Plan Sponsors Q&A

A: Communicating retirement planning concepts to plan participants through clear, jargon-free language may be more dependable and effective than using imagery, suggests new research from Capital Group. The language that is selected for retirement communications is critical to prompting participants to engage and take the steps they need to prepare for retirement. Because each person is unique, there really is no “picture” that truly represents retirement for everyone. In fact, asking employees to “imagine retirement” and selecting an image of a senior couple enjoying their grandchildren on a beach (or on a travel adventure) may be considered by many employees to be extremely subjective (not to mention very cliché) — and actually turn them off.

The Capital Group’s, “The art of retirement communications: How well do people today connect with the language and images of retirement?,” suggests best practices for plan sponsors and also highlights imagery and messages to avoid. Alternatively, you can access the report at: https://tinyurl.com/bddwvurn.

A: You are not alone in having a lot of choices available. The 65th Annual Plan Sponsor Council of America’s Survey of Profit-Sharing and 401(k) Plans found that more than a quarter of plan sponsors offer more than 26 options, whereas another 18% offered 21-25, and 27% offered 16-20. A long-held principle of behavioral finance is that more choice doesn’t always lead to better decisions. As such, it’s probably a good idea that you are reviewing your investment menu and considering reducing the options. Are there funds on the current menu that either aren’t being used or aren’t being used widely? You may find that they are contributing very little other than information overload for your employees. Not to mention adding more pages to cover in your investment reviews.

A: Data from Northwestern Mutual's “Planning & Progress Study 2022” reveals that Americans between the ages of 18 and 25 — known as Generation Z — are taking significant steps to improve their financial well-being with the goal of retiring at age 59; years ahead of the generations that preceded them. They also were the most likely to build savings during the pandemic and begin working with an advisor. However, while they prioritize an early retirement, money is not what drives most of them at work. Nearly two-thirds (64%) said personal fulfillment is more important in a career than money (36%). You can also access the study at https://tinyurl.com/3r8zpw3c.

A: Updated research released last March from the Investment Company Institute (ICI) details just how far fees and expense ratios have fallen over the past 25 years. For example, it found that equity mutual fund expense ratios averaged 0.47% in 2021, compared with 1.04% in 1996; bond mutual fund expense ratios averaged 0.84% in 1996 and fell to 0.39% in 2021. ICI’s report also shows that in 2021, the average expense ratio of actively managed equity mutual funds was 0.68%, down from 1.08% in 1996. Average index equity mutual fund expense ratios were 0.06%, compared with 0.27% in 1996.

A: The Employee Benefit Research Institute issue brief, “Field of Dreams? Measuring the Impact of Financial Wellbeing Initiatives on 401(k) Plan Utilization” summarizes the extent to which the attendance of financial wellness webinars affected 401(k) plan participant behaviors. According to the report, participants’ estimated increase in 401(k) contributions after attending any financial well-being webinar was between $649 and $988, depending on age and initial contribution level.

Use of a budgeting webinar was positively related to increased employee 401(k) contributions for all participants. And for younger and lower contributing workers who attended a budgeting webinar, average contributions went up $3,284. In addition, participants’ contribution levels increased after workers used nine of 10 of the webinars.

A: Selecting a higher default rate has the largest impact on employee savings rates for new employees, according to a new research paper, “The Impact of Employer Defaults and Match Rates on Retirement Savings,” published by the Social Science Research Network. The research found that when employees are defaulted in at a higher rate, fewer move away from the default savings rate, which resulted in higher and more equal savings rates among employees at all income levels. In addition, the researchers note that lower-income workers can benefit from remaining in the default plan investment by taking advantage of institutionally priced diversified funds. You can download the paper at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3992899.

