Tag Archives: 401(k)

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 which 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 advisor 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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A “Sign O’ the Times” for 401(k) plans?

Laursen DarleneTimes have changed since 401(k) plans were started back in the ’80s, just like hair styles and rock bands. Where most 401(k) plans only offered a lump-sum distribution option, the new trend in retirement plans may have you facing a decision. Could additional options, such as installments and ad hoc distributions, be the new featured value to plan participants? Could a lack of more distribution options be affecting participants’ distribution behaviors? Let’s look at the options and effects for the participants.

A 401(k) retirement plan that offers only a lump-sum distribution option requires participants to move the full account balance before they can even access one dollar from their accounts. While this may seem like no big deal, let’s turn this soup can around and read more about this lump sum on the label. It may provide greater insight into the lump-sum option.

If the need for cash at retirement is immediate, a participant may be forced to distribute the full account balance when the investment market is down. Participants would be locking in the investment loss on their entire account. This effect of the lump-sum distribution option affects participants whether rolling over their account or taking a distribution in cash.

These same lump-sum distributions can also adversely affect the plan as a whole. You may be scratching your head at this point and asking what do you mean? How can only having the lump-sum distribution option adversely affect the plan? Consider the scenario of a large population of plan participants retiring or terminating within a similar time period and possibly carrying away the larger balances in the plan. A tsunami of lump-sum distributions may trigger a significant drop in the total plan assets. This drop in assets may adversely affect the asset pricing structure for the remaining population of participants in the plan, creating a higher asset expense. Not to be a downer on lump-sum distributions, as they certainly have their place in retirement plans, but it may be time to consider offering additional options.

Installment payments can be a second option for a retirement plan. I like to call them the “Pac-Man” of the payment structures. This stream of same bite-size payments works like the Pac-Man arcade game. Pac-Man just kept munching his way around the board, eating until every bite was gone. The upside to installment payments is that participants can have a steady stream of income from the retirement plan and still remain invested. The participant continues to glean the benefit of lower investment pricing by remaining a participant in the plan. What participants should be considering, however, is the effect of these steady Pac-Man installment payments, which continue to happen in a downward investment market. Those installment payments can result in a larger reduction or faster depletion of a participant’s account than planned. For plan sponsors who offer the installment payment option, it is one way of potentially slowing down abrupt changes to the assets in the plan.

The third option, ad hoc distributions, may be considered the most flexible option in retirement plans. Let’s unpack how the ad hoc option can provide an ongoing investment benefit as well as distribution flexibility through retirement. Participants can leave their retirement accounts in the plan and remain invested in the plan’s institutional fund options. The ability to request a distribution when needed, or at the peak of a market upswing, can provide the ability to manage retirement drawdown. For participants who can afford to retire on other sources of income but may incur an unexpected medical cost during retirement, the ad hoc option provides a financial source to tap into only when needed.

Each distribution option has something to offer plan participants. Is it time to offer all three?

DOL issues final rule on fiduciary/conflicts of interest

The Department of Labor (DOL) has released a final rule redefining “fiduciary” under ERISA, focusing on individuals who provide investment advice or recommendations to retirement plan savers for a fee. The rule requires investment advisers to adhere to a fiduciary standard—that is, they must act in a client’s best interest—when advising retirement plan participants, such as on whether to roll over funds from an employer-sponsored 401(k) plan or on what funds to invest in for IRAs. The agency concurrently published related guidance to exempt certain activities from the conflict-of-interest rule, allowing advisers to continue to receive fees or compensation if they comply with the fiduciary standard. The final rule generally applies beginning April 10, 2017, although portions become effective January 1, 2018.

The package of the final rule and related guidance on class exemptions and prohibited transaction exemption amendments is lengthy and complex; this Client Action Bulletin highlights the key areas covered for retirement plan sponsors. The rule applies to tax-qualified plans under ERISA; it does not affect 457 governmental plans or 403(b) tax-sheltered annuities under a governmental plan or a nonelecting church plan.

Goodbye rollovers, hello “stay-overs”

Moen-AlexNo surprise here—Baby Boomers are retiring. But as they retire, there is a new trend in town, the “stay-over.” The stay-over approach represents a shift in thinking about how employees will handle their retirement savings investments. Instead of rolling money out of employer plans into IRAs, the stay-over approach encourages retirees to keep their money in their current company-sponsored plans.

Plan sponsors, and their plan advisors, are now competing to keep retirees’ money in employer plans. The reason? As that extremely large workforce exits, sponsors are worried about their ability to negotiate fees with their outside fund managers and maintain lower overall fees for plan participants. Plan sponsors are now forced to weigh traditional concerns related to administration and compliance costs against fee negotiations. A recent Wall Street Journal article says, “Workers pay about 0.45% of assets in fees to outside money managers when they remain in the firm’s 401(k) plan; by comparison, experts estimate they would pay fees of more than 1.5% in IRAs.” Increased plan assets create economies of scale, which in turn reduces the level of fees for all participants in the plan. This movement is also in line with the overarching goal of encouraging retirees’ savings, focusing on keeping money in the plan, and educating employees about their options. Baby Boomer assets in defined contribution/401(k) plans currently total $4 trillion dollars, according to the same Wall Street Journal article, and 2013 was the first year that plan level withdrawals exceeded contributions. This rollover versus stay-over debate is just beginning to launch.

