Category Archives: Defined contribution

It’s Your Move: The dash(board) to retirement

O'Brien-ShaneDonald Rumsfield, the former U.S. Secretary of Defense, once discussed “known unknowns,” referring to things that we are aware we don’t know. The idea can be applied to retirement plan participants as well. It is evident year after year that plan participants still lack a fundamental understanding of certain aspects of retirement planning, such as how to invest, how much to invest, and how to create a plan for retirement. These aspects remain widely misunderstood.

Enter the It’s Your Move dashboard on Milliman’s newly reimagined website. This dashboard aims to make participants aware of the tools at their disposal that can help them plan for retirement. The dashboard falls in line with other initiatives in the industry, all aimed toward improving employees’ preparations for retirement. I’ve previously discussed how the working population in the United States is massively unprepared for retirement and suggested that “gamification” was a possible solution. The SaveUp app was cited as an example of the effectiveness that gamification can have on retirement planning.

Now there is another newsmaker with a similar name—the Secure, Accessible, Valuable, Efficient Universal Pension Accounts (SAVE UPs) Act—grabbing a few headlines. SAVE UPs is a new piece of legislation that was introduced by Representative Joe Crowley (D-New York). The main objective is to provide all American workers with the opportunity to generate tax-advantaged assets. The legislation intends to help smaller employers subsidize the cost of contributing to IRAs in the form of a tax credit for the value of the contributions to 10 employee accounts. This bill, if enacted, could be following down a very controversial path similar to that of, I shudder to say, healthcare.gov. Since the full name of this new legislation threatens to exceed the character limit of any tweet commenting on it, I figured it would be easier to discuss on this platform since the overall objective appears to be to help provide opportunities for more people to prepare for retirement. The new Milliman Benefits dashboard was created with the same goals in mind and has a significantly lower chance of becoming part of the script for the next season of House of Cards.

The new It’s Your Move dashboard was designed to make participants aware of the various successful behaviors that will optimize their experience. With tools that help participants maximize company matches, diversify their investments, and utilize automatic increase and rebalance features, it could help to set new standards for best practices and increase participation rate in the plans that we manage.

PlanAhead - It's Your Move 2

Participant feedback has shown that a knowledge gap still exists in regards to retirement planning and investment decisions. A survey in March showed that 71% of participants were very likely or somewhat likely to seek advice from their plan providers and 69% were likely to seek advice from an independent advisor or financial services company. The advice they were seeking is on how to invest their money, what to do with their savings when they leave their employers, and what to do with the money when they retire. This shows that a majority of participants would like assistance in their retirement planning. The It’s Your Move dashboard helps to do just that. This readily accessible checklist of retirement behaviors is making participants aware of the tools available to them in an effort to improve their retirement outcomes. It can help employees feel more confident about retirement and offer some encouragement and useful information along the way.

The NDCP dirty dozen: Timing is everything

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

While most nonqualified deferred compensation plan (NDCP) sponsors will be hard-pressed to find humor in 409A compliance, they may be willing to acknowledge that proper administration of NDCP distributions shares at least one common attribute with a winning comic performance: for the NDCP to successfully stand up in front of the most demanding critic—i.e., the Internal Revenue Service (IRS)—without facing any heckling, the plan must practice precision timing with its distributions to participants. Just as a comedian must work not to deliver a punch line too early or too late, an NDCP needs to avoid improper accelerations or delays of participant payments. A failure to do so can elicit a most unpleasant response in the form of a cacophony of catcalls and boos from participants, or an IRS audit discovery of 409A noncompliance, thereby triggering the resultant penalties.

This blog entry examines some of the toughest timing tests for the satisfactory operation and administration of NDCPs under section 409A of the tax code.

Activating the trigger
Section 409A severely restricts employer and/or executive discretion on the timing of distributions. It identifies six permissible NDCP distribution triggers, which generally must be established within 30 days of the date the executive first becomes eligible to participate in the plan:

1. A specified payment date (i.e., a future distribution date is designated either by the employer and/or executive upon the participant’s initial eligibility)
2. Separation from service
3. Disability
4. Death
5. Change in ownership or control of a corporation
6. Unforeseeable emergency

Except for death, each trigger has its own special 409A definition, along with complicated rules regarding how it may be applied. There is also a separate rule that permits the attachment of a “window” period to the applicable trigger. Under this rule, the participant may not designate the taxable year of payment; and such period must either both begin and end within one taxable year or must not be more than 90 days.

