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Social Security & Retirement, 2034, and the 23% gap

We have all read about some of the funding issues that Social Security will be facing in the not so distant future. No, Social Security isn’t going away and it won’t be bankrupt in 2034. What will occur barring any Congressional action is there will be a funding gap in or around 2034. The reason we are being vague is that year changes a bit depending on the economy, employment, and the money moving into the Social Security Trust.

For those retirees, near retirees, or current workers (just about everybody), the numbers don’t look great. If there isn’t a change, Social Security will be able to pay out approximately 77% of current promised benefits. If you have gone to My Social Security and taken a look at your statement, you will notice a few telling items: 1) On page one it clearly states that Social Security is not intended to be your only source of income in retirement, 2) On page two, it notes that benefits are based on current law and the law governing benefits amounts may change!!!

What this means for 457b, 401K and 403b savers is you need to save a lot more. You not only need to make sure you are on track to replacement your income when coupled with Social Security, you also might want to provide a 23% buffer to the upside. The fix to Social Security could be any combination of things but it likely will mean higher taxes, lower benefits, means testing, increasing the taxeable wage based, or some combination of all of those items. At the end of the day you want to make sure you are saving aggressively, keeping money in your plan, rebalancing assets, and increasing savings over time.

My Employer Cut My Match: Should I Stop Contributing?

For the first time in just over a decade, we are hearing this question come up again as employers are tasked with the difficult decision of cutting costs to shore up corporate finances. As an employee, participants frequently default their savings rate to whatever the company will match. If the match disappears, what is one to do?

For a retirement plan to work, a participant needs to save at a sufficient rate throughout their career. For anyone who has worked at a start-up knows, matching isn’t provided by every employer. Does that mean they shouldn’t save in the first place? On the contrary, the burden of saving for retirement is shifted from the employer/employee solely to the employee. An employee has to evaluate this when they are looking at a job opportunity and factor that into their total compensation.

When I worked for a start-up (a long time ago), there was a 401K but there was no match. I had to look at that in my overall compensation and decided that the opportunity of working for a start up and receiving higher pay offset the lack of a match. I fully participated in the 401K.

If you are working at a company that is trying to stave off lay-offs, the executive decision to forgo matching may very well have maintained your job. We have also experienced over time that companies in this position try to re-initiate the match as soon as the firm gets back to a financially stable place.

So back to the original question, should you quit participating in the plan? Assuming you are confident your job is going to be maintained and you already have emergency cash reserves saved, you should increase your contribution to offset the lost match. This can be a tall order during a time like this and you may not have the extra room in your budget to do this. Assuming the match was cut and your take home pay has stayed level, at a minimum you will want to keep deferring what you were before the match was removed and try to inch up your savings over time to compensate for the smaller amount going into the plan.

You still want to retire at some point and eliminating or reducing your contribution just gets you further away from that goal.

Do Total Compensation Statements Make Sense for Your Employees?

Most employees do not fully understand the costs associated with their employment. While many of these are the cost of doing business, employers that offer more generous benefits packages might want to shine a light on the extent of those benefits. Some payroll systems as well as some third party providers have the ability to provide total compensation statements.

Prior to jumping into distributing these statements, employers should be aware of the potential pitfalls. The old saying that “No good deed goes unpunished” can hold true when it comes to these statements. Employees could look at the statements as just a justification for not handing out raises. Because of this, you might want to time this after raises or merit based increases have been awarded.

Employees may also look at some of the benefits that are listed that have a value applied to them and determine that those are meaningless because they don’t use them. To avoid this employers may want to customize the statements to each individual and just include the “core” compensation items that are universal across all employees and leave a separate section to highlight other potential forms of compensation.

Lastly, you obviously need to make sure the statements is done correctly. Any errors can create painful discussions with employees. On the plus side, for those employers offering a generous retirement or health benefit to employees, it helps visualize the cost to the employer to do so and also why their salary today is actually more than that prospective employer is dangling out there because of those additional forms of “soft” compensation that employees may not readily identify with. In today’s hyper-competitive job market, employers need to make sure that employees are valuing all that is being offered to them.

Can Split Deposits Lower Loan Usage?

