The value-driven workplace and its implications for retirement plans

 

Your workplace may be evolving in many facets, from remote options to new generations coming into the workforce. These changes reflect those of the larger social climate and, in turn, employee priorities, values and expectations. Many professional and financial decisions are being influenced by these trends, as 53% of consumers are now “value-driven.”^[1]

Some of the progressing values represent environmental, social and governance factors, known collectively as ESGs. These factors correspond to an array of investments that reflect a company’s interest in sustainability efforts; they can be offered to employees as part of their 401(k) lineup. ESG funds are becoming increasingly present, with nearly $20 billion in annual flows during 2020.^[2]

• Environmental: greenhouse gas (GHG) emissions, climate change, renewable energy, energy efficiency, waste management, etc.
• Social: human rights, labor standards, workplace health and safety, employee relations, diversity, consumer protection, etc.
• Governance: board structure, size, diversity, skills and independence

Companies frequently look to display their devotion to the environment around them and in the workplace, ranging from efforts like Diversity, Equity and Inclusion (DEI) within the workforce to issues regarding climate change.

Efforts that reflect a company’s commitments, like ESG investments and sustainable purposes, can project not only a positive brand image but also continually work to align company goals with investments and employer loyalties with employee values.

 

Four Types of Involvement

Now, don’t feel like you need to adjust your investment lineup right this moment. As a fiduciary, you have a duty to act in the best interest of the plan and its participants. ESG funds can also be considered at different levels of involvement. Before diving into sustainable investing, decide on which, if any, of the four approaches your investment lineup might want to take.^[3]

ESG Integration is the most conservative option for firms entering the landscape. This approach considers ESG factors along with others when creating investment profiles, with the primary goal of achieving promising returns.

Exclusionary Investing entails the exclusion of certain companies or sectors that do not reflect a company’s sustainability values. An example would be not investing in the tobacco industry, as many have done in response to health concerns and the related environmental impact.

Inclusionary Investing focuses on actively seeking out ESG-centered entities to invest in as opposed to rejecting certain companies or sectors.

Impact Investing is the most engaged strategy, where a company dedicates its investing practices to achieving a positive difference in an environmental or social arena in addition to producing returns for its employees.

 

What Do You Believe In?

To get an idea of what sustainable topics you, your firm and your employees may resonate with and consider investing in, the United Nations Sustainable Development Goals (SDGs) can help.^[4] These goals “address the global challenges [the world] face[s], including poverty, inequality, climate change, environmental degradation, peace and justice”, and are the focus of many ESG funds.^[5]

Examples of the SDGs:

• Good Health and Well Being
• Gender Equality
• Affordable and Clean Energy
• Decent Work and Economic Growth
• Sustainable Cities and Communities
• Climate Action

Identifying your firm’s values and objectives can help reveal the best ways to align with those of current and future employees and learn how they want their benefits packages to be structured.

Looking to the Future

As new generations enter the workforce, they expect diverse and sustainable portfolios. More than 85% of all investors now express interest in ESG investments, specifically those addressing global warming and climate change.^[6] This percentage increases with each younger generation – the future of the American workforce. Sustainability, the impact of plastic on the oceans and data fraud and theft are also top considerations for consumers interested in ESG fund investment.^[7]

ESG funds may be a promising element of 401(k) investment lineups for plans, employers and employees in the coming years. Consider if and how they represent your firm and its employees, but more importantly, how they may or may not fulfill your fiduciary duty to act in the best interest of your plan and its participants.

As ESGs become more readily available and your company continues to evolve, we are here to help by discussing your options and identifying efforts that may help align your company with future goals and employee values.

 

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] “Sustainable Investing for a Sustainable Business.” New York Life Investments, 2019.

[2] Hale, Jon. “Sustainable Funds U.S. Landscape Report.” Morningstar Direct, 10 Feb. 2021.

[3] “New York Life Investments Guide to ESG Investing.” New York Life Investments, 2020.

[4] “The 17 Goals | Sustainable Development.” United Nations, United Nations, 2015.

[5] “Take Action for the Sustainable Development Goals – United Nations Sustainable Development.” United Nations, United Nations, 2015.

[6] “Sustainable Investing for a Sustainable Business.” New York Life Investments, 2019.

[7] “Sustainable Investing for a Sustainable Business.” New York Life Investments, 2019.

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.

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.

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.

 

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.

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.

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