A: From a plan sponsor perspective, the act of hiring a fiduciary advisor is a fiduciary act, and one the sponsor should conduct thoughtfully. While fiduciary services vary by advisor firm, here are the types that plans commonly use:

An advisor acting as a 3(21) fiduciary provides investment guidance and recommendations to the plan sponsor, but the sponsor makes the ultimate decision as to whether to change the investment lineup. Because the sponsor has the final say, it also assumes the fiduciary responsibility for that decision (though it can document that the process included guidance from a professional advisor). An advisor who acts as an investment manager 3(38) fiduciary also provides guidance and recommendations but makes the final decision on investments. This typically costs more and reduces the plan sponsor’s involvement. Hiring a 3(38) advisor is a deeper level of fiduciary outsourcing and fiduciary protection; they have the discretionary authority to make, vet and implement investment recommendations.

A: As you probably know, workers are becoming increasingly interested in financial wellness education that can help reduce financial stress and prepare them for economic uncertainty. In fact, a recent survey by Brightplan revealed that when employees ranked employer-sponsored benefits, “financial wellness” was consistently ranked higher than workplace standards like healthcare and vacation time — and was only surpassed by “salary.”

Here are two activities to consider before launching a financial wellness education program in the workplace:

Conduct an employee survey. Employees should be formally surveyed to get a sense of what they need to feel supported as they continue to return to their pre-pandemic lives. Employees should be specifically asked in which areas of their personal finances they would most value employer support — such as building an emergency savings account or reducing debt.

Quantify your numbers to justify funding the program. Employers should consider quantifying how financial stress impacts their bottom line through factors such as lower productivity, absenteeism or medical costs. They may also want to consider identifying and targeting groups of employees who need the most help and focus initial financial wellness education efforts on them.

A: The fidelity bond required under the Employee Retirement Income Security Act of 1974 (ERISA) specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) by persons who handle plan funds or property. Fiduciary liability insurance, on the other hand, is insurance plan fiduciaries purchase to protect themselves in the event they breach their fiduciary responsibilities with respect to the plan. Please note that courts can hold plan fiduciaries personally liable for losses incurred by a plan as a result of their fiduciary failures. Fiduciary liability insurance — while not required — could be an important financial safety net for plan fiduciaries. Although obtaining ERISA fiduciary insurance is considered prudent, it does not satisfy the fidelity bonding required by ERISA.

A: A recent GOBankingRates survey found that nearly three-quarters (73.5%) of respondents say inflation is affecting their retirement planning in some way. Thirty percent say that they are trying to put more money away in retirement accounts to cope with inflation. This was particularly common among younger respondents, with 41% of those ages 18-24 and 33% of those ages 25-34 saying they are now trying to save more for retirement. To review more ways people are coping with inflation through their retirement planning, check out the survey at:

https://www.gobankingrates.com/retirement/planning/inflation-2022-americans-retirement-planning-is-impacted-new-study/.

A: Many employers share your concerns, because financial decisions today will undoubtedly have considerable impact on future retirements. Your desire to help is commendable. But it’s important that you know the difference between providing financial education and financial advice, and that your service provider does, too. Generally speaking, you or your service providers can provide investment education without fear of triggering a prohibited transaction — an event with serious plan qualification implications. Such education is general in nature. For example, you can explain asset allocation, diversification, and dollar-cost averaging. Investment advice is more specific to an individual. Avoid telling a participant what they “should” invest in, even if it’s something you personally do. For more information about this important topic, read the article, “The Difference Between Investment Education and Advice,” from Financial Finesse and published on 401khelpcenter.com: http://www.401khelpcenter.com/ff/ff_ed&advice.html#.YVypFZrMKM9.

Many job switchers leave their 401(k) behind to deal with later. The result is that they can end up with a string of 401(k) accounts tied to former employers, each with different fees, asset allocations and custodians. In an updated version of its 2021 white paper, “The True Cost of Forgotten 401(k) Accounts”, Capitalize found forgotten accounts have grown by 20% in the last two years. As of May 2023, there are an estimated 29.2 million forgotten or left-behind 401(k) accounts in the United States, representing $1.65 trillion in assets. Capitalize research attributes the growth to last year’s “Great Resignation” push and raised rates of job switching. The average account balance of a forgotten 401(k) increased to $56,616 from $55,400, and in aggregate, the assets left behind by job changers now represent close to 25% of the total savings in 401(k) plans.

As a side note, if you are considering embarking on a search for missing participants who still have accounts with your plan, here are five tips for plan sponsors to better document their missing participant search efforts.