Recent IRS guidance expanded the permissible early payout alternatives to an NDCP participant’s beneficiaries in cases of death, disability, or unforeseeable emergencies. The guidance also clarifies that the NDCP may provide that the occurrence of death, disability, or an unforeseeable emergency may accelerate a schedule of payments that has already commenced prior to a participant’s or beneficiary’s death.

One of the most complex triggers happens to be one of the most commonly used: the “separation from service” distribution trigger. This trigger will not pose problems when the separation is clear-cut and final, such as a full retirement, resignation, or termination of employment. However, employment separations are often not so simple, such as where an executive’s duties are scaled back from his or her previous role (e.g., under a “phased retirement” scenario) or where a key employee “retires” but is then retained to consult as an independent contractor. Depending on the extent of the cutback and the terms of the NDCP, the plan may risk either prematurely commencing payment or impermissibly delaying a distribution that should commence. This may occur if the employer and/or the executive’s idea of what constitutes a separation does not align with the guidance under 409A. Although it basically is a facts-and-circumstances test, 409A considers a termination to have occurred if the employer and employee reasonably anticipate that either of these two conditions applies:

1. No future services will be performed after a certain date.
2. The rate of bona fide services to be performed after such date will not exceed 20% of the average rate of services performed over the preceding 36-month period (or the full period, if less than 36 months). (If the new rate of services is over 20% but less than 50%, such reduction may be treated as a separation from service under 409A, provided special rules are met.)

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Approach 401(k) eligibility provisions strategically

Employers who take a strategic approach to defining eligibility provisions in a 401(k) plan can contain benefit costs, recruit and retain talent, simplify administration, and comply with regulations. In his article “Making participants out of employees via eligibility,” Milliman’s Noah Buck answers six strategic questions that plan sponsors should take into consideration. The excerpt below highlights two of the questions.

To what degree is the plan used to attract and retain talent?
A law firm does not want highly sought-after recruits joining a competing law firm down the road because they can enter the competing firm’s retirement plan sooner. Employers relying partially on their 401(k) plans for recruitment should consider that quicker and easier access to the plan will be more attractive to those in their prospective talent pools.

Are eligibility and entry date provisions cost-efficient with respect to turnover and vesting?
An organization’s turnover rate and average employee tenure are important to consider. A restaurant chain employing high-turnover wait staff will save cost and administrative energy by requiring employees to work six months before entering the plan instead of requiring one month.

It’s also important to consider the plan’s vesting provisions. If the plan has immediate vesting, the employer matching contributions — meant to supplement long-term retirement savings — could be going right out the door to short-term employees who are allowed to enter the plan too quickly. Employers should consider structuring eligibility and plan entry provisions so employer contributions are more likely to stay in-house with longer-term employees.

Retirement income considerations

The latest issue of Milliman’s Benefit Perspectives features two articles that focus on 401(k) plans and retirement income. “Helping employers in their retirement: 401(k) decisions, decisions, decisions!” by Jinnie Olson explores options employers can implement to help employees access retirement savings. A second article, “Helping 401(k) plan participants calculate withdrawal rates in retirement,” by Matt Kaufman, focuses on calculating withdrawal rates in retirement.

Milliman adds Jacobs Management Corporation as retirement services client

I’m happy to announce that Milliman has added Jacobs Management Corporation as a defined contribution client. Jacobs Management Corporation is a privately held corporation that includes FLW, LLC, a premier tournament fishing organization; the J.R. Watkins Company, America’s original apothecary manufacturer; Larson Boats, best known for their experience in quality boat manufacturing; Marquis Yachts, a builder of luxury and sport yachts; and Jacobs Trading Company, a recognized leader in the closeout trading industry.

David Mahler, Vice President-Treasurer at Jacobs Management Corporation, says, “We chose Milliman for their reputation as a trusted service provider who values commitment to client service. In addition, the website is user-friendly and includes robust tools to assist participants in planning for retirement. Partnership with providers is critical, and Milliman’s unique ability to design services and systems to meet the needs of all of our companies was a strong factor in our decision making.”

At Milliman, we believe most plan sponsors want strong service and a commitment to the industry, not just a low-cost or product-oriented sales pitch. Our focus is to provide superior service and value that exceeds our clients’ expectations. Jacobs Management Corporation recognized this when they chose Milliman as their provider, and we look forward to an enduring relationship with them.

