Tag Archives: Alexandra Moen

Boomerang employees: What employers need to know

In general terms, a boomerang employee is an individual who leaves an organization and later returns. The often-used and well-known example is Michael Jordan and his stint as a baseball player before returning to playing basketball in the NBA. Lately, however, there is a new trend among boomerang employees. Some are returning to their previous employers, but not from another company. Instead, they are actually coming out of retirement. This movement has become popular to the point that companies are implementing formal programs aimed at rehiring retirees. Some see the rehiring as crucial, especially given how Baby Boomers are retiring at an exceedingly faster rate (current estimates show 10,000 file for retirement benefits per day) and the much discussed labor shortage that some industries are currently experiencing.

These boomerang programs are expected to grow, especially among larger companies with the resources to implement this type of program and take on the associated costs. In fact, phased retirement for federal government employees has been rolled out over the last few years. Such a program allows employees considering retirement to instead reduce their hours over time while still receiving retirement benefits as active employees.

For the most part, retirees are rehired to work less than 1,000 hours per year, which reduces some of the associated retirement plan costs. But if an organization has this type of program, or is looking to implement one, it is worth taking the necessary time to review retirement plan documentation as well other benefits policies regarding rehires. Some things to consider when reviewing the retirement plan are:

• Does a company’s plan exclude any types of employees?
• How does the plan define eligibility for employee and employer contributions (or eligibility for benefit accruals in a defined benefit plan)? (Read carefully—it’s very likely rehired employees will be immediately eligible for employee contributions, at a minimum, and that should be properly communicated.)
• Make sure to have resources in place, internally or through the plan’s third-party administrator (TPA), to answer questions and confirm operational compliance.
• Review the plan’s withdrawal options—are they flexible?
• Is a procedure in place to ensure that employees terminating employment in order to start retirement distributions have a bona fide break in service (as opposed to a brief, sham retirement before starting distributions and returning to work)?
• Lastly, consult with your ERISA counsel for clarification if there are any concerns or questions regarding Internal Revenue Service (IRS) rules and other legislation.

When reviewing the health insurance repercussions for the boomerang employee, the most important thing to consider is how many hours this employee will be working during the year. As an employer, if the rehired employee(s) are only scheduled to work 1,000 for the year (20 hours per week), as seems to be the trend, there is no requirement to offer these rehired retirees health insurance. The Patient Protection and Affordable Care Act has strict rules on how rehires and new hires are classified and clearly defines full-time employees as those who work 30 hours per week.

However, the health plan specs should be reviewed carefully for items such as break in service rules, etc. The employer may wish to consider providing boomerang employees designated health insurance and retirement plan call center or HR resources to tackle these sometimes complex rules.

Taking a step back and looking at the big picture, there are many benefits to such a program. It can be great for organizational culture. “Retiree employees” know the ins and outs of a company and can continue to operate in familiar job functions or can step up to a mentor role; often they are happy to be working and create positive morale. There are also the benefits to the employer: not having to extensively train new hires; being able to implement flexible scheduling such as on an on-call, contract, or project basis; the ability to access years of historical data and information through individuals; and even using a potential retiree rehire program for retention purposes.

Overall, this is an interesting development in the human resources realm and serves as some food for thought.

IRS adds flexibility to rollover timing

Moen-AlexOn August 24, 2016, the Internal Revenue Service (IRS) released Rev. Proc. 2016-47, allowing quicker and easier relief of the existing 60-day rollover rule for retirement plans, including 403(b) and governmental 457 plans and IRAs. In the past, under Rev. Proc. 2003-16, an individual had to submit for a private letter ruling requesting a waiver of the 60-day rule and await a response before proceeding with the rollover. The request for waiver via private letter ruling from the IRS is not free; in 2016, an individual may be required to pay up to $10,000 for the waiver. Under Rev. Proc. 2016-47, an individual can proceed with the rollover, at no cost, as long as he or she self-certifies the reason for the delay.

