Tag Archives: 401(k)

Bitcoin considerations for retirement plan sponsors

Bitcoin is a digital “currency” or cryptocurrency not tied to a sovereign or bank. It is mainly a tool for transactions (purchase of goods, payment of services), and the number of bitcoins is governed by the blockchain technology that underlies its use.

Bitcoin is most popular with people and institutions on the leading edge of technology, and a large number of investors, rather than the everyday consumer. Very few businesses currently accept bitcoin or other cryptocurrencies as payment, but cryptocurrencies are being used by a small number of companies and may be used more often in the coming years.

In this article, Milliman’s Charles Hodge discusses bitcoin and whether it is an appropriate investment vehicle for retirement plan sponsors.

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.