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7 Concerns on the Forefront of 401k Plan Sponsors’ Minds Right Now

7 Concerns on the Forefront of 401k Plan Sponsors’ Minds Right Now
November 27
00:03 2018

As we begin the final descent into the close of the calendar year, companies are wrapping up their annual business task list. No doubt they’re looking at their 401k plans. Plan sponsors, as a collective, share some common concerns regarding their defined contribution plans. What are they and what’s the buzz about them? Here’s a list of seven issues 401k plan sponsors are either concerned about right now or ought to be concerned about right now.

#1: Hardship Withdrawals
Regulators, the industry, and therefore plan sponsors are in a quandary about this. On one hand, it’s their money, so why shouldn’t retirement savers be allowed to borrow of even withdraw from their retirement assets prior to retirement. After all, does it make sense for someone to lose their home to foreclosure when they have more than enough money in their 401k plan to pay for it?

On the other hand, we all know the quickest path to retirement “un”-readiness is to prematurely withdraw from your retirement savings. It may seem like a few thousand dollars today, but decades from now it could represent a substantial portion of your annual retirement expenses. Only it won’t be there anymore. In fact, it may not even be sitting in the driveway by then if the money was taken out to pay for a car.

Well, at least there’s universal agreement that such withdrawals should be limited to specific hardship cases. “401k plan hardship provisions are one thing at the front of some plan sponsors’ minds these days,” says Benjamin L. Grosz, a benefits and tax attorney at Ivins, Phillips & Barker in Washington, DC. “Legislative changes from the Bipartisan Budget Act of 2018 are all effective for new plan years beginning Jan. 1, 2019 (and thereafter), and major recordkeepers (including Fidelity and Vanguard) are requiring plan sponsors to make their design decisions this November. We’ve seen a number of clients asking about what they need to know and do. Recordkeepers have been programming their systems and plan sponsors were all making decisions in the absence of expected regulations, but then the Treasury Department just released its proposed regulations.” (Here’s a link to the proposed rules.)

#2: Compliance
This is a perennial concern. And why not? Most plan sponsors are too busy trying to maintain profitability in their business to remember how to dot ever “i” and cross every “t” in their plan. That’s why they generally delegate much of the work to dedicated professionals. Still, when your neck is on the line, you worry. And the labyrinth-like intricacy and ever-changing nature of government regulations gives just cause for that anxiety.

“Qualified retirement plans are very complicated from operational difficulties to legal complexities,” says Joshua Sutin of Chamberlain Hrdlicka in San Antonio, Texas. “Vendors helping plan sponsors usually are not proactive with ongoing compliance and assisting plan sponsors with making sure their plans are running efficiently but error free. 401k plans are important to employees’ morale and economic stability, to have a plan that is not in compliance can cause much frustration that minor continual checkups on plan compliance could avoid.”

#3: Sustainability
This isn’t what you’re probably thinking. This sustainability focuses on a different kind of “green.” Here, green is not the color ecology, it’s the color of money. After all, as stated in the previous segment, for most plan sponsors, the top priority is business sustainability. Without that, you have no salary, no jobs, and, for many, no overarching purpose for existing. To do this, you need to make money.

“Plan sponsors are focused on how they are going to make their company profitable, retain key employees, stay competitive, and do so in a tight labor market where wages are on the rise,” says Charlie Epstein, Founder and CEO, Epstein Financial Services and The 401k Coach in East Longmeadow, Massachusetts. This might sound like it doesn’t have anything to do with the 401k plan, but company benefits are a key component to the corporate sustainability equation.

“Plan Sponsors are growing increasingly concerned about providing a retirement plan that will recruit and retain employees,” says Matthew J. Haywood, Retirement Plan Advisor at Krilogy Financial, LLC. in Saint Louis, Missouri. “With unemployment at its lowest levels since 1969, plan sponsors not only need a company contribution, they need retirement plan advisors to educate those participants on personal financial planning. A financially healthy employee is a productive employee.”