The revenue procedure provides a sample letter that can be supplied to the plan administrator or financial institution, and allows an individual to submit a request for waiver as long as the IRS has not already issued a denial. There are 11 acceptable reasons for waiver of the 60-day rule, including:

• The financial institution made mistakes or did not supply needed information when requested
• A lost check or postal service errors
• An IRS levy
• The check was deposited into an account incorrectly believed to be a retirement plan or IRA
• Personal reasons: family death or illness/disability, natural disaster, incarceration, or foreign country restrictions

If none of the above situations apply, a person can still use the old private letter ruling process to request relief.

As expected, there are timing conditions associated with the self-certification. An individual must complete the rollover contribution “as soon as practicable” after the reasons that caused the delay in the first place are no longer present. The revenue procedure refers to this as the 30-day safe harbor.

What happens if it is discovered during an IRS audit that the waiver is not accepted? The individual would receive additional income and be required to pay the taxes and, potentially, penalties.

This new rule reduces the burden on plan administrators, trustees, and custodians to verify the legality of the rollover. In addition, the ruling simplifies procedures for the individual because the rollover can be processed efficiently, without having to wait for an IRS review of the situation and response letter.

Plan sponsors, you may be wondering if there is any action you need to take, or if this is even relevant to you. The answer is no. This is simply for your reference in case a participant asks whether the 60-day rollover rule has any exceptions. I’ve found that with some of our smaller clients, plan sponsors receive a variety of questions and become more involved in assisting participants with the distribution process. You may get a question about this new Rev. Proc. from a participant and after reading this, hopefully, you are more equipped to assist them.

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.

You heard it before, American workers still aren’t saving

Moen-AlexA recent survey shows that Americans are saving more overall, but less in employer-sponsored retirement plans. So how can sponsors and administrators of defined contribution plans solve this? Easy:

1. Use an auto-enrollment design with a default of no less than 6%.
2. If you provide a match, stretch the match to at least 7% or 8% of pay.
3. Consider adding a nonelective (i.e., profit-sharing) contribution.
4. Reenroll all non-savers every six years at the default rate.

Some experts suggest that automatic plan features are the best way to change behavior. This is most likely true, but a New York University (NYU) study suggests that while auto-enrollment gets people into the plan, it is not ensuring that they build secure retirements. All too often employers select the default rate of 3%, which, according to researchers, reduces long-term retirement savings for those who would have enrolled at a higher rate. As consultants, we see this example frequently—a young employee enters the plan automatically and three years later is still at 3%, even though the plan is matching deferral rates up to 6%. Out of sight and out of mind can be dangerous for young employees. The NYU study states that 80% of retirement plans include an employer match contribution, and of those plans, almost half of employees are not maximizing the match. That means that at least half of workers do get it; at the right deferral rate, there is free money on the table. With this in mind, consider an example to illustrate the savings impact of a new match contribution formula: currently, the match is 50% of the first 6% (or maximum of 3% of pay). Why not match 100% of the first 1%, then 25% of the next 8%? In this scenario, we could argue that half of the employee population would defer 9% of pay to get the 3% match. This would produce a total annual contribution of 12% of pay per year, without the employer matching anymore compensation than it did in the current formula.

Figure 1: Match Formulas

Figure 1

To emphasize the impact of different deferral rates on an employee’s account balance at retirement, using the proposed new match formula, see the chart below:

Figure 2: Potential Savings

Figure 2

A recent Employee Benefits Research Institute Retirement Confidence Survey asked workers what action they would take if they were automatically enrolled into their retirement plans, deferring 6%. Nearly three-quarters, 74%, responded that they would stay at that rate or increase their contribution rates. This survey addressing employee behavior offers strong incentive for a 6% auto-enrollment rate. In my opinion, plan sponsors should incorporate this type of employee behavioral analysis into the plan design process. A current client has maintained participation rates near 90%, with a 6% auto-enrollment rate. And of those deferring, 84% defer at a rate greater than or equal to 6%.

