How to Prepare for a 401(k) Audit

If the term ”audit” makes you uncomfortable, anxious or even scared, you are not alone. Last year, the Department of Labor (DOL) closed 1,122 civil investigations with 754 (67%), resulting in fees, repayments or corrective actions.[1] The agency collected over $3.12 billion in direct payments to plans, participants and beneficiaries. This represents a whopping 300% increase in just five years.[2]

From this perspective, you might think there is no chance that you’re walking out of an audit unscathed. However, the outlook is a little less bleak when you realize that in the US, there are nearly 722,000 retirement plans and only 1,122 escalated to investigation.

So instead of viewing the DOL as the boogey monster or fearing a 401(k) audit, let’s take a look at the utility behind audits, identify red flags and establish best practices to help demystify the process.

 

What is a 401(k) Audit?

Retirement plan audits are normal; in fact, they happen all the time. Generally speaking, a plan audit is the review of a company’s retirement plan with the primary objective of ensuring that it meets guidelines and regulations set by the DOL and IRS. For large companies with over 100 participants, audits are an annual occurrence, but small plans can also be under scrutiny if a red flag is raised.

 

What are Audit Red Flags?

The following red flags can prompt the DOL to take a closer look at your retirement plan.

Employee Complaints

Individual complaints from employees are a frequent source of DOL investigations. From a total of 171,863 inquiries from workers, 357 resulted in the opening of new investigations and more than half of all monetary recoveries relate to benefits of terminated vested participants of defined benefit plans.[3] The simple lesson here is that plan sponsors must establish clear protocols for how participants can communicate questions or complaints about their benefits to the plan sponsor before filing complaints with the DOL. Quick and effective responses are critical.

DOL Enforcement Priorities
Examinations may also relate to enforcement priorities launched by the DOL.  As of this publication, the agency “continues to focus its enforcement resources on areas that have the greatest impact on the protection of plan assets and participants’ benefits.”[4]  Just like the old story about why a robber goes to a bank, this translates to the DOL likely focusing more on large plans because that’s where the money is.

Delinquent Contributions
Delinquent contributions are pursued as part of an ongoing national priority. These are easy pickings for the DOL and a clear violation of the most basic fiduciary standards. No employer should deduct contributions from employees’ wages and fail to contribute those deferrals to the plans without fear of significant and swiftly administered reprisals.

Plan sponsors are encouraged to review their Form 5500 and other records to spot trouble points, such as:

  • Missed contributions
  • Assets not held in trust
  • Paying unreasonable compensation to service providers (conduct regular fee benchmarking to avoid this)
  • Paying expenses from the plan that are actually expenses of the employer (known as “settlor expenses”. These costs include consulting services regarding plan design or plan termination.)

Other areas of interest include lost or missing participants, and, of course, the DOL often accepts referrals from other agencies such as the IRS.

 

A Knock at the Door

If you happen to receive a notice from the DOL about an audit or an investigation, your response should be the same:

  • Take a deep breath.
  • Put your team together and choose a qualified primary contact person.
  • Strongly consider engaging ERISA counsel. Expert help may avoid missteps and provide an intermediary for difficult conversations.
  • Consider requesting an extension of time to respond. Many initial deadlines can be short for complex exams. Extensions, if reasonable, are routinely granted.
  • Review all documents prior to production. Be ready to report any issues found.
  • Deliver documents in neat and organized fashion.
  • Prepare employees for interviews. Treat it like a deposition. Caution them to take their time, thoughtfully consider their responses and ask for clarification of any questions they do not understand.
  • Always be truthful and respectful.

 

What Documents are Typically Requested?

The sheer volume of documents requested may at first seem overwhelming, but the requests will be for documents you should have readily available in your files. They include:

  • Plan document, Investment Policy Statement, plan records of fees/expenses
  • Form 5500, Summary Plan Description (SPD), Summary Material Modification (SMM), participant fee disclosures and benefit statements
  • Service provider contracts and fee disclosures
  • Participant claims and benefits data
  • Bonding and fiduciary liability insurance
  • Fiduciary committee charters, committee meeting minutes and other records
  • Organizational documents about your company and organizational charts
  • More recently, cybersecurity practices

 

Stay Prepared

Whether you are subject to a routine audit or a red flag prompts an investigation, it is important to remember that fiduciary vigilance is key. The best preparation is to follow sound operational procedures every day and don’t fall behind.

