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.
From a regulatory perspective, 2015 has been a good year for defined contribution (DC) retirement plans. The Employee Benefit Research Institute (EBRI) 2015 Retirement Confidence Survey reported that 22% of workers are now very confident about their retirement savings, up 4% from 2014 and 9% from 2013 survey results. Despite the rising confidence, only 67% percent of workers have reported they or their spouses have saved for retirement, which is statistically equivalent to the findings from 2014.
As we roll into 2016, we’ll begin to see the effects of most of 2015’s legislative updates. We hope to see a continued rise in retirement confidence among American workers. Here are the regulatory updates from 2015 that will affect defined contribution plans:
• Announcement 2015-19 (January): Changed the determination letter program for qualified plans. Effective January 1, 2017, the regular five-year determination letter cycle for individually designed plans will be terminated. Determination letters will only be required upon initial plan qualification and plan termination. Effective July 21, 2015, off-cycle determination letter applications will no longer be accepted.
• Form 5500 SUP (effective January 2015): Offers a paper-only form to supplement the Form 5500 for 2015 and later plan years. Only plans that are exempt from mandatory Internal Revenue Service (IRS) electronic filing may use this form.
• Rev Proc 2015-28 (April): Updated the corrections procedures under the Employee Plans Compliance Resolution System (EPCRS) to provide some relief for missed deferral penalties.
• Rev Proc 2015-32 (June): Granted late filer penalty relief for Form 5500-EZ filers. The new payment per submission is $500 for each delinquent return for each plan up to a maximum penalty of $1,500 per plan.
• H.R. 3236, Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 aka “The Highway Funding Bill” (July): Extended the Form 5500 deadline for taxable years beginning after December 31, 2015. For calendar-year plans, the deadline extends from October 15 to November 15 of the following year.
Employers are constantly seeking new ways to get employees enrolled in their retirement plans. This Plan Adviser article quotes Milliman’s Gerald Erickson and Jinnie Olson discussing how automatic plan designs and targeted communication strategies can affect the enrollment of participants especially Millennials.
Here is an excerpt:
When it comes to automatic plan design, says Gerald Erickson, a principal at Milliman Inc. in Minneapolis, the adviser community obviously supports these features. Still, it is important to acknowledge that while popular opinion claims auto plans are the next logical step in improving participant outcomes, “from a plan sponsor and an administrator/recordkeeper perspective, automatic plans are not easy to administrate.”
There’s a lot that goes on behind the scenes, he says, and that may include some mistakes. “I think it’s important for people to understand that it’s not as easy as just getting people to automatically go in the plan and think that’s the end of it. It does require a lot of work from the plan sponsor side, and it does require a lot of work from the recordkeeping/administrator side.”
Plan advisers should be wary of potential complications when designing their automatic features. Most retirement plan advisers are “looking at what makes the biggest impact in getting people in the plan,” Erickson says, which for Millennials may lead them to look at Roth options. “If you add a Roth feature to the plan,” he points out, Millennials that are in a lower tax bracket now can essentially “marginalize their tax hit by taking advantage of the tax-free distribution on the back end.”
Speaking for Millennials, Olson says, “We’re really the first generation that’s going to have to fund our own retirement, rather than relying on the typical defined benefit [DB] plan that’s losing popularity, and it can be really intimidating for people to hang onto enrollment packets for a year while you try to meet the eligibility requirements.”
…Advisers can help make an overwhelming amount of information more accessible for all participants, Olson says. “You want to be able to give that information to everybody but in a way that everyone has the opportunity to get through it and understand what it is,” she says. “Rather than a 15-page enrollment packet, maybe you pare it down to two pages, summarizing everything, but then give them the opportunity to look into it more later.”
The 2015 Retirement Confidence Survey, published by the Employee Benefit Research Institute, continues to highlight the rise of retirement confidence in American workers. An increase in retirement plan participation (14% in 2013 to 28% in 2015 for those with a retirement plan) seems to closely correlate with the rise in the percentage of workers who are confident about having enough money in retirement (13% in 2013 to 22% in 2015).
