCEs versus NHCEs.
Top-Heavy test looks at how much HCEs contribute to the plan compared to everyone else. If Key Employee balances exceed 60% of the entire plan balance at the end of the plan year, the employer is required to make a 3% contribution to the non-key employees to be non-discriminatory.
WHAT IF TESTING FAILS?
401(k) test failures are no fun for anyone, it requires swift action for employers and plan sponsors. To correct plan failures, additional contributions may be required or corrective distributions would need to be made which means pre-tax savings returned requiring owners and key employees to refile their taxes… talk about a nightmare!
CAN TESTING BE AVOIDED?
A Safe Harbor Plan eliminates the need for non-discriminatory testing. They automatically pass ADP/ACP testing when certain contribution and participant notice requirements are met. To fulfill the requirements, employers must make one of the following contributions:
Basic matching – The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation.
Enhanced matching – The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation).
A non-elective contribution of not less than 3% of compensation is made by the employer to all eligible employees, regardless of whether they defer under the 401(k) arrangement. The 3% contribution must be set by the plan document and may provide that this contribution be made to only Non-Highly Compensated Employees.
QACA safe harbor match – The QACA safe harbor matching contribution formula is a 100% match
on the first 1% of compensation deferred and a 50% match on deferrals between 1% and 6%;
While a Safe Harbor plan allows owners and highly compensated employees to maximize deferrals, they do require specified employer contributions, and all contributions are immediately vested. Another factor to consider is distribution of employee communication, plan sponsors are responsible for notifying participants of their plan rights and obligations within 90 days of their plan eligibility date and 30-90 days before the start of each new plan year thereafter.
Keeping proper documentation is a good way for plan sponsors and fiduciaries to show compliance with applicable laws and regulations. If the Department of Labor (DOL) or Internal Revenue Service (IRS) knocks on your door, there are certain documents that should be complete and on file.
So, what should you have in your fiduciary vault? Download and save our free infographic to review our proper documentation checklist.
Should we have a retirement plan committee?
If you are an employer or employee who has decision-making authority over your company’s retirement plan, there is a strong chance that you are a 401(k) plan fiduciary. You have a legal obligation to operate the plan solely in the interests of the plan participants (people with retirement account balances) and their beneficiaries (people who may inherit those retirement account balances). Additionally, two other primary responsibilities are to manage the plan for the exclusive purpose of providing benefits and paying reasonable plan expenses.
Many HR representatives, Controllers, CEOs, CFOs, and Presidents are unfamiliar with the significant amount of liability to which they are exposed with their duties regarding their company’s 401(k) plan. Establishing a retirement plan committee might be a resourceful cornerstone for the oversight of your company’s retirement plan.
Questions to begin
When considering if a retirement plan committee could be beneficial for your organization, start by asking a few questions:
Plan fiduciaries have a continual and ongoing responsibility to monitor the plan. Therefore, if there was any hesitation over these questions, maybe it’s time to speak with a professional to learn more.
Setting up a committee
If you believe a committee might be a good way to establish plan accountability, reduce liability exposure, and share the task work responsibility of plan management, here are some next steps to consider.
Helping govern your company’s retirement plan is a big responsibility: you have the power to directly impact future retirement outcomes. It is important to take this role seriously. By establishing a committee, it might be another way that your company can strive to increase the preparedness of your workforce and place them on the path to a secure retirement!
BENCHMARKING YOUR 401(K) FUNDS
Benchmarking is a retirement plan best practice that allows plan sponsors the opportunity to “take a peak under the hood” of their 401(k). The process allows you to compare your plan to similar plans, measuring key metrics such as participant saving and participation rates, fee reasonableness and service providers. Benchmarking should be a key part of your due diligence process and there are four main areas to focus on when assessing your company’s retirement plan. They are:
Each aspect of your plan requires a slightly different set of research, analysis, questions and documentation process. In this article, we are going to focus on the best practice of benchmarking Funds.
To get started, let’s use a familiar analogy. If your company’s retirement plan was a car, then the plan’s investments would be like the components and features of your vehicle. They would range from the engine and power steering, to features like back-up camera, cruise control, power windows, Bluetooth, and more. The features you select will depend on your preference and driving needs. However, for now, let’s begin with the basic car model – or in the 401(k) world, we call these investment menu options the 404(c) list of funds.
The basic 401(k) investment menu would include five (5) investment categories:
In the car industry that would be like the equivalent of:
While all of these are necessary for the car to run, there are always options with each selection. Just like a car, your investment menu may offer different types of investment categories. While searching for appropriate investments for your plan, it is a best practice to speak with an investment professional for support. They can help to find, narrow, and provide a list of investment options that aim to meet the objectives of the plan and diversity of the participants.
With the basic mechanics of your 404(c) list established, it’s time to actively monitor, or benchmark, them.
Benchmarking best practices:
Additionally, it’s important to remember that each participant has a different retirement time horizon and risk appetite. Therefore, when plan fiduciaries are selecting the investments for the plan, it’s important to consider different investment options that are in the best interest for the variety of the employee population.
One investment option to consider is a qualified default investment alternative, better known as a QDIA. This is a particular investment fund that encourages employees to invest in long-term savings options. Adopting a QDIA can help plan sponsors manage exposure to liability from the investment decisions (or lack thereof) made by their plan participants. Without one, fiduciaries could be held liable for losses when a participant fails to actively direct their investment.
QDIA regulation states that plan participants have exercised control over the assets in their retirement accounts if, in the absence of a participant’s investment instructions, the plan sponsor invests those assets in a QDIA. This serves as a safe harbor for the plan sponsor. There are four different types of approved QDIA funds:
Target date fund: Creates an investment model based on participant’s age, retirement date and life expectancy.
Balance fund: Offers a mix of equity and fixed income investments.
Professionally managed account: This is actively managed by investment managers and provides an appropriate asset mix of equities and fixed income for each individual participant; this also takes into account the primary decision factors of age, retirement date, and life expectancy.
Stable value fund: This serves as a capital preservation product for the first 120 days of participation and offers an option for plan sponsors who want to simplify administration if employees opt out of participating before incurring additional tax.
Take the time to document each investment. Also, if you have questions or want to talk through strategies, we can help.
A key goal of a retirement vehicle is to provide employees with a suitable vehicle that, like a car, can fuel their drive toward a successful retirement destination.
Being apart of your company’s retirement plan committee is a big responsibility with some important rules and regulations.
We want to help you to create a repeatable process for your committee. Take a look at our short video that breaks down a simple, yet effective process to help manage your company’s retirement plan and help each employee reach their retirement goals.