 

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

L.Kavanaugh@nebstpa.com

www.nebstpa.com

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

[1] Department of Labor. “Fact Sheet. EBSA Restores Over $3.1 Billion to Employee Benefit Plans, Participants and Beneficiaries.”  2020.

[2] Ibid.

[3] Ibid.

[4] Employee Benefits Security Administration. “Enforcement.” DOL.gov. Accessed 2021.

Q1 2022 Newsletter: Fiduciary Plan Governance Edition

The workforce is changing as we know it, and efforts like DEI, sustainable ESG investing and proactive preparation for DOL audits can help employers like you keep up with this transformative period.

As you look for new ways to refresh your retirement plan in the new year, consider the trending opportunities outlined in the Q1 2022 Newsletter: Fiduciary Plan Governance Edition.

Download the Newsletter

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

L.Kavanaugh@nebstpa.com

www.nebstpa.com

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC.  All rights reserved. Proprietary and confidential.  Do not copy or distribute outside original intent.

Video – Get to Know Your Retirement Plan Committee

If you think you’re alone in managing your 401(k) plan, think again! A Retirement Plan Committee is a dedicated group that manages investment options, oversees retirement plan administration and provides fiduciary oversight and accountability.

In this two-minute video, learn who should be on your committee, how to formalize your team, how to oversee your plan and how a financial advisor can help!

Watch the Video

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

1200 Jefferson Rd. Suite 302

Rochester, NY 14623

585.214.0030

L.Kavanaugh@nebstpa.com

www.nebstpa.com

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Live your Best Life: Now and In Retirement

Americans are living longer than ever before. Life expectancy is now at 79 years old, and many employees will need to save enough to live 17+ years in retirement. How financially prepared are your employees to enter into this next stage of life?

Saving more today can make a huge difference. Share this questionnaire with your employees so they can picture their retirement lifestyle and determine if they should be saving more today to live the future they desire.

Download the Guide

 

U.S. Department of Health and Human Services. “Vital Statistics Rapid Release.” CDC.gov. February 2021.

Who’s on Your Retirement Plan Committee?

Northeast Benefit Services_Larry Kavanaugh_Retirement Plan Committee

 

Retirement plan committees are super important; they set the direction and priorities of the company’s retirement plan. These actions (or inactions) can have a huge impact on how successful employees are at preparing for retirement.

For some plan sponsors, overseeing an organization’s retirement plan can be an overwhelming and taxing exercise. Many companies recognize this and choose to establish groups to manage and make decisions about this important employee benefit. Retirement plan committees play an integral part of managing investment options for plan participants, providing fiduciary oversight and working toward the goal of plan success.

 

Who Needs a Retirement Plan Committee?

Although retirement plan committees aren’t a legal requirement, establishing one allows for a designated group to be tasked with plan management, investment decision-making and fiduciary responsibility.

A retirement committee’s collective expertise can also better address the increasing complexity of governing rules and regulations that primarily stem from the Employee Retirement Income Security Act (ERISA), which sets the minimum plan governance standards to provide protection for participants.[1]

 

Understanding Fiduciary Duty

A plan fiduciary must always act solely in the interest of the participants, although there is some confusion about who exactly the fiduciaries are. According to one study, nearly 1 out of 3 plan sponsors do not see themselves as plan fiduciaries,[2] which is a big problem since a plan fiduciary can be held personally liable for restoring any losses to the plan.

Retirement plan fiduciaries are either named in the plan document or considered as such based on the activities they perform. The primary responsibilities of fiduciaries are the:

  1. Duty to act prudently with the care, skill, prudence and diligence under the circumstances that a person acting in a like capacity and familiar with such matters would use.
  2. Duty of loyalty to manage the plan solely in the interest of participants and beneficiaries.
  3. Duty to diversify the plan’s investment options to minimize the risk of large losses.
  4. Duty to follow plan documents to the extent that the plan terms are consistent with ERISA (rules and regulations that govern retirement plans).

Additionally, plan fiduciaries should avoid any conflicts of interest.[3],[4]

 

Structuring a Retirement Plan Committee

Financial advisors can play a vital role in helping plan sponsors establish and maintain a retirement plan committee. In addition to providing financial investment expertise, they may give operational insight for the committee and recommend experts outside the company for additional support.