Employees benefit by keeping their balances in the plan as well. Fees paid by participants have a huge impact on the growth of investments over time, thus participants can benefit from the lower fees. Retirees face pressure from outside financial advisors who will try to convince them that keeping money in employer plans adds a layer of difficulty to investment changes and accessing funds. On the contrary, though, investing can be easier for ex-employees to manage because they are more familiar with the fund offerings and fewer choices are less overwhelming. Usually plan investment options are selected and monitored by independent investment advisors who work with the plan fiduciaries—this translates into professional unbiased advisory services, which benefits all participants. A plan feature to consider, which will aid and encourage workers to keep money in the plan, is ad hoc withdrawals for retirees, allowing participants to access their accounts the same way they would in an IRA, and take money as needed. This is a balancing act, however, as the retiree still needs to be aware of the risks of removing money and should have a financial plan in place for retirement.

Employers and plan sponsors should think big. Rather than designing retirement savings plans for the length of time the employee is with the company, plans should represent a tool for lifetime retirement savings for all workers.

Celebrating National 401(k) Day can generate enthusiasm for retirement plan

Many employers hold benefits fairs during open enrollment, providing employees an opportunity to review all benefits offered to them. Focusing on the 401(k) plan only during open enrollment events can give employees the false impression that they must make their 401(k) decisions only during the open enrollment period. This article explains how Milliman helped one employer highlight its 401(k) benefits by engaging employees in the process more effectively.

Weighing income options can prepare individuals for retirement

Pushaw-BartPension plans are providing an ever-decreasing portion of retirement wealth as wave after wave of Baby Boomers reach retirement. In and of itself, this is neither surprising nor remarkable. What is remarkable, though, are two typical characteristics of what we are being left with regarding retirement wealth.

First, the jettison of pension plans means relying on defined contribution plans as the provider of principal retirement wealth. This is suboptimal inasmuch as these plans are typically 401(k) savings plans, originally introduced as a sideline fringe benefit scaled for purposes less than what they’re now required to deliver on. This is mostly a benefit-level issue of which we have seen recent hints of amelioration—namely, the industry recognizing that in an all-account-based retirement world, saving 16% of annual pay is in the ballpark, not the historical mode of 6% employee deferral (plus maybe 6% employer match totaling 12%). This relates to the second endangered characteristic, which needs to be brought into brighter focus: an in-plan solution for generating guaranteed retirement income.

Pension plans are wonderful for participants in that everyone is automatically a participant, automatically earning benefits on a meaningful trajectory, and automatically having the ultimate retirement wealth delivered on a lifetime guaranteed basis. Yes, 401(k) plans are trending this way on the first two, and the third is quickly emerging as another area where we need more pension-like alternatives.

One may generalize by saying that retirees take their 401(k) balances and roll them over when they retire. An economic conundrum baffling academics is that none or very few of these folks take advantage of insured annuities even in the midst of robust studies identifying them as an optimal solution for retirement income in face of investment uncertainty and longevity risks. This raises two subtle yet important points.

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Automatic savings increase tool enhances 401(k) plan

Milliman’s automatic savings increase tool helped one bank transition to a defined contribution-focused retirement program. In this article, Noah Buck discusses how the organization’s 401(k) plan achieved higher employee participation as well as greater savings rates two years after plan modifications.

Here’s an excerpt:

Separate from providing guidance and strategy on plan design, Milliman helped the client roll out a secret weapon: Milliman’s voluntary automatic savings increase tool. To be clear, the plan design changes mandated a 1% annual increase up to 10% for any participant who is automatically enrolled. The voluntary automatic savings increase tool is a feature of Milliman’s website that allows participants to elect their own automatic increase schedule. It is a convenient mechanism to help participants update or confirm their current savings rate and choose an annual increase date, the annual incremental increase, and the maximum savings rate. For example, a participant may elect to save at 5% with an annual 1% increase every September 1 until the savings rate reaches 12%. Participants can provide their email address in order to receive a reminder a few weeks before the scheduled annual increase.

The voluntary automatic savings increase tool was not expected to have a major impact. Instead, it was considered something useful to help chip away at the lost 11.5% of annual DB benefits. It was also considered a means for those participants on a tight budget who were not automatically enrolled to increase their savings rates at their own pace.

… As seen in the table below, the average expected total increase in the savings rate for the 35 participants who elected auto-increase is 5.9%, which will roughly double the current average savings rate for this group. This increase, combined with the expanded profit-sharing contribution, is projected to close the 11.5% gap for many employees.

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