HTLF Retirement Plan Services
Plan Sponsors Q&A

A: There are definitely some potential compliance violations that are more common among retirement plans. The Government Accountability Office recently published a 56-page report, (https://www.gao.gov/assets/gao-21-376.pdf), which provides updated information regarding the Employee Benefits Security Administration’s (EBSA’s) enforcement activities and how the agency is working to improve their investigative and enforcement processes.

As far as retirement plans go, the most common Employee Retirement Income Security Act of 1974 (ERISA) violation categories found in closed EBSA investigations through 2020 included: 

• Fiduciary imprudence (869 cases)
• Exclusive purpose (793 cases)
• Fiduciary self-dealing (543 cases)
• Prohibited transactions with a party in interest (457 cases)
• Failure to follow plan documents (344 cases)
• Improper benefit to employer (235 cases)
• Duty of disclosure: plan descriptions and summary plan descriptions (183 cases)
• Bonding (159 cases).

Your plan advisor is a great resource to help you better understand what these violations encompass and how best to avoid them.

A: It is somewhat of a growing trend and understandable if it catches many plan sponsors by surprise. Consider the following:

• According to a 2020 Employee Financial Wellness Survey by iGrad/Wellable, one-third of employees nearing retirement (ages 55–64) feel they don’t have enough saved to retire. 
• According to PwC’s 2020 Employee Financial Wellness Survey, delayed retirements can be expensive for employers, with increased annual costs of 1% to 1.5%. The survey noted that workers delaying retirement usually have more paid sick leave and vacation days, along with higher life, disability, and health insurance costs.

There are some basic things you can do as a plan sponsor to help buck the trend. For example, if you haven’t already, consider leveraging auto enrollment and auto escalation to encourage more effective saving strategies among employees. Also, make sure employees over the age of 50 are aware of “catch up” contributions — extra money they are allowed to save toward retirement each year ($6,500 is the amount for 2021, on top of the $19,500 maximum that all employees can contribute). You may also want to think about implementing some basic personal finance education, focusing on topics such as budgeting and debt management, to help improve the overall financial health of your employees.

A: Yes, retirement confidence has taken a hit for many because of repercussions of the pandemic. A January 7, 2021, article on Kiplinger’s summarized a poll they conducted with Personal Capital, a wealth management firm. In that poll, 43% reported less confidence in their ability to retire comfortably as a result of COVID-19. Forty percent said their confidence level has not changed, though. What are people planning to do about it? About one-third of them (34%) said their plans have not changed. Thirty-five percent said they expect to work longer, 34% plan to save more, and 20% said they will revise their activities and/or travel in retirement so it will be less costly. The poll shows that just over 34% said they took a distribution from a retirement account and 27.4% took a loan. Nearly one-third (32%) said their withdrawal was between $75,000 and $100,000, and 31% borrowed in that same range.

A: First, be aware that you cannot offer investment advice to participants; doing so could violate your fiduciary duties. You can, however, offer general investment education. Your nervous participants are correct that 2020 has stimulated a lot of market volatility, and it may continue. But over the years, dollars that stay invested in the stock market have historically done better than dollars that come and go based upon the emotional response of the investor. One recent blog post commented on research from DALBAR, showing that investors’ desire to “do something” in turbulent times may have resulted in underperforming the S&P 500 by 4% per year between 2009 and 2019. Similar results came in the bond market, in which the average non-index investor lagged behind the Bloomberg-Barclays Aggregate Bond Index by 3% during the same time period. Sadly, those investors did not manage to beat the inflation rate during that decade. Learn more at https://blog.nationwidefinancial.com/markets-economy/capital-market-impact/emotional-investors-fall-behind-the-market/.¹

¹Past performance is no guarantee of future results. Individual results may vary; investors may not invest directly in an index.

A: One fiduciary argument springs immediately to mind: there is no risk of excessive fees being charged to participant accounts if the company is footing the bill. Still, it’s a good question to ask when structuring a new plan, or re-examining an existing one. Besides the fiduciary liability benefit, there are several other reasons paying plan fees with company assets could benefit both the company and plan participants, according to Capital Group. First, because plan fees are tax-deductible, paying from company assets may result in tax savings. Second, it can improve transparency to participants, which may contribute to employee relations efforts. Paying from company assets may also mean more investable assets. Not only could that result in better pricing, it may lead to higher account balances for participants down the road. Take a look at the article here: https://www.capitalgroup.com/advisor/pdf/shareholder/RPGEFL-408-617981.pdf.