A financial advisor may also provide education and guidance regarding fiduciary best practices, regardless of the size of your investment committee.

For many companies, the retirement plan committee will include the plan administrator, members from the company who have financial or benefits responsibility and additional members who provide needed experience.

Lawyers with ERISA expertise can help committees navigate regulation changes that affect retirement plans as well as provide protection from litigation exposure; approximately two-thirds of organizations that have legal counsel participate in committee meetings. However, only half of organizations with fewer than 1,000 plan participants have legal counsel, in contrast to the nearly 92% of organizations with more than 5,000 participants.[5]

Legal expertise is particularly necessary as in recent years, retirement plans have experienced an uptick in legal challenges. In 2020 alone, there was a fivefold increase from the previous year in class action lawsuits challenging 401(k) plan fees.[6]

Other committee members may include third party administrators (TPAs) to provide guidance on plan compliance, administration and related areas; recordkeepers that track plan participants, as well as investment and financial activity and the company’s accountant for bookkeeping oversight.

Setting a meeting schedule is dependent on the size and complexity of the plan. Many retirement committees meet quarterly, but nearly 40 percent of small organizations meet semi-annually.[7]

Duties of a Retirement Plan Committee

After a retirement plan committee has been organized, a governing document is established to outline the responsibilities, procedures and processes to follow. Creating an investment policy statement is another key step that will help align the plan’s objectives and investment approach.[8]

The committee should consistently monitor the plan’s investment performance against benchmarks and also review adherence to compliance processes.

In the 401(k) world, the process that led to your decision may be more critical than the decision itself. Documenting everything from committee meeting discussions to the rationale behind service provider selections to investment policies are all equally important.

Consistent employee communication is a cornerstone of any committee’s duty and should cover at a minimum, enrollment periods, contribution limits and matches and plan information and fees.

The success of a retirement plan committee can have a much greater impact than what meets the eye. While it may seem like an administrative obligation, the reality is that the members’ efforts are actually playing an active role in helping fellow employees pursue their retirement goals.

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

1200 Jefferson Rd. Suite 302

Rochester, NY 14623

585.214.0030

L.Kavanaugh@nebstpa.com

www.nebstpa.com

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

 

[1]  Department of Labor. “Employment Retirement Income Security Act.” DOL.gov.

[2]  AllianceBernstein. “Inside the Minds of Plan Sponsors: Fiduciary Awareness on the Rise.” alliancebernstein.com. 2020.

[3]  Department of Labor. “Fiduciary Responsibilities.” DOL.gov.

[4]  TIAA. “What it Means to be a Retirement Plan Fiduciary.” TIAA.org. 2020.

[5] PSCA. “Retirement Plan Committees.” PSCA.org. April 2021.

[6] “Bloomberg Law. “401(k) Fee Suits Flood Courts, Set for Fivefold Jump in 2020.” Bloomberglaw.com. August 2020.

[7] PSCA. “Retirement Plan Committees.” PSCA.org. April 2021.

[8] TIAA. “What it Means to be a Retirement Plan Fiduciary.” TIAA.org. 2020.

Year End Wrap-Up: Evaluating the Effectiveness of Your Company’s Retirement Plan

With Cycle 3 deadlines fast approaching, now is a great time to review your retirement plan. Measuring your retirement plan’s data provides key information to help increase its competitiveness, which can be extremely helpful in today’s labor market.

Benchmarking is a way to determine your retirement plan’s effectiveness. As relevant data is gathered, you can compare your plan to others of a similar size in your industry. Comparing your plan regularly can help identify more opportunities for improvement.

Download the Guide

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

1200 Jefferson Rd. Suite 302

Rochester, NY 14623

585.214.0030

L.Kavanaugh@nebstpa.com

www.nebstpa.com

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

The Tale of Two Economies: Promoting Workplace Benefits in a K-Shaped Economy

More than a year into the COVID-19 pandemic, there are signs of recovery in the U.S. Millions of vaccines have been administered, businesses and offices are reopening and life is starting to look more like it did pre-pandemic.

All this is cause for optimism. Simultaneously, however, there’s abundant evidence that the pandemic has taken a financial toll on Americans, and it’s hit some harder than others. As the economy begins to bounce back, we are experiencing what is called a K-shaped recovery. When plotting the impact of an economic downturn, and its subsequent recovery, on a graph, a K shape is formed, showing some industries and demographics recovering quickly, while other stagnate and may sink further. More financially secure individuals are likely to be on the upward facing arm of the K, falling into the demographic that recovers quickly and continues to grow, while others, on the downward sloping leg of the K, struggle to make ends meet.