The survey findings seem to indicate that more American workers are taking retirement planning into account and they are feeling very confident about having enough money in retirement, both of which may be related to the increase in availability and accessibility of online retirement calculators and a growing confidence in the overall economy. Yet at the same time, the percentage of American workers who report having saved for retirement has stayed fairly consistent at 63%, indicating that more may need to be done in order to assist workers in saving. Here are a few standout figures from the 2015 survey results:
• 80% of current workers believe personal savings will play a large role in their retirement incomes
• 71% of employed workers report their employers offer an employer-sponsored retirement savings plan
• 12% of those without a retirement plan reported feeling very confident
• 50% of those asked what they would do if they were automatically enrolled at 3% said they would raise their contribution rate; only 2% said they would stop it altogether
It seems that, as the economy strengthens, many American workers are comfortable making retirement savings a priority, so what better time to encourage them to make the most of it?
As plan sponsors, what can be done to help keep retirement confidence on the rise for years to come? Here are some ideas.
• If you don’t offer an employer-sponsored plan, consider offering one. Behavioral finance has found that inertia makes humans their own worst enemies when it comes to retirement savings, making it all that more difficult for the 29% of employed workers without an employer-sponsored retirement plan to save for their retirement. Open the door for them to begin saving today!
• If you already offer an employer-sponsored plan, think about offering additional employer-sponsored plans. Employee stock ownership plans (ESOPs), nonqualified retirement plans, cash balance plans—there are a variety of options available that could be used to supplement your current 401(k) plan.
• Or continue to drive participation by considering plan design changes that will promote additional plan participation. Speak with your consultant about the best options for your company.
• Educate participants. Make sure your employees have sufficient information and tools to assist in their retirement planning.
What changes will you make to help your employees’ retirement confidence increase?
For many, a new year usually means a fresh start. With that thought in mind, Milliman’s Jinnie Olson provides 401(k) plan sponsors 10 ideas that can help them administer their plans more effectively in 2015. Below are her 10 ideas.
1. Create administrative procedures and internal controls—and follow them.
2. Make sure changes to your operating procedures are well documented.
3. Audit your data.
4. Transmit contributions in a timely manner.
5. Establish a retirement committee.
6. Understand plan fees.
7. Audit your service providers.
8. Conduct an annual plan review.
9. Establish success measures.
10. Establish a strategy for the upcoming year.
Read Jinnie’s article “Top 10 New Year’s resolutions for plan sponsors of retirement plans” for more perspective.
Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.
20. Mike Williams and Stephanie Noonan’s blog, “Four things employers should know when evaluating private health exchanges,” can help employers determine whether a PHE makes sense for them.
19. Kevin Skow discusses savings tools that can help employees prepare for retirement in his blog “Retirement readiness: How long will you live in retirement? Want to bet on it?”
18. The Benefits Alert entitled “Revised mortality assumptions issued for pension plans,” published by Milliman’s Employee Benefit Research Group, provides pension plan sponsors actuarial perspective on the Society of Actuaries’ revised mortality tables.
17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.
16. Milliman’s infographic “The boomerang generation’s retirement planning” features 12 tips Millennials should consider when developing their retirement strategy.
15. “Young uninsureds ask, ‘Do I feel lucky?’” examines the dilemma young consumers face when deciding to purchase insurance on the health exchange or go uninsured.
14. Last year’s #1 blog, “Retiring early under ACA: An unexpected outcome for employers?,” is still going strong. The blog authored by Jeff Bradley discusses the impact that the Patient Protection and Affordable Care Act could have on early retirees.
13. Genny Sedgwick’s “Fee leveling in DC plans: Disclosure is just the beginning” blog also made our list for the second consecutive year. Genny explains how different fee assessment methodologies, when used with a strategy to normalize revenue sharing among participant accounts, can significantly modify the impact of plan fees in participant accounts.
12. Doug Conkel discusses how the Supreme Court’s decision to rule on Tibble vs. Edison may impact defined contribution plans in his blog “Tibble vs. Edison: What will it mean for plan sponsors and fiduciaries?”
11. In her blog “Retirement plan leakage and retirement readiness,” Kara Tedesco discusses some problems created by the outflow of retirement savings. She also provides perspective on how employers can help employees keep money in their plans.