One of the more vexing issues that Plan Sponsors have is how to limit the usage of their loan feature. We have been involved with plans that have flat out eliminated their loan feature due to serial loan takers. The employer in this case felt employees were not doing enough to plan for retirement and they didn’t want to continue to support the poor behavior.

If this is too extreme of a position, what about offering split deposits for those serial loan takers? This requires a great deal of education on behalf of the employer to get those employees focused on their long term needs. If they are continually taking loans, they probably haven’t done the necessary budgeting to live within their paycheck. Once this budgeting exercise has occurred, it might help to split their paycheck into two sources. With most employees receiving direct deposits, the employer, with the assistance of the plan advisor, can help determine what the extent of those individual loans have been.

Splitting the paycheck into an “every day expense” bank account as well as a “intermediate term high interest” account would allow that employee to build up a balance over the course of a few years. If they are taking a loan out of the plan every few years, this could eliminate the need to constantly borrow from the plan. This also is more reasonable for them to build up an emergency spending account outside of the plan to plan for that rainy day. While the split account is obviously much easier for the participant to get to, it also doesn’t come with the costs associated with taking a plan loan and isn’t subject to the ebb & flow of the market.

While this solution won’t be a fit for everyone, it is a more simplistic approach that does not require any extra effort for the plan administrator. It also has the potential to eliminate many of those small loans that are continually being distributed from your plan. Lastly, it is much simpler than adding an after-tax contribution source to your plan that while it can be used for emergency needs, it also triggers additional testing for your plan. Sometimes the best solution is just creatively messaging and structuring how someone receives their paycheck.

SECURE Act Tax Credits

Much has been made about the increase in the required minimum distribution age to 72 and the reduction of the Stretch-IRA, but what about plan coverage? The SECURE Act is attempting to increase plan coverage for Americans. Despite having IRA’s, Simple-IRA’s, SEP-IRA’s, 403B’s, 457b’s, 401K’s, etc. available, the number of American covered under a workforce retirement plan has stayed roughly the same. These plans are also one of the few places that Americans do a good job saving for long term retirement needs.

In the SECURE Act, for employers starting a new plan, they can receive tax credits up to $5,000 for the first three years of a plan. There is also a credit for those plan sponsors who start a new plan with automatic enrollment or amend their plan to allow automatic enrollment of up to $500 for the first three years. If start up costs were an issue, this bill provides ample incentive to get a plan going. This bill also provides some additional incentive for employers who were considering automatic enrollment but for a number of reasons have yet to adopt it.

Too Many Former Participants…

Working with small retirement plan sponsors is tricky. The dirty little secret in the industry is that small plan sponsors are probably harder to work with and present more potential pitfalls than their larger plan counterparts. One area we see a lot of plan sponsors struggle with is former participants. What if you only have 80 employees but your plan is creeping towards large plan filer status?

This can create a significant cost to small plan sponsors who then have to perform an annual audit. Those aren’t cheap and in many cases the only reason the plan sponsor is anywhere close to the head count requiring an audit is because of former employees who have left their money behind.

Many plan sponsors will take the necessary steps to move assets to auto-IRA’s for those under 5K in assets or cash out those participants under 1K. But what about those who have 20K, 50K or 100K and haven’t been at your firm for a long time? If the plan sponsor is paying the recording, administration and/or advisory fees for participants, there is a way to offload those expenses onto to those former participants. For the better part of a decade, Revenue Ruling 2004-10 states that plan sponsors can have fees swept from plan assets of former employees.

If the plan sponsor’s vendor has the capability to do this (most do), you can combine this with a communication campaign to those former participants to provide them the push they need to take action. In many cases that former employee was probably waiting until they were eligible for their new employer plan and simply forgot. In other cases participants may have been overwhelmed by the IRA choices available to them. By taking this action and communicating it to those former participants we have seen plan sponsors able to reduce former accounts significantly and in many cases maintain small plan filer status. #401 #403b #QPRetirement #fiduciary

My plan is too small to be sued, right?

Plan sponsors are always wondering why we go through the exhaustive process of developing a prudent process for reviewing their plan, establishing an investment policy statement, monitoring those investments on an ongoing basis, and occasionally making adjustments as new options become available. They may even think their benefits broker or personal investment advisory person can handle that along with their other responsibilities. What litigation teaches us is that isn’t always the case.

