Tag Archives: 401(k)

Auto plan features produce uptick in DC plan savings and participation

Defined contribution (DC) plan sponsors can struggle with employee enrollment and participation. This was the case with one safe harbor-designed DC plan offering participants 100% matching contributions up to 4% of pay.

The sponsor eventually set a new goal to help employees save at least 10% of pay while taking advantage of the employer match. Milliman worked with the sponsor to attain its goal by implementing auto plan features to effectively increase participation and retirement savings for individuals. Consultant Kevin Skow explains how in his article “Automatic enrollment with auto increase, re-enrollment, and fee equalization.”

Hurricane Irma victims: Hardship and loan relief available

Good news: the Internal Revenue Service (IRS) announced that 401(k) plans and similar defined contribution (DC) employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Irma and members of their families. Similar relief was provided to victims of Hurricane Harvey. Plans will be allowed to make loans and hardship distributions before they are formally amended to provide for these features. This relief applies to 401(a), 403(a), 403(b), and certain 457(b) plans. Defined benefit (DB) plans and money purchase plans cannot make hardship distributions unless they contain either employee contributions that are separately accounted for or rollover amounts.

Loans and hardship distributions will provide the financial resources needed to those suffering in the wake of the hurricanes. Announcement 2017-13 states that both current and former employees are able to take loans or hardship distributions if their principal residences on September 4, 2017, were located in the Florida counties identified for individual assistance by the Federal Emergency Management Agency (FEMA) because of the devastation caused by Hurricane Irma, or whose places of employment were located in one of these counties on that applicable date, or whose lineal ascendant or descendant, dependent, or spouse had principal residences or places of employment in these counties on that date.

Plans can ignore the reasons that normally apply to hardship distributions, thus allowing the funds to be used, for example, for food and shelter. If a qualified plan requires certain documentation before a distribution is made, the plan can relax this requirement and still be considered qualified. The amount available for a hardship distribution is still limited to the maximum amount available under the IRS Code. In addition, there are no post-distribution contribution restrictions required as there normally are in plans, if the distribution is being made for hurricane relief. Employees still have to pay income taxes on hardship distributions and may have to pay the 10% early penalty tax. Loans, if not repaid, but rather defaulted, become taxable income to the participant.

There is a window of time in which employees can take advantage of this relief. The distributions must be taken from a qualified plan on or after September 4, 2017, but no later than January 31, 2018. Employers need to amend their retirement plans to provide for loans or hardship distributions generally by December 31, 2018.

Why this relief is important does not need debating, but the significant impact it may have on retirement plans and employee retirement accounts remains to be seen. It is challenging for employees to save money and, with an unforeseeable emergency in front of them, employees will turn to where they have most if not all of their savings. Employees may also stop saving for the future indefinitely because of their need for current income to survive now. All of this can’t help but compromise their future retirements.

Should 401(k) sponsors continue offering employer stock?

There are several valuable reasons why companies include employer stock in 401(k) plans. However, increased risk of litigation has caused many employers to reconsider the decision to offer employer stock as an investment option. In her article “Employer stock in a 401(k) plan,” Milliman’s Kara Tedesco outlines initiatives for plan sponsors to consider when deciding to maintain or discontinue their employer stock offering.

A personal touch enhances 401(k) plan

One telecommunications company seeking an upgrade of its 401(k) plan’s design and administration determined that Milliman was able to provide them with the type and quality of services needed. Milliman consultants offered the company a three-pronged solution to address several operational concerns related to its 401(k) plan. The case study entitled “Service is in the eye of the beholder” by Dominick Pizzano highlights the approach.

Here is an excerpt:

(1) Plan design revisions. Milliman’s analysis of their situation revealed that several of the ongoing administrative burdens could be addressed through amending the plan. Suggested revisions included (a) removing the joint and survivor annuity requirements which had been included and continued in the plan even though by law the plan was not a type of plan that required such annuities and neither the firm nor participants had expressed any interest in using these payment options; (b) increasing the 401(k) deferral limit which had never been modified to reflect the higher limit that went into effect with a past law change; and (c) adding a $5,000 mandatory cash-out threshold. Milliman proposed amending the plan to incorporate these revisions.

(2) Implementing a more service-oriented administrative approach. There were several operational areas (e.g., loan applications, withdrawal requests, and qualified domestic relations order determinations) where the previous provider did not assume responsibility. Milliman assured the organization that if they made the switch to Milliman, they would be relieved of such tasks in the future as these services would fall within the scope of Milliman’s responsibility.