Milliman will provide recordkeeping, administration, communications, and compliance services for the Jacobs Group 401(k) Plan. Advanced Capital Group, headquartered in Minneapolis, assisted with the recordkeeper search and is the independent investment adviser providing consulting services for the plan.

For more information about Milliman’s employee benefit services, click here.

Linking NDCPs with 401(k) requires a “contingency” plan for compliance

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

Last month’s blog discussed similarities and differences between the rules governing participant deferrals made under a nonqualified deferred compensation plan (NDCP) versus those contributed to a qualified 401(k) plan. This month’s entry will again turn to the NDCP-401(k) connection; however, this time it will show that when NDCP sponsors choose to link their NDCP’s benefits with their 401(k) plans’, they must be aware of and comply with not only Internal Revenue Code Section 409A’s restrictions but also Section 401(k)’s “contingent benefit rule” (CBR). While such compliance does not directly affect the NDCP, it is a qualification requirement for the 401(k) plan.

In general, an employer may not directly or indirectly condition another employer benefit (other than matching contributions) upon an employee’s election to make or not make elective contributions. If the employer conditions any such other employer benefit upon elective contributions, it is a qualification defect. The purpose of this rule is to prevent employers from encouraging employees to make or not make elective contributions by linking valuable benefits to their contributions or lack of contributions. These other benefits include but are not limited to the following:

• Benefits under a defined benefit plan
• Nonelective employer contributions to a defined contribution plan
• The right to make after-tax employee contributions
• The right to health and life insurance
• The right to employment
• Benefits under a NDCP

Because NDCP benefits are included among the items for which 401(k) contingency is prohibited, NDCP sponsors must guard against including provisions in their NDCPs under which participants may receive additional deferred compensation under the NDCP, depending on whether they make or do not make 401(k) elective contributions. Each of the following three examples illustrates provisions that would create such a contingent benefit and thus a violation of the CBR:

Example 1: Employer T maintains a 401(k) plan for all of its employees and a NDCP for two highly paid executives, Employees R and C. Under the terms of the NDCP, R and C are eligible to participate only if they do not make elective contributions under the 401(k) plan. Participation in the NDCP is a contingent benefit because R’s and C’s participation is conditioned on their electing not to make elective contributions under the 401(k) plan.

Example 2: Assume the same fact pattern as Example 1 except that this time, under the terms of the NDCP, Employees R and C may defer a maximum of 15% of their compensation and may allocate their deferrals between the 401(k) plan and the NDCP in any way they choose (subject to the overall 15% maximum). Because the maximum deferral available under the NDCP depends on the elective deferrals made under the 401(k) plan, the right to participate in the NDCP is a contingent benefit.

Example 3: Employer S maintains three plans: a 401(k) plan, a qualified defined benefit (DB) plan, and a defined benefit NDCP. Under the terms of the NDCP, each participant’s NDCP benefit is offset not only by the qualified DB plan benefit but also by the total account balance under the 401(k) plan. Because the amount a participant elects to defer or not defer under the 401(k) will directly affect the amount of the offset and thus the resulting NDCP benefit, the offset is a contingent benefit.

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Avoiding poverty in a DC-only world

Bradley_JeffIn a defined contribution (DC) world, retirees are forced to make critical decisions, often with little or no assistance. Most of these individuals choose to take a single lump-sum distribution either immediately or soon after they terminate employment.

This paper from the Center for Retirement Research at Boston College asserts that distribution provisions in DC plans are critical factors in evaluating the risk of falling into poverty in old age.

Specifically, the paper states that reliance on non-annuitized DC benefits with fairly easy access to lump-sum distributions puts elderly households at risk of not having sufficient income (or assets) to sustain themselves or, if they are not already in poverty at retirement, falling into poverty as the household members age or die off.

As workers continue to age, this will become a greater problem as those covered by defined benefit plans retire from the workforce and are replaced by those covered only by DC plans. So what can plan sponsors do to minimize the probability of their retirees falling into poverty?

Extrapolating from thoughts in the paper, the conclusion is that plan sponsors should encourage the following behaviors:

• Not taking lump-sum distributions before retirement
• Annuitizing some or all DC benefits when possible
• Choosing joint-and-survivor options when available

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Milliman launches enhanced defined contribution participant website

Milliman today announced the launch of its latest in a series of website enhancements for its defined contribution clients and their plan participants.

New features on MillimanBenefits.com include an interactive “It’s Your Move” dashboard with tools that support successful retirement behaviors, such as saving enough to get the company match, diversifying investments, and utilizing automatic increase and automatic rebalance features—all with a refreshed look and feel. The site enhancements build on Milliman’s robust PlanAhead for Retirement® projection tool, educational Financial Resources Center, and award-winning mobile application.