#4: Low Participation Rates
You might think everyone’s adopted auto-enrollment, but it continues to remain elusive to some plan sponsors. That might be the primary reason their plans are experiencing lower participation rates. “Plan sponsors who do not automatically enroll their employees may struggle to increase take-up,” says Elizabeth Kelly, a Senior Vice President at United Income in Washington DC. “According to Vanguard’s survey of 8,900 small-business retirement plans, only 15% of small businesses offering plans automatically enroll workers. Those plans having automatic enrollment enjoy an 83% participation rate vs. 58% for plans with voluntary enrollment.”

But most auto-enrollment policies can get you only so far. Auto-enrollment represents merely one of the arrows in the quiver available for plan sponsors to encourage higher participation rates. “The end of the year is a good time to reflect on what the participation rate was and how can it be increased in the new year so that this benefit doesn’t go to waste,” says Roger Lee, CEO and Co-founder, Human Interest in San Francisco, California. “Low participation rates can be the result of an intimidating signup process or a lack of financial literacy. Some things to consider adding to your 401k benefit are a smooth sign-up process, auto-enrollment, financial education, robo-advising, immediate eligibility, and a great employer match – all of which have the potential to significantly boost participation rates. The end of the year is a great time to reevaluate the company 401k and make time to meet with the 401k provider to go over options and improvements for the upcoming year.”

#5: Low Savings Rates
Most Americans underestimate their life expectancy, putting them at risk of outliving their savings. According to the 2018 TIAA Plan Sponsor survey, which surveyed more than 1,000 nonprofit and for-profit employers, three in four employers (75%) worry that many of their employees are not saving enough. That said, only one in four (27%) say that their current default investment option adequately manages longevity risk—which is at odds with the more than half (55%) of plan sponsors that recommend saving for a retirement of at least 20 years.

To combat this lack of savings ethos, plan sponsors are utilizing education programs to encourage greater savings. Gone are those quarterly “employee enrollment” meetings. They’ve been replaced by more engaging – and usually on-line – interactive activities meant to spur the casual saver. “Financial Wellness programs continue to be on the forefront of plan sponsors’ minds,” says Taylor Hammons, Vice President and Head of Retirement Plans at Kestra Financial in Austin, Texas. “Due to their continued focus on driving a higher level of retirement readiness, they are now seeing a positive increase in their plan participants’ engagement and savings rates.”

#6: Costs
Would any list about 401k concerns be complete without costs? Plan sponsors should always pay attention to what the plan pays. “One thing on the mind of plan sponsors is the costs that are embedded in their plans. There are several layers of costs that need to be managed in order to maintain an attractive plan to see employees up to and possibly through retirement. Plan sponsors and their fiduciaries need to be cognizant of investment costs, recordkeeping costs, as well as third party administrative costs. Managing investment choices is also a vital part of fulfilling a fiduciary obligation to do what is in the best interests of the participant,” said Gary Rudow, Managing Director/Investments at Stifel’s New York City office.

#7: Fiduciary Liability
Ultimately, everything must come down to this bottom-line concern. It defines the ultimate risk each plan sponsor personally takes when starting a 401k plan. If not for fiduciary liability, plan sponsors would find they’d have a reduced concern about their plan. In an odd way, then, concern is good. It means plan sponsors’ best interests are aligned with the plan participants’ best interests. Much of this concern might be attributed to the volume of media attention paid to the DOL’s now-vacated Fiduciary Rule.

“Plan sponsors are concerned whether their plan providers are providing them enough protection from being sued or fined by regulators,” says Brian Menickella, Managing Partner at The Beacon Group of Companies based in King of Prussia, Pennsylvania. “They are reading headlines about heightened regulatory enforcement activity and other plan sponsors being sued, and they want to know that they are protected from those threats.”

In the end, as Greg Trost, President & Founder of Trost Financial in Los Angeles, California, suggests, this has plan sponsors asking, “Are we giving the best possible advice” to our employees?

And if that’s the result of these concerns, then maybe the best possible plan sponsor meme should be “Keep Calm and Be Concerned.”

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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