“The True Cost of Forgotten 401(k) Accounts” can also be viewed at: https://tinyurl.com/3sjwrs4u. “5 Tips for Located Missing Participant Searches” (401kSpecialist Magazine, June 15, 2023) can also be viewed at: https://tinyurl.com/jr5vy22m.

A: Investors struggling with ongoing inflation, high interest rates and an unstable economic environment are considering delaying their retirement plans, according to Nationwide’s eighth annual Advisor Authority survey. The survey by the Nationwide Retirement Institute finds that 25% of pre-retirees — defined as nonretired investors aged 55–65 — are planning to retire later than expected and another 15% are unsure if they will ever retire. Although a number of factors are contributing to their decision to delay retirement, the majority (60%) said inflation poses the greatest immediate challenge to their retirement portfolio over the next 12 months. An economic recession (46%), market volatility (36%) and taxes (23%) are also factors in their decision. You can also view the survey results at: https://tinyurl.com/3txu8rr5.

A: Many plan sponsors already outsource administrative duties to their recordkeeper (such as hardship approvals and preparation of 5500 forms) in a nonfiduciary capacity. Some are now looking to outsource not only the work, but also the fiduciary discretion or control, to minimize workloads and/or reduce ERISA liability. Given the scope of responsibilities, a provider’s technological capabilities and knowledge, skill and experience with plan administration is very important. Connectivity to the recordkeeper (when the 3(16) fiduciary is unrelated) also matters to ensure a quality service experience for plan participants. To further explore governance models that delegate some level of fiduciary responsibility to external providers, check out “Defined Contribution Plan Governance Models: A Guide for Plan Sponsors,” published by the Defined Contribution Institutional Investment Association. You can also view the guide at: https://tinyurl.com/bdzankwj.

A: For Form 5500 purposes, 401(k) plans with 100 or more participants at the beginning of the plan year are considered a “large plan,” whereas plans with fewer participants are considered a “small plan.” Large plans must file an audit report with their Form 5500 while most small plans do not. 

Recent U.S. Department of Labor (DOL) changes to the Form 5500 now allow plans to count fewer participants when determining the need for an audit. Under the previous method, 401(k) plans had to count all eligible participants, regardless of whether they had an account balance. With the new method (which is effective for plan years beginning on or after January 1, 2023), plans must only count participants with an account balance. The DOL expects the change to eliminate the audit requirement for 20,000 small business 401(k) plans. This is good news considering the cost, time and effort of an audit for employers. Small businesses should understand how the method will affect their 401(k) plan's audit status this year. 

To view a summary of the DOL’s changes to Form 5500, go to: https://tinyurl.com/3a95jakb.

A: An excellent resource is Fidelity’s annual Plan Sponsor Attitudes survey. The 2023 research report, released in August, revealed plan sponsors value improved participant outcomes (44%) over any other service offered by their plan advisor. Other notable drivers of value were time spent on plan and administrative support (43%) and providing objectivity when making plan choices (41%). The survey covers a number of other topical areas, including evolving investment menus and plan designs, as well as additional ways advisors can have an impact with plan sponsors and their employees.

For more on the 2023 study, go to: https://tinyurl.com/53fy4r44.

A:  Following a pause for three years during the COVID-19 pandemic, federal loan repayments resumed on October 1 of last year. After surveying more than 2,100 federal student loan borrowers, Corebridge Financial found that 75% said that resuming student debt payments will impact their ability to save for retirement. In order to make payments, 22% said they plan to reduce how much they save for retirement, and 29% plan to reduce their emergency savings. And while many assume younger employees are impacted the most by student loans, a new survey by Nationwide found that more than 1 in 10 employees aged 45 and older currently have student loan debt. Most of these individuals (61%) agree that the reinstatement of student loan repayments has negatively impacted their financial stability and long-term planning. 

For more in-depth discussion, including considerations for plan sponsors, check out this article: “Student Loan Repayments Expected to Derail Employees’ Retirement Savings” (PLANSPONSOR, September 27, 2023.” (https://tinyurl.com/2p8yrd69).