Questions and Answers
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Q: More and more of our employees are asking about the potential to add cryptocurrency options to our retirement plan investment line-up. What is the current regulatory perspective on this?
A: On March 10, the Department of Labor (DOL) published compliance assistance for 401(k) plan fiduciaries who are considering plan investments in cryptocurrencies. Published by the department’s Employee Benefits Security Administration (EBSA), Compliance Assistance Release No. 2022-01 cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants. The DOL called it an effort to “protect the retirement savings of U.S. workers” and came one day after President Biden signed an Executive Order on Ensuring Responsible Development of Digital Assets. Part of the order instructs the Federal Reserve to explore the development of a U.S. Central Bank Digital Currency (CBDC).
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Q: We have worked very diligently with our plan advisor to create a comprehensive plan investment line-up that offers diverse, institutionally-priced funds to our employees. Has there been any noticeable trend in mutual fund expense ratios over the years?
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.
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Q: We are thinking of launching a series of financial wellness webinars with a goal of increasing employee engagement with our workplace retirement plan. Is there any recent research on this?
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 wellbeing 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.
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Q: We are looking for ways to increase savings rates among new employees, at both lower and higher income levels. Should we focus on increasing our employer match, or setting a higher default rate?
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 results 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://insights-north-america.aon.com/investment/aon-what-drives-fiduciary-liability-whitepaper.
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Q: During the first quarter of this year, we have had a number of employees leave our organization, some of which had nonvested employer contributions. Do you have any guidance on how best to handle these?
A: The money must be moved into the plan’s forfeiture or suspense account, where it can be used to:
- Cover other employer contributions already payable by the plan
- Restore the accounts of rehired employees, subject to certain criteria
- Pay ERISA-approved plan expenses
- Make additional employer contributions for existing plan participants
Regardless of which option a plan sponsor uses, ERISA specifies that any forfeited contributions be used for an appropriate purpose by the end of the plan year.
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Q: We are considering adding a financial wellness program as part of our retirement plan benefit program. Unfortunately, there isn’t a lot in the budget to work with right now. Any ideas on how we might approach it?
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. -
Q: Our plan committee is thinking about purchasing fiduciary liability insurance. Is a fidelity bond the same thing as fiduciary liability insurance?
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.
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Q: Our plan committee has worked hard this year to maintain a consistent system of checks and balances with regard to plan compliance. Are there any items, in particular, we should prioritize in terms of staying compliant with our retirement plan?
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.
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Q: Over the past couple of years, some of our retirement-age employees have opted to continue working. While their expertise and experience are invaluable, it has resulted in some unplanned challenges for our organization. Is part of a growing trend?
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.
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Q: The ups and downs in the stock market have made some of our 401(k) plan participants very nervous, to the point that some have moved their entire accounts into money market funds. Is that a good strategy for retirement savings?
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.
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Q: Participants seem to need help figuring out the best approach to take with their 401(k) plan investments. How can we help them?
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.
Pension Plan Limitations for 2022 | ||
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401(k) Maximum Elective Deferral (*$27,000 for those age 50 or older, if plan permits) |
$20,500* | |
Defined Contribution Maximum Annual Addition | $61,000 | |
Highly Compensated Employee Threshold | $135,000 | |
Annual Compensation Limit | $305,000 |
PLAN SPONSOR’S CALENDAR
- Send payroll and employee census data to the plan’s recordkeeper for plan-year-end compliance testing (calendar- year plans).
- Audit fourth quarter payroll and plan deposit dates to ensure compliance with the DOL’s rules regarding timely deposit of participant contributions and loan repayments.
- Verify that employees who became eligible for the plan between October 1 and December 31 received and returned an enrollment form. Follow up for forms that were not returned.
- Update the plan’s ERISA fidelity bond coverage to reflect the plan’s assets as of December 31 (calendar-year plans). Remember that if the plan holds employer stock, bond coverage is higher than for nonstock plans.
- Issue a reminder memo or email to all employees to encourage them to review and update, if necessary, their beneficiary designations for all benefit plans by which they are covered.
- Review and revise the roster of all plan fiduciaries and confirm each individual’s responsibilities and duties to the plan in writing. Ensure that each fiduciary understands his or her obligations to the plan.
- Provide quarterly benefit/disclosure statement and statement of plan fees and expenses actually charged to individual plan accounts during prior quarter, within 45 days of end of last quarter.
- Begin planning for the timely completion and submission of the plan’s Form 5500 and, if required, a plan audit (calendar-year plans). Consider, if appropriate, the DOL’s small plan audit waiver requirements.
- Review all outstanding participant plan loans to determine if there are any delinquent payments. Also, confirm that each loan’s repayment period and the amount borrowed comply with legal limits.
- Check bulletin boards and display racks to make sure that posters and other plan materials are conspicuously posted and readily available to employees, and that information is complete and current.
- If a plan audit is required in connection with the Form 5500, make arrangements with an independent accountant/auditor for the audit to be completed before the Form 5500 due date (calendar-year plans).
- Audit first quarter payroll and plan deposit dates to ensure compliance with the United States Department of Labor’s rules regarding timely deposit of participant contributions and loan repayments.