Your diverse workforce likely includes both. Chances are, some were even forced to put their retirement in jeopardy, stopping or reducing savings to meet more immediate financial needs.

 

The Pandemic Recovery Is Uneven

Why the term “K-shaped recovery?” Simply put, not everyone is experiencing recovery at the same pace. Individuals who were prepared for a financial emergency—those with savings or an emergency fund, for instance—fared better than those living paycheck to paycheck. In fact, some Americans were transformed into “super savers” within weeks of the COVID-19 outbreak. In fact, 52% of households dramatically reduced spending.[1] High earners were the most likely to cut back. As a result, America’s savings rate soared from just under 10%, where it stagnated for the last two decades, to a record 33.7% in April 2020.[2]

For those who were not as prepared, the situation looked noticeably different. Nearly a third of Americans (30%) report that their financial situation is worse now than it was before the pandemic.[3] Among them, half said that job loss was a major reason why. In addition, a majority are worse off when it comes to saving for retirement (73%) and emergencies (72%). In addition, 23% tapped into their retirement savings prematurely or stopped saving altogether during the COVID-19 pandemic, putting their future security in peril.[4]

 

Workers Felt the Impact Differently

The pandemic also impacted workers of different stripes. Many full-time W-2 employees who kept their jobs—especially white-collar workers—were able to transition to working from home when their offices closed. They may have felt little, if any, impact on their household finances.

Contract workers, on the other hand, suffered significant financial setbacks in terms of income, emergency savings, retirement savings and benefits. In fact, 53% of contractors were earning half or less of their pre-pandemic income vs. 14% of traditional workers.[5] As a result, contract workers may need more help than traditional employees to improve their financial well-being during the pandemic recovery.

The impact of the financial fallout was also felt across income brackets. Both highly-compensated employees (HCEs)—those making $130,000 or more per year, or those with at least a 5% stake in a business—and non-highly compensated employees experienced retirement savings challenges due to layoffs, business disruptions and delayed or deferred plan contributions. As businesses cut costs to survive, highly-compensated employees might have missed out on employer contributions, such as top-heavy minimum contributions. For their part, non-highly compensated employees might have stopped retirement plan contributions due to job loss, wage cuts or the need to divert funds elsewhere for near-term needs.

Take a Solutions-Oriented Approach

No matter their current financial status, working Americans have a common goal: getting back on track with their retirement savings. To maximize the impact, employers must first understand the disparate nature of a K-shaped recovery. Employees at the top of the K, who tend to be more financially stable, are likely more ready, able and willing to increase their savings or start saving again. Conversely, those at the bottom of the K, who may have had extended periods of unemployment and financial hardship, likely need more help to get back on their feet so they can save for the future. Employers must consider both points of view when evaluating benefits programs.

Employees who are more financially secure may value insights on:

  • Increasing net worth
  • Purchasing or renovating a home
  • Improving their retirement savings
  • Diversifying their portfolios
  • Capitalizing on market opportunities
  • Tapping their home equity

Those still experiencing or emerging from financial insecurity may require guidance and support around:

  • Budgeting
  • Job loss
  • Rebuilding, starting, or delaying retirement savings
  • Creating an emergency fund
  • Paying down debt
  • Managing healthcare costs

In a world irrevocably altered by the COVID-19 pandemic, employers must embrace innovation in the benefits they provide to support employee financial well-being. These benefits should extend beyond their retirement savings plan to include education and mentorship through financial wellness programs. Offering access to personalized financial guidance, along with practical and actionable tips to build savings and wealth, can go a long way to provide support where it’s needed most.

 

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

1200 Jefferson Rd. Suite 302

Rochester, NY 14623

585.214.0030

L.Kavanaugh@nebstpa.com

www.nebstpa.com

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

 

[1] Royal, James. “Survey: Majority of Americans have cut their spending because of coronavirus concerns.” Bankrate. March 31, 2020.

[2] U.S. Bureau of Economic Analysis. Personal Saving Rate [PSAVERT], retrieved from FRED, Federal Reserve Bank of St. Louis.

