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Will 401k Plan Sponsors Fall for These Over-Hyped Topics?

Will 401k Plan Sponsors Fall for These Over-Hyped Topics?
January 08
00:03 2019

You’ve probably read dozens of stories on these topics. Or maybe just the headlines. Either way, you’ve seen these words and phrases ad nauseum over the past year or so. In fact, they’ve been repeated so often, it’s easy to understand how they may now be treated as solid axioms rather than merely loose conjecture. Yet, it’s well within the purview of one’s fiduciary duty to ask if there’s steak beneath that sizzle. Here are five over-hyped topics that represent prime candidates to deliver less than expected (at least in the near-term).

Student Loans in 401k Plans:
This particular topic got a lot of airplay beginning about six months ago. On August 17, 2018, the IRS issued a private letter ruling that allows companies to match employees’ student loan payments in the same way employers match employees’ 401k contributions (see the actual IRS release here). Glenn Sulzer, J.D., Senior Legal Analyst at Wolters Kluwer Legal & Regulatory U.S. in Chicago, Illinois, believes the influence of the letter ruling regarding the matching of student loan payments may prove to be over-hyped.

“The letter ruling may not give sponsors sufficient confidence to adopt such plans, as private rulings are limited in scope and application, have no precedential effect, and do not represent official IRS guidance,” says Sulzer. “Specifically, the ruling is limited to application of the contingent benefit rule and expressly does not represent an IRS perspective (official or nonofficial) on whether the program satisfies all of the qualification requirements of Code Sec. 401(a). Nor does the ruling indicate whether the plan would comply with the requirements of a safe harbor 401k plan. Thus, the ruling may receive a tepid response in the marketplace.”

The cost of college and the accumulation of associated student debt has climbed tremendously. The student loan crisis, for many, is quite real. At the same time, student debt may be quelling young workers’ ability to make contributions to their retirement plans. Ironically, this suppression occurs precisely at the best time for those contributions to be made (i.e., when they’re young and the power of compound interest can most work in their favor).

Is the IRS letter more sizzle than steak? It’s not a question if companies offer the student loan match. It’s a question if, when offered, whether young employees take advantage of it. This presents the potential for the classic “you can lead a horse to water…” conundrum. It is therefore incumbent upon fiduciaries wishing to offer the student loan match option to also offer associated education programs to encourage employees to use the program.

Annuities in 401k Plans:
Certainly, everyone has seen this never-ending story and all its peripheral stories. In fact, these stories seem to have been around so long, they might be classified as “desperate plea” rather than hype. Despite the urging of the retirement plan industry (as well as some regulators and certain academics), in-plan annuities don’t seem to be sticking when it comes to the idea of including them in 401k plans.

“Even though annuities can be a valuable tool to help individuals not outlive their assets,” says Rob Austin, Head of Research at Alight Solutions in Charlotte, North Carolina, “plan sponsors have repeatedly cited many reasons for not adding them to their 401k plans: fiduciary concerns, waiting to see the market evolve more, administrative barriers.”

On the face of it, the lack of interest in annuities doesn’t make sense. Numerous surveys have cited findings that suggest people would prefer a fixed income than not. Yet, people don’t buy annuities to the degree these surveys suggest. Perhaps it’s because there’s some unknown trade-off that has dissuaded people from purchasing annuities. In either case, Austin doesn’t see things changing for annuities in the near-term, meaning we’ll continue to catch that ever-present aroma of the sizzle, but probably won’t be seeing any steak soon.

All Passive 401k Plans:
Here’s one that has been building for some time now. Indeed, one can probably make the case that, once the market got out of the hole they dug in 2008/2009 (around 2013), index investing has become the assumed standard. Some have even suggested there’s no place for active investing anymore, especially in corporate retirement plans. Alas, to everything there is a season, turn, turn, turn.

The concept of the all-passive defined contribution plan may have peaked with the market. “Participants face imminent market gyrations as markets move into a late-cycle bull market phase, and those invested in passively managed funds will be unable to avoid capturing all of the downside of market declines,” says Holly Verdeyen, Director of Defined Contribution Investments with Russell Investments in their Chicago office. “This may be the catalyst for plan sponsors to take a closer look at an all-passive approach and whether that approach is aligned with the desired outcome for their participants.”