- Verify that employees who became eligible for the plan between January 1 and March 31 received and returned an enrollment form. Follow up for forms that were not returned.
- Monitor the status of the completion of Form 5500, and, if required, a plan audit (calendar-year plans).
- Issue a reminder memo or email to all employees to encourage them to review and update, if necessary, their beneficiary designations for all benefit plans by which they are covered.
- Perform a thorough annual review of the Plan’s Summary Plan Description and other enrollment and plan materials to verify that all information is accurate and current, and identify cases in which revisions are necessary.
- Provide quarterly benefit/disclosure statement and statement of plan fees and expenses actually charged to individual plan accounts during the prior quarter, within 45 days of the end of last quarter.
- By May 15 (or 45 days after the end of the quarter) participant-directed defined contribution plans must supply participants with a quarterly benefit/disclosure statement and a statement of plan fees and expenses actually charged to individual plan accounts during the first quarter.
- Begin planning an internal audit of participant loans granted during the first six months of the year. Check for delinquent payments and verify that repayment terms and amounts borrowed do not violate legal limits.
- Confirm that Form 5500, and plan audit if required, will be completed prior to the filing deadline or that an extension of time to file will be necessary (calendar-year plans).
- Review plan operations to determine if any qualification failures or operational violations occurred during the first half of the calendar year. If a failure or violation is found, consider using an IRS or Department of Labor elf-correction program to resolve it.
- Check for any ADP/ACP refunds due to highly compensated employees for EACA plans, in order to avoid an employer excise tax.
- Conduct a review of second quarter payroll and plan deposit dates to ensure compliance with the U.S. Department of Labor’s rules regarding timely deposit of participant contributions and loan repayments.
- Verify that employees who became eligible for the plan between April 1 and June 30 received and returned an enrollment form. Follow up for forms that were not returned.
- Ensure that the plan’s Form 5500 is submitted by July 31, unless an extension of time to file applies (calendar-year plans).
- Begin preparing for the distribution of the plan’s Summary Annual Report to participants and beneficiaries by September 30, unless a Form 5500 extension of time to file applies (calendar-year plans).
- Provide quarterly benefit/disclosure statement and statement of fees and expenses that were charged to individual accounts to participants (due 45 days after end of quarter).
- Submit employee census and payroll data to the plan’s recordkeeper for midyear compliance testing (calendar- year plans).
- Confirm that participants who terminated employment between January 1 and June 30 elected a distribution option for their plan account balance and returned their election form. Contact those whose forms were not received.
- Begin preparing the applicable safe harbor notices to employees, and plan for distribution of the notices between October 2 and December 2 (calendar-year plans).
- Distribute the plan’s Summary Annual Report by September 30 to participants and beneficiaries, unless an extension of time to file Form 5500 applies (calendar-year plans).
- Send a reminder memo or e-mail to all employees to encourage them to review and update, if necessary, their beneficiary designations for all benefit plans.
- Audit third quarter payroll and plan deposit dates to ensure compliance with the Department of Labor’s rules regarding timely deposit of participant contributions and loan repayments.
- Verify that employees who became eligible for the plan between July 1 and September 30 received and returned an enrollment form. Follow up for forms that were not returned.
- For calendar year safe harbor plans, issue the required notice to employees during October or November (within 30-90 days of the beginning of the plan year to which the safe harbor is to apply). Also, within the same period, distribute the appropriate notice if the plan features an EACA (Eligible Automatic Contribution Arrangement), QACA (Qualified Automatic Contribution Arrangement) and/or QDIA (Qualified Default Investment Alternative).
- Prepare to issue a payroll stuffer or other announcement to employees to publicize the plan’s advantages and benefits, and any plan changes becoming effective in January.
- Conduct a campaign to encourage participants to review and, if necessary, update their mailing addresses to ensure their receipt of Form 1099-R to be mailed in January for reportable plan transactions in the current year.
- Check current editions of enrollment materials, fund prospectuses and other plan information that is available to employees to ensure that they are up-to-date.
- Provide quarterly benefit/disclosure statement and statement of plan fees and expenses actually charged to individual plan accounts during the prior quarter, within 45 days of the end of last quarter.
- Prepare and distribute annual plan notices, such as 401(k) safe harbor for safe harbor plans with a match, QDIA annual notice, automatic enrollment and default investment notices, at least 30 days before plan year end.
- Prepare to send year-end payroll and updated census data to the plan’s recordkeeper in January for year-end compliance testing. (Calendar year plans)
- Verify that participants who terminated during the second half of the year selected a distribution option for their account balance and returned the necessary form.
- Review plan operations to determine if any ERISA or tax-qualification violations occurred during the year and if using an IRS or DOL self-correction program would be appropriate.
Consult your plan’s financial, legal, or tax advisor regarding these and other items that may apply to your plan.
Heartland Retirement Plan Services are offered through Dubuque Bank and Trust Company. The information provided herein is general in nature and is not intended to be nor should be construed as specific investment, legal or tax advice. The factual information has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Heartland Retirement Plan Services makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, it. Products offered through Heartland Retirement Plan Services are not FDIC insured, are not bank guaranteed and may lose value, unless otherwise noted.