A: The Internal Revenue Service recently issued a Notice, #2020-42, addressing this concern. The Notice provides temporary relief from the “in-person” requirement for witnessing a participant signature on this kind of document. It applies to participant elections made between January 1 and December 31, 2020. Under normal circumstances, the signature of the employee must be witnessed in person by a plan representative or a notary public.  But temporarily, the requirement can be met, in the case of a notary, by using live audio-video technology. If the signature is to be witnessed by a plan representative, there are additional requirements, such as requiring that the participant present a valid photo ID during the live video conference. More conditions apply, so it is important to understand the temporary rules. The Notice  can be found at https://www.irs.gov/pub/irs-drop/n-20-42.pdf.  You may wish to discuss it with the plan’s attorney, too, because  if the signing does not meet the requirements, it could be invalid. That could cause trouble for the plan and its fiduciaries, not to mention significant complications of the payout upon the participant’s death. 

A: SSA.gov has the most up-to-date, accurate and complete information available on the subject of Social Security. There, people can obtain a statement of how much to expect when they begin receiving payments. Whether or not to begin payments is an important decision with lifetime implications, and it is important for those employees to understand that. Taking benefits early will mean a lifelong reduction in monthly payments. Yet, when the economy takes a downturn, the first inclination of people who are eligible may be to start their benefits early; according to the Center for Retirement Research, about 42% of people who were 62 in 2009 — 1 year after the stock market drop in 2008 — signed up for their benefits. That was a nearly 5% increase over the prior year. An April 9, 2020, post on the Squared Away Blog from the Center for Retirement Research at Boston College (https://squaredawayblog.bc.edu/feature/social-security-tapped-more-in-downturn/) reminds readers of the considerable financial cost of starting Social Security benefits early.

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.

A: We can give you information gathered by the Employee Benefit Research Institute (EBRI). Since 2016, EBRI has tracked balances of participants in participant-directed plans and delivers the data monthly. (In fact, they tracked data before 2016, but changed some methodology in that year making direct comparison difficult). For participants with account balances at December 31, 2016, figures show a dramatic increase of 172% for the period January 1, 2017, through January 1, 2020, for participants aged 25–34 and 1–4 years of tenure with the current employer. The account balances reflect investment returns as well as contributions. Account balances for employees aged 35–44 with 5–9 years of tenure during the same period increased 88%, and those 45–54 years old with 10–19 years of tenure increased 60%. You can see the data for yourself at https://www.ebri.org/docs/default-source/401(k)-valuations/cumulative/january-1-monthly-k-valuations.pdf?sfvrsn=712b3d2f_2.

A: Two principles come to mind: keep it simple, and keep it positive. Invesco studied the topic of clear participant communication recently and found that the language we use to communicate with employees about their plans really does make a difference. For example, participants respond much more favorably to “free money” than “matching contribution.” While “free money” certainly clarifies the definition of matching contribution, it also resonates as a positive. Overall, 39% of employees responded favorably to the term; in contrast, 23% responded favorably when the concept was expressed as the more negative aspect of “leaving money on the table.” Understanding and proper use of target date funds also improves when clear language is used to describe them. Participants of all ages understand target date funds best when the term “managed for you” is used. The frequently used term “glide path” seems distasteful to them, with just 4% preferring it when the topic is discussed. Compare that to the phrase “risk-reduction path,” which was preferred by 40%. For more on this topic, visit Invesco at https://ir.invesco.com/investor-relations/press-releases/press-release-details/2019/Invesco-Defined-Contribution-Language-Study-Finds-Disconnect-Between-What-Plan-Sponsors-Say-What-Participants-Hear/default.aspx.

A: While it may seem counterintuitive, setting a low rate may actually work against employees’ ability to save enough. In part, that’s because inertia can set in. T. Rowe Price says that, among employers utilizing auto-enrollment, participants are saving at a rate of 6.5% of pay. Contrast that to plans where employees opt-in, where participants are saving 9.3% of pay. The lower savings rates for auto-enrollment plan suggests that employees view the auto rate as an endorsement from the employer; they feel safe contributing that — and only that — percentage of pay. Recently, the Wharton Pension Research Council at University of Pennsylvania studied OregonSaves, a state-sponsored auto-enrollment retirement plan. Their findings suggest that the optimal default deferral rate is 8%. You can access the paper in which they present their findings at https://repository.upenn.edu/cgi/viewcontent.cgi?article=1574&context=prc_papers.

Read more on the impact of auto-enrollment on employee retirement savings at https://www.troweprice.com/content/dam/fai/Collections/DC%20Resources/Automated%20Services/AutoEnrollment.pdf.