“Our consultants are excited to offer these new features to our clients. More than ever, our clients understand that it’s important to encourage constructive behavior in this age when too many people are not saving enough for retirement,” says Jeff Budin, Milliman’s global employee benefits practice leader. “From a behavioral finance perspective, it’s helpful to participants to see a list of items they are doing well next to some additional actions they could take to strengthen their account with the simple click of a mouse.”

To learn more about Milliman’s independent, conflict-free approach to recordkeeping in the defined contribution industry, click here.

409A deferral election results: A mixed bag

Pizzano-DominickThis blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.

The process of deferring a portion of a participant’s pay under a nonqualified deferred compensation plan (NDCP) can, at first glance, appear quite similar to how such deferral would be handled under a 401(k) plan. Participants designate a specified dollar amount or percentage of their pay they wish to defer under the plan. The plan sponsor then arranges for such amounts to be deducted from the participants’ pay and allocated to an account maintained on their behalf under the plan. However, upon delving deeper, we see stark differences that must be observed by NDCP participants and sponsors in order to comply with Internal Revenue Code Section 409A. As with many of 409A’s rules, the restrictions on deferral elections require tight timing. This blog will highlight the differences between permissible 401(k) and NDCP deferral elections while also describing some of the plan design options available to provide participants with at least some flexibility when making their NDCP deferral elections with respect to salary and bonuses. While 409A also contains specific rules governing other types of deferrals (e.g., short-term deferrals, commission, etc.), analysis of such rules is beyond the scope of this series.

NDCP deferrals: Generally “Election Day” comes just once a year
Typically, 401(k) plans permit participants to make deferral elections as soon as their first payroll periods coincident with or next following the date on which they meet the plan’s eligibility requirements. If any participant fails to defer when first eligible, a 401(k) plan could allow them to begin deferring as of any subsequent payroll period. Similarly, a 401(k) plan can generally permit participants to increase, decrease, or discontinue their rates of deferrals as of any subsequent payroll period. In contrast, while a participant’s initial deferral opportunities under an NDCP are somewhat similar to the 401(k) plan, once the first deferral chance passes, there is considerably less flexibility.

Under an NDCP, in the case of the first year in which a participant becomes eligible to participate in the plan (whether it is a brand new plan or an existing plan for which the individual has just become eligible), participants have until 30 days after they first become eligible to make their salary deferral elections. Such elections must only apply to compensation (whether in the form of salary or bonus) paid for services to be performed beginning with the first payroll period after the election. If participants pass on this initial deferral option, they will not have another deferral opportunity until January 1 of the next calendar year. Similarly, for those participants who do elect to defer a portion of their salaries when first eligible, no changes to such initial elections can be made until January 1 of the next calendar year.

Because all NDCP deferral elections (including elections not to defer) are “locked in” for the calendar year in which they are made, plan sponsors need to be sure that their corporate cultures and populations are the right fit and that they have effectively provided the appropriate caveats before deciding to offer participants “evergreen elections.” Under such elections participants have the ability to make an NDCP deferral election and then have that election automatically roll over from year to year unless they specify otherwise before the applicable January 1. Without such a fit and/or without any proactive measures in place, such a design runs the risk of participants forgetting to get decrease or discontinuance requests to sponsors on time and then being stuck for the coming year with deferral rates that they do not want, or worse, may not be able to afford, given their anticipated cash flow and expenses for such year. In order to prevent this predicament, the NDCP sponsor can instead require that the participants reenroll each year by making a new salary election prior to January 1 of each year. This design is particularly effective in decreasing potential participant complaints if combined with a strong annual communications campaign during an open enrollment period that begins as early as October and ends on whichever day in December is the last day that the plan administrator is able to accept the election in order to process it for the first payroll period in January, during which the participant earns pay attributable to services performed in the new year. (Note: any “carry-over” pay from the previous year, i.e., pay earned in the previous year but not payable until January of the current year, will be subject to the previous year’s deferral rate.)

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Quantifying retirement programs competitiveness

In this case study, Milliman’s John Wukitsch and Neil Hagin explain how a “peer group” analysis helped one large employer gauge the competitiveness of its retirement benefits program. The analysis provided a comparison of five competing programs, demonstrating to the employer that it needed to offer more generous retirement benefits to keep employees satisfied and retain key talent.