[3] Brown, Kathi S. “How Financial Experiences During the Pandemic Shape Future Outlook.” AARP Research. Updated May 2021.

[4] Brown, Kathi S. “How Financial Experiences During the Pandemic Shape Future Outlook.” AARP Research. Updated May 2021.

[5] Prudential. Flexible Workers: Impact of the Pandemic. Nov. 20, 2020.

You Can’t Talk About That at Work: Tackling Financial FAQs

Northeast Benefit Services_Larry Kavanaugh_Financial FAQs

 

Talking about money is tricky, especially at work. While it may seem too personal for work and easier to avoid the conversation, the effects can have a lasting effect on a company.

More and more forward-thinking employers are starting to overcome the stigma that surrounds talking finances at work. They are putting to rest their fear of overstepping boundaries because employees strongly value financial guidance at work. In fact, 87% of employees want help and nearly 9 out of 10 take advantage of financial wellness services when offered.[1]

 

Stress Impacting the Bottom Line

It is well documented that financial stress can cause a myriad of workplace complications. Stress can have a cascading effect; for example, 4 in 10 employees experience health issues or loss of sleep due to financial stress, which in turn leads to a $400 annual increase in healthcare costs per stressed employee.[2]

Stress also has a way of consuming productivity; 3 in 10 employees admit that financial stress has impacted their job performance, and they spend three to four hours a week at work dealing with their finances.[3]  That’s 150 hours of lost productivity per stressed employee per year.  That’s a lot!

 

The Elephant in the Room

When companies are up against a complex problem like financial stress, how do they start attacking the problem? Well, like the saying goes, you have to eat the elephant one bite at a time, so financial guidance and education can be great ways to start combating the 5,000-pound problem.

One of the most important areas of concern for employees is retirement readiness, so employers need to emphasize communication around the topic.

Good employee communication is a must, especially letting them know there is no such thing as a “stupid” question. Emphasize that they shouldn’t be hesitant or embarrassed to ask the questions on their minds. Here are some questions employees might ask about saving, investing and planning for retirement.

 

Tackling Employee FAQs

Why save? First, to help you in the event of an emergency or for large-ticket items such as a house or car. It is also very important is to save for retirement if your goal is to be financially secure when you’re no longer working. You don’t want to depend on Social Security for your total retirement income.

When should I start saving for retirement? Now. The sooner the better. It’s easy to see retirement as something in the future and not an important event you need to start preparing for at an early age. Additionally, if you don’t know how to start, what to invest in or understand the power of compound interest, you might feel like putting it off. Ask your 401(k) administrator if you don’t understand your plan.

What’s compound interest? Compound interest is interest paid not only on the money you’ve invested, but on the interest you’ve already earned. Because of compound interest, even small amounts become larger over time.

What’s an investment? An investment is a way of putting money aside so you can get a return on it. Investments are often thought of in terms of stocks and bonds. Your 401(k) plan has investments to put your contributions into, so take advantage of them.

What’s a stock? A stock is an investment that represents partial ownership of a company. Units of stock are called “shares”, which may pay interest and dividends to you as an owner. They’re traded on the stock market, where the price can fluctuate up and down.

What’s a bond? A bond is an investment where you lend money to a company (or a government); the borrower then pays interest until the bond matures at which time you should receive your money back.

Your 401(k) plan may have a variety of investments such as mutual funds, a type of investment in which many investors pool their money in securities like stocks, bonds, and money market instruments. It might also contain Target Date Funds, a type of investment, often consisting of mutual funds, structured to grow over a specific time frame and then become more conservative once that target date, usually at retirement, is reached. Like stocks, the value of mutual funds and target date funds can fluctuate.

 

Teamwork Makes the Dream Work

Speaking with a financial advisor or joining a financial wellness education session can engage and assist employees in being more financially responsible, take better advantage of their 401(k) plan and be more “present” at work.

After all, 82% of employers subscribe to the belief that it is in their company’s best interest to help employees become more financially secure. And employees tend to agree: when employers demonstrate a commitment to their financial wellness, 60% of workers say they are more dedicated, loyal and productive at work.[4] It’s a win-win situation for all!

Contact us to discuss common employees FAQs and ideas to reduce workplace financial stress that can elevate savings.