(3) The existing 401(k) plan currently offered participants a choice of 34 investment alternatives, many of which were similar in asset composition, expense ratio, and average return so as to be redundant. Analysis of the breakdown by fund indicated that many of these funds were not being used by participants. Accordingly, the current array of funds was creating more confusion than appreciation with participants. Milliman proposed to have its investment consultants analyze the existing funds and replace them with a more concise set of funds that would provide sufficient diversification opportunities for participants by covering each of the investment categories previously provided but doing so with a smaller number of funds carrying lower expense ratios. In conjunction with this smart-sizing of the plan’s investment alternatives, Milliman also proposed to have the plan offer Milliman’s InvestMap as an alternative for those participants who did not want to assume the initial task of designing a unique investment portfolio as well as the ongoing responsibility of monitoring fund allocations. By choosing InvestMap, such participants would have an age-appropriate allocation mix created for them upon their selection with such mix proportionately rebalanced as they approached retirement.

Improving fiduciary practices and duties

In this case study, Milliman’s Katherine Smith discusses a comprehensive review the firm conducted of one organization’s 401(k) fiduciary processes. As a result, Milliman identified three specific areas where the plan administration and governance could improve: fee schedules, expense allocation, and fiduciary plan governance. The changes that were implemented enhanced the participant and plan sponsor experience and fiduciary best practices.

Five ways your retirement plan may change in 2017

dey-elizabethThe start of a new year brings with it reflection on the year that has passed and anticipation for the changes that may be coming. For retirement plans, this often means a look at new federal regulations, new technology, and new industry trends. The annual contribution limit to 401(k) plans is holding steady at $18,000 with employees age 50 and older able to save an additional $6,000. But here are five ways your retirement plan may change in 2017.

1. Focus will start to shift to financial wellness
By now, it’s common knowledge that many Americans aren’t adequately prepared for retirement. But rising costs in healthcare, student loan debt, and other areas make it difficult to plan for retirement expenses when people are struggling to pay for their current expenses. The use of creative tools and incentives may serve as ways to help improve overall financial wellness.

Beyond just offering access to educational programs for employees, covering topics such as how to set and stick to a budget or how to manage and pay down existing debt, employers may offer an additional incentive such as cash or gift cards to entice their employees to participate in financial wellness programs.

2. Financial advice must now be in your best interest
Effective in April and phased in through the remainder of 2017, all financial professionals who provide investment advice to a retirement plan will be considered fiduciaries, and bound by the legal and ethical standards set forth in ERISA. This means that the funds financial professionals recommend must be in the plan’s best interest, instead of funds that would be most profitable for the advisor.

3. You may see a shift in investment options
Gone are the days of dozens of investment options in retirement plans. Instead, plan sponsors are now choosing to streamline their investment lineups to make investing decisions less complex. There’s also a greater emphasis being placed on investment products that offer target date or risk-based options, taking much of the guesswork out of choosing allocations.

The development of robo-advisors for employer-sponsored plans (subscription required) will also help participants with portfolio allocation. These programs use complex algorithms to deliver investment solutions that were previously only available in the retail investment market, but are now making their way to employer-sponsored plans, offering personalized investment advice at lower costs than traditional human advisors.

4. You may be enrolled in your plan even if you don’t take action yourself
Research has shown that when new hires are automatically enrolled in their 401(k) plans, 91% participated, compared with only 42% voluntary participation in plans that don’t offer this feature. Many employers have already taken advantage of this type of plan design, and more are considering adding this feature to their plans. If a plan already implements auto-enroll, adding an annual auto-increase feature may be another way to improve overall retirement savings.

There has also been an increased interest in reenrollment, where employees hired prior to the adoption of the auto-enrollment provision are automatically increased to match the new auto-enrollment level. Any combination of auto-enrollment, auto-increase, or reenrollment can be useful in encouraging retirement savings for participants who may not otherwise contribute.

5. Your plan may be going mobile
Most employer-sponsored retirement plans have some sort of online portal where employees can check balances, view performance, and initiate transactions. However, people are often on the go and may not have access to a laptop or computer—but most usually have access to a smartphone. Development and enhancement of mobile apps will be a focus of many retirement plan providers as the demand for mobile access increases.

There will also be an increased focus on offering a comprehensive overview of retirement readiness. Many retirement plan providers will continue working on offering tools that allow participants to link external accounts for a big-picture view of their overall financial positions.