Most fiduciaries don’t recommend only one type of investment option. Index funds are fine, but only for do-it-yourself investors. Most employees, it seems, opt for the default option. The default option (usually a target date fund or target risk fund), while sometimes containing index funds among its underlying assets, remains and actively managed portfolio, if only for the purposes of asset allocation.

Financial Wellness:
“Financial wellness” has been on our radar for several years now. When it first arrived, it had the attractiveness of the novel. It was a new idea. People like new ideas. What’s more, it was a metaphor. People were encouraged to look after their fiscal health in the same manner they look after their physical health. Great concept.

Converting that sizzle into steak, though, has proven to be a challenge, to the point where some are looking for the reset button (when all other metaphors fail, use the bowling metaphor). “Financial wellness programs have been overhyped and will not gain as much traction with plan sponsors or plan participants as we anticipated,” says Ben Pitts, Vice President of Corporate Development at Picwell, Philadelphia, Pennsylvania. “This is not because there isn’t a need for improved capabilities of plan sponsors and plan participants, but rather the inability for existing financial wellness vendors to help where employees need it most. I believe we will see a shift of financial wellness away from retirement focus more toward helping plan participants manage their personal risk broadly. For example, plan sponsors should be assessing tools that help their employees assess their personal risk more broadly (e.g. 401k vs HSA contribution or voluntary benefit selection) and 401k plan advisers and platforms would be smart to partner to integrate those capabilities into their offerings.”

Financial wellness sprung up from the need to motivate employees to save for retirement. In the early years of the 401k, it was enough to tell employees they could reduce their taxes and earn free money (via the employee match). That grew stale over time; hence, the push towards “financial wellness.” It could be that financial wellness has grown stale, too, because the concept has yet to live up to its hype. As Pitts hints at, there may be more effective tools.

On-Line Education:
On of those tools we’ve been hearing a lot about lately is web-based education and training. With the near-universal availability of the internet and the preferred mobile device delivery, this has come to replace the traditional employee education/enrollment meetings.  While early employee meetings were driven by the plan adviser, on-line education tools, like enrollment meetings, is drive by the plan recordkeeper. But, has on-line education lived up to its promise?

“I think that on-line education is being over-hyped and underutilized,” says Robert Gibson, a Fiduciary Consultant at Centurion Group in Plymouth Meeting, Pennsylvania. “I think that it can be effective. But the statistics that I’ve read indicate that the majority of participants are not taking advantage of the on-line education offers.”

For his part, Gibson is constantly working on ways to improve communication directly with the participants and finding ways to spend to spend more time in front of them. “I’d like to see us get back to basics with more general financial education,” he says. “Not plan specific, but general financial education. It seems that many participants still like a personal approach. I think if we can help people better understand basic financial concepts and improve overall financial literacy, we can have better results with more plan specific education.”

On this last topic, it may be that we’re still in the first few innings (or frames, if you insist on continuing the bowling metaphor). As millennials continue to replace the once dominant baby boomers in the workforce, the need to do everything on the phone may diminish the need for a personal approach. (For more on this, see “Exclusive Interview: Chuck Underwood Explains Why the Generations View Money Differently,”, October 16, 2018.) At that point, on-line education will become the standard. As for now, it’s a lot a sizzle, but you know there’s a big juicy steak somewhere in there.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary Solutions,  Hey! What’s My Number? How to Improve the Odds You Will Retire in ComfortFrom 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.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Jack Towarnicky
    Jack Towarnicky January 14, 12:20

    Keep or pitch

    Student Loan Debt: Student loan debt is an issue. But, most workers have no such debt or debt that may be budget-able or manageable.

    Financial Wellness. Plan sponsors may want to first review existing benefits; paycheck insurance (life, LTD, etc.) and liquidity 401(k). A 401(k) can do “double duty” – avoiding diverting assets and attention along the way to retirement.

    Annuity: Lots of reasons for lack of interest, low take up rates – many households may already be highly annuitized.

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