There is a reason why retirement plan advisory firms specialize in one distinct niche within the “investment advisory” world. We also painstakingly benchmark their plans to determine what services we are getting and what we are paying for them. Are those services meaningful to our participants? Are we benefiting from some additional bells and whistles? The Cornerstone Pediatric Profit Sharing plan highlights the reason why you want to have a prudent process in place. This 2.8 million dollar plan was sued by a participant. Yes, the target was the vendor and the attempt was to get this as a class action.

After all, there has to be enough of a reward for the litigator to pursue this sort of action. The lesson however is a simple one. The monitoring of the process you have put in place is critical. As best practices evolve in the advisory world, it is key to hire a firm that will keep you at the forefront of this ever changing critical employee benefit. In 1980 we all agreed you had to have at least four funds. In 1990 we agreed you had to have multiple best in class investment managers. In the 2000’s we figured out that employees could use some help with allocations and thus target date funds were born. In the 2010’s we determined that not all target date funds are made equal and that revenue sharing and working with brokers might not be a good idea. The 2020’s will present their own challenges and working with a specialist retirement plan advisor will keep you at the top of the scrap heap of once great ideas. #401k #403b #QPRetirement #fiduciary

Brotherston V. Putnam Investments…Practical lessons for committees

This case was decided by the 1st US Circuit Court of Appeals in 2018 in favor of the plaintiffs/participants. Yes the case involved proprietary investments which is an issue for very few firms (also, check to make sure your advisor isn’t proposing proprietary funds or collective investment trusts of his/her firm). What was interesting in this decision is the court said that a fiduciary can “easily insulate itself” from liability by “selecting well-established, low-fee and diversified market index funds” or for those selecting active funds it states, “it too will be immune as long as it follows a prudent selection and monitoring process.”

Now if you have invested in an index fund recently, you know that like Baskin-Robbins, there are at least 33 flavors. Market weighted, cap-weighted, rules based…. You also know there are certain indices that probably shouldn’t be made available as part of a core fund line-up. This case was petitioned to the Supreme Court to review the 1st circuits’ decision but was declined so the decision remains.

For retirement plan committees with massive laundry lists of funds, this can obviously create an unnecessary burden for you on an ongoing basis. It is one thing to evaluate & monitor fifteen funds but what if you have 50. More importantly, why do you have 50? It is important to not only follow common best practices in the industry but it is also key to read the tea leaves of what the courts opinions are telling you. #401k #403b #fiduciary #QPRetirement

Pitfalls of Passive Enrollment

With resources stretched thin, many plan sponsors utilize a passive enrollment. This is essentially a process whereby employees essentially rubber stamp the benefits they already receive. It simplifies the process for both the employee and employer but it also can serve to cement existing enrollment which may not be beneficial for the employee.

We frequently see plans that have adopted auto-enrollment but have only instituted this for new hires. This can leave decades of employees who have been with you the longest out of the plan (or not part of the plans escalation clause). While a plan that goes back and re-enrolls the entire workforce will have the benefit of bringing everyone into the plan except those who opt out, for some employees the auto-enroll rate may be sub-optimal.

This is where a coordinated active enrollment can compliment a plan that has auto features available. It allows the retirement plan advisor to engage employees and educate them on the other advisory tools available as well as capture those employees who don’t make the meeting or are otherwise pre-occupied. This also allows the H.R team to shine while they get to address the issues they are hearing about the most from employees. #401k #403b #QPRetirement

Uncashed Checks

For many small plan sponsors, dealing with former employees who maintain account balances can be a major issue. These folks are naturely not as engaged in the day to day communications that extend to current employees. Many either don’t read mail or email from their prior employer or they have moved and those addresses no longer apply.

When automatic distributions occur for those former employees under 5K (auto rollover) or under 1K (cashed out), sometimes the checks go uncashed. SPARK Institute conducted a member survey this past year that covered ten providers who distributed four million checks in 2017. Of those, 185,500 went uncashed with a value of $47 million dollars.

The IRS has chimed in with guidance in revenue ruling 2019-19:

This addresses how the taxation issues are to be handled but what about a small plan sponsor that is slowly approaching large plan filer status? These types of issues can multiply for growing businesses and a savvy retirement plan advisor can assist with creative solutions. #401k #403b #QPRetirement