 

 

Larry Kavanaugh, Jr. AIF®, CPFA, CLU, ChFC

950-A Union Rd. Suite 31

West Seneca, NY 14224

716.674.7200

1200 Jefferson Rd. Suite 302

Rochester, NY 14623

585.214.0030

L.Kavanaugh@nebstpa.com

www.nebstpa.com

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

 

[1] PwC. “PwC’s 10th Annual Employee Financial Wellness Survey.” 2021.

[2] Prudential. “Wellness Programs Earn Their Place in Human Capital Strategy.” June 2019.

[3] Prudential. “Wellness Programs Earn Their Place in Human Capital Strategy.” June 2019.

[4] Prudential. “Wellness Programs Earn Their Place in Human Capital Strategy.” June 2019.

Q4 Newsletter: Strategic Thinking Edition

As we begin to say goodbye to 2021, let’s look forward to the new year by addressing employee financial habits after COVID, how a K-shape economy is impacting your workplace and how your retirement plan committee plays an important role in helping employees pursue retirement plan goals.

Explore these topics and their implications for employers in helping employees save in the Q4 Newsletter – Strategic Thinking for Plan Sponsors.

Download the Q4 Newsletter

Four Tips to Boost Your Employees’ Retirement Outlook

As many employees look ahead to retirement, 47% of workers feel somewhat confident that they’ll have enough money saved to retire on time and then live comfortably.1 However, forward-thinking employers have the ability to help their employees work toward a confident and happy retirement. According to the 2018 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), only 17% of American workers feel very confident in their ability to live comfortably in retirement.  Additionally, their 28th annual survey found that another 47% of workers feel somewhat confident about living comfortably in retirement.[1] That means that over 64% of Americans (or 2/3 of your workforce) feel prepared for their retirement future.

To help boost confidence, here are 4 forward-thinking tips proactive employers can do to help improve your employees’ retirement outlook:

Amp Up Auto Features

The majority of plans, nearly 6 out of 10, have already adopted auto-enrollment.[2] A lot of plans started years ago; but back when many employers implemented automatic enrollment, it was at a 3% default deferral, with no auto-escalation feature.

If you’re auto-enrolling employees at a low rate like 3% and leaving the deferral rate there, consider that many retirement-savings experts believe that Americans need to save 12% to 15% every year. Relying on a 3% deferral, even with a match, may limit your employees’ chances of reaching their goals upon retirement.

We can help you figure out whether a higher initial deferral rate makes sense for your participants and for your organization’s budget constraints on match spending. Auto-escalation has become the new norm: 73.4% of auto-enrolling plans now have this feature.2

Strengthen the Match

Many employees take their cue on how much they should save for retirement from the message you send with the employer match you offer. Match 100% of the first 3% of pay that an employee defers, for example, and employees may think they need to save 3% a year to have enough for retirement. In reality, they most likely will need to save more.

We can work with you to analyze your options for a match formula that can help your employees save more for retirement. For some sponsors, this means implementing a “stretch” match that requires employees to contribute more to get the full employer match: Instead of a 100% match on a 3% deferral, for instance, a plan could match 50% up to 6%.

Other employers, realizing the long-term costs to the company if employees do not retire on time, have decided that it makes business sense to offer a more-generous match to employees. According to the 60th Annual Survey of Profit Sharing and 401(k) Plans by the Plan Sponsor Council of America, it was found that employer contributions have increased to an average of 4.8% of payroll, up from 3.8% in 2007.2

Move Forward on Re-enrollment

Even if you auto-enroll, all your eligible employees may not experience the benefits. Many employers implement automatic enrollment only for new hires, not employees already working at the company when auto-enroll started. And some new hires likely opted out of enrollment when they joined the organization, or later reduced their deferral because they faced a budget crunch at the time. They may be in better financial shape now, but most won’t take the initiative to sign up on their own for participation in the plan.

Think about re-enrolling all eligible employees currently not participating in the plan and eligible employees currently contributing less than the initial default deferral rate. So, if you use 6% as your initial default deferral rate, for example, the re-enrollment could include non-participating employees and active participants saving less than 6%. Some employers do a re-enrollment as a one-time event, while others do it every year. We can help you evaluate whether re-enrollment makes sense for your plan.