While matching contributions are an important feature, the researchers argue a more beneficial tool for a plan is a general (i.e., nonelective) contribution. And if the employer can afford to, and the plan is designed for the population correctly, the nonelective contribution can provide a more substantial retirement benefit. There are, of course, trade-offs, and with nonelective contributions comes stricter annual testing.

Something else to think about—reenrolling all current employees when the plan adds the auto-enrollment design. I have witnessed firsthand the success of such an endeavor with another Milliman client who did this 18 months ago. The plan went from 63% participation to 97%—and has maintained that level.

As an administrator of defined contribution plans, I know automatic arrangements can be difficult to administer, but the recent relaxation by the Internal Revenue Service (IRS) of correction rules (Revenue Procedure 2015-28), and the evidence provided by the surveys mentioned above, simplify the decision. If employers enroll new employees in plans automatically, they are clearly likely to stay, and the automatic arrangement often becomes the obvious choice. But the rate needs to be high enough to be worthwhile. Plan sponsors must evaluate the goals of their plans. Is the objective to simply have higher participation, satisfy tax incentive rules, and ensure that workers save something toward retirement? Or is it to truly build a serious retirement benefit for employees? In that likely case, additional studies of the employee population and their saving behavior must be incorporated into plan designs.

Putting a stop to retirement plan leakage

Moen-AlexThe Center for Retirement Research at Boston College recently published a study that found in-service withdrawals (partial withdrawals and hardships) and cash-outs were the main reasons for leakage from 401(k) plans and IRAs. Leakage refers to the erosion of assets in retirement accounts—approximately 1.5% of retirement plan assets “leak” out every year. This can potentially lead to a reduction in total retirement assets of 20% to 25% over an employee’s working years. The phenomenon is the result of the gradual change in retirement funding vehicles over time from predominantly defined benefit plans to defined contribution plans and, in recent years, IRAs.

The impact of this 1.5% leakage is easier to grasp when the total dollar amount involved is known. The Investment Company Institute’s quarterly reports show the following numbers. Consider the total assets affected and the significance of that annual number.

U.S. assets in retirement plans

401(k) plans have three main sources of leakage:

In-service withdrawals: In-service encompasses one of two options: a hardship withdrawal or a withdrawal at age 59½. Hardships can be taken based on proof of an immediate financial need, but they are subject to an early 10% tax penalty (if applicable) on top of the required 20% federal tax and they force a participant to cease deferrals for six months. Hardships also require participants to use up their loan resources first. By the time a participant is eligible for a hardship, the account has been severely depleted. In-service withdrawals allow an active employee who has reached the age of 59½ to remove funds from the account without the 10% penalty. These age 59½ withdrawals are on the rise and the leakage arises when the funds are not rolled over. It is estimated that only about 70% are, in fact, rolled into an IRA.

Loans: Approximately 90% of actively working individuals enrolled in a retirement plan have access to some type of loan. While loans get a bad rap, they are not the leading offender in terms of leakage, but there is still some asset loss. If loans are repaid in a timely manner, the withdrawal is not taxed, but the employee no longer has the ability for gains on those assets during the repayment period. And while the participant has an obligation to repay, that does not always happen. When the loan has defaulted, it is deemed a distribution and is then subject to tax withholding.

Cash-outs: Cash-outs are the act of automatically paying out terminated participants below a certain threshold; for balances of $1,000 or less, checks are cut, whereas balances between $1,000 and $5,000 require a rollover to an IRA. And while plan sponsors do have a say in the dollar threshold and the timetable for cash-outs, virtually every 401(k) plan has this rule.

Looking at defined contribution plans only, withdrawal activity has increased slightly over the last three years, while hardships have remained steady. These numbers may seem small, but they do not include IRAs, which are considerably harder to track. And because IRAs lack the same rules as defined contribution plans, estimates suggest the percentages are much higher.

Source: Investment Company Institute
Source: Investment Company Institute

The Federal Reserve’s 2013 Survey of Consumer Finance presented some scary results—workers between the ages of 55 and 64 had average assets of only $111,000. What’s more, assets in IRAs have surpassed assets in defined contribution plans. Looking at the numbers above for third quarter 2013 and 2014, IRAs consistently have 2.5% more in assets than defined contribution plans. IRAs can be risky for long-term retirement funding, if not used correctly, which is due to the lower levels of regulations and the lack of education and promotion to “keep assets in.” A recent Department of Labor report expands on this concern that rolling funds to IRAs puts the worker at the mercy of the investment advisor and asks whether all investment advisors take their fiduciary duties seriously or not. The report discusses what they call “conflicting advice” and estimates the leakage due to this is as high as 12% of an account balance.

There is hope. Some proposals that have been suggested include:

• Raise the age requirement for early withdrawal from 59½ to 62 to match the earliest Social Security retirement age
• Limit balances for in-service withdrawals to only employee contributions
• Tighten hardship rules even more and only allow hardships in case of “unpredictable events,” for both 401(k) plans and IRAs
• Remove cash-outs altogether (this will mostly likely be met with resistance from plan sponsors because small balances can be expensive and burdensome to administer)

Plan sponsors can make many of these adjustments to their individual plans, but these proposals are working to ensure that the goal of preparing workers for retirement stays in sight.

Thrift Savings Plan for all Americans?

Moen-AlexRecently, members of Congress reintroduced the idea of opening the government-employees-only Thrift Savings Plan (TSP) to all Americans not currently covered by an employer-sponsored plan. Right now, that number is estimated at 78 million U.S. workers. According to the Bureau of Labor Statistics, as of early 2013, 68% of all workers had access to a defined benefit (DB) or defined contribution (DC) plan and 54% were enrolled. The vast majority of workers not covered are part-time or seasonal employees. The government recognizes that help is needed, and the TSP proposal is the latest attempt.

In place since 1986, the Thrift Savings Plan (TSP) has provided federal employees and military service members with retirement savings. It is a defined contribution plan, similar to 401(k) plans offered by corporations. A governing board, consisting of six people who are presidentially appointed, administers the plan. A variety of issues should be considered with this proposal, but there are a few important advantages and disadvantages.

Positives:
• The most important aspect of this proposal is that it would provide payroll-based savings to millions of American workers—people who do not now have access to employer-sponsored retirement savings accounts.
• The Thrift Savings Plan is a simple plan with an auto-enrollment feature, six investment choices, and low fees.
• Because it is run by government agencies, taxpayers are technically funding the costs of the plan, so opening it to all Americans is a fair proposal.
• Increasing the TSP population this significantly would have a profound impact on the retirement savings industry that is hard to predict. Both private and government providers may benefit from increased competition.

Challenges:
• Administration of the TSP would require a major upgrade at a minimum, and possibly an entirely new system.
• With TSP membership this massive, government agencies would have a greatly increased, more powerful role in the retirement savings industry, and selection of investment fund options might take on a political element (at least the perception of such). This is the biggest concern that has been voiced.
• Potential compliance issues would be introduced as the TSP is exempt from ERISA and Internal Revenue Service regulations that govern the private sector. Independent review/oversight of the TSP would have to be in place. The TSP is required to adhere to regulations under the Federal Employees’ Retirement System Act (FERSA). These regulations are more lax.
• The conservative investment options offered by the TSP deliver the security and returns associated with long-term Treasuries, which are not protected against inflation.

All employees deserve the availability of a retirement savings plan. The difficulty lies in determining the best option to accomplish that goal. Inviting American workers not covered by an employer-sponsored plan to the TSP may not represent the best solution. The administration-sponsored “myRA” is already taking a step in that direction. This starter retirement account offered by the Department of the Treasury gives workers access to the most conservative of the six TSP funds, the G fund. MyRA will serve as an important first attempt, on a manageable scale, and will provide important input to the comprehensive solution. The time may be right for Congress to undertake a complete review of this area. Hopefully, employers will be included in these discussions.