Send Targeted Messages to Low Savers

Research has shown that people respond more to communications that have been tailored to them individually. Fortunately, recordkeepers have made big strides in their data-crunching and customization capabilities in the past few years. Now they can more easily drill down and identify particular groups of participants in a plan–such as those saving below a particular percentage of their pay—and then do an education campaign targeted to that group, personalizing the communication for each participant.

Consider moving ahead with a customized communication campaign to low savers in your plan, such as those participants not currently contributing enough to maximize the match. We can serve as a liaison between you and your recordkeeper to coordinate a targeted campaign to a particular group of participants.

Lawrence M. Kavanaugh, Jr. AIF, CRPA, CLU, ChFC

 

Northeast Benefit Services, Inc.
950-A Union Road, Suite 31
West Seneca, NY 14224
info@nebstpa.com

Phone: (716) 674-7200 x237

1200 Jefferson Road, Suite 302
Rochester NY 14623
info@nebstpa.com

Phone: (585) 214-0030 x237

[1] Employee Benefit Research Institute. “2018 Retirement Confidence Survey.” April 2018.

[2] Plan Sponsor Council of America. “PSCA’s 60th Annual Survey.” Feb. 2018.  

Risky Business: Why Plan Governance Matters

Participant-driven lawsuits are on the rise, and employers are facing heightened scrutiny of the way they manage their retirement plans. In today’s continually-evolving regulatory and legal environment, it’s more important than ever to make sure your organization’s retirement plan is both effective and compliant. A well-structured retirement plan governance program can help you pursue these goals when aiming to limit fiduciary risk and improve plan performance, while striving to boost participant outcomes.

 

What is retirement plan governance?

Simply defined, governance outlines the processes and policies for managing a retirement plan as well as the roles and responsibilities of everyone involved. It provides a framework for effective decision-making on all aspects of the plan, from plan documents and investments to operations and financial reporting.

 

Why is plan governance important?

 The stronger your governance, the stronger your plan. An effective governance program details processes, roles and responsibilities for all parties involved in managing the plan and helping support its objectives. It should address how duties are delegated and to whom, and the documentation and oversight of all responsible parties to the plan. Perhaps, most importantly, proper governance procedures help reduce plan fiduciaries’ exposure to personal liability for actions and decisions made on behalf of the plan and its participants. Finally, a successful governance program enables plan fiduciaries to work together towards the same goals, which can potentially improve plan performance and participant outcomes.

 

What can you do about it?

Governance best practices include documenting every aspect of the plan’s day-to-day management, along with long-term operating procedures, such as:

 

  • Proof of the existence of a retirement plan committee(s) with key fiduciary responsibilities (including meeting minutes)
  • Plan documents containing key provisions such as eligibility, benefits, contribution limits and distributions
  • Investment management and monitoring procedures — an Investment Policy Statement (IPS) is optional but highly recommended — along with documentation of how the plan’s investment menu fits the criteria in your IPS, investment monitoring and any discussions about the IPS
  • Compliance monitoring, stakeholder responsibilities and statements of accountability
  • Participant communication guidelines that detail how the plan will educate and support employees to help them understand the perks of participating and how to make informed investment decisions
  • Annual plan review and reporting criteria and documentation of related activities, including Forms 5500 filings, audit reports and participant plan disclosures[1]

 

Of course, all of this documentation must be updated and maintained on an ongoing basis.

 

Wrapping It Up

Straightforward retirement plan governance guidelines and best practices help toward ensuring that your plan is compliant and continues to run smoothly, and that fiduciaries can confidently and successfully fulfill their responsibilities. Moreover, having carefully documented plan governance procedures can assist you in preparing for and managing plan audits and compliance reviews, increasing your plan’s efficiency and improving your participants’ experience1.

 

To recap, an effective governance program:

  • Makes decision-making less complex
  • Reduces risk exposure for the plan and its fiduciaries
  • Supports plan and participant objectives
  • Seeks to improve financial controls1

 

While governance programs are typically established when the plan is adopted, it’s never too late to develop or update governance procedures. Keep in mind, an effective governance program provides a carefully documented record of the plan fiduciaries’ efforts to manage and maintain the plan prudently in the best interests of its participants and their beneficiaries. Doing so helps all parties clearly understand and carry out their roles and responsibilities, and it helps manage their fiduciary liability.

Is it time to review your plan governance program? We can help. Contact us today for a comprehensive evaluation of your governance processes and policies.

[1] TIAA. “Plan governance toolkit.” March 2017.