Eric Lazzari

Utilizing ESG in your Retirement Plan

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Recently the EBSA division of the Department of Labor (DOL) released a proposal that was largely viewed as discouraging the use of Environmental, Social or Governance (ESG, or Socially Responsible Investing) factors as due diligence in ERISA based defined contribution retirement plans.

In the DOL’s proposal Secretary of Labor Eugene Scalia said “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan. Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

How did we get here?

ESG investing has been a hot topic of late and more plan fiduciaries that we speak with are considering utilizing ESG considerations in their due diligence process.  We feel that there is a place for ESG but selecting funds based on ESG factors must not be taken lightly.  In recent years there have been several interpretive bulletins and one Field Assistance Bulletin (FAB 2018-01) outlining the DOL’s guidance around selecting and monitoring plan investments as they relate to ESG factors: 

FAB 2018-01 consolidated past guidance that said that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals. 

  • IB 2015-01[1]
    • Fiduciaries can not sacrifice investment return or take additional risk for collateral Social Policy Goals
    • Fiduciaries can use ESG as a tie-breaker for investment choice.
    • Adding an ESG alternative to the lineup as an additional asset class is acceptable if it doesn’t forgo adding other non-ESG themed investment options to the platform.
    • Nothing in the QDIA regulation suggests that fiduciaries should choose QDIAs based on collateral public policy goals.
      • For example, the selection of a ESG-themed target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with commensurate degrees of risk, or if the fund would be riskier than non-ESG alternative available target date funds with commensurate rates of return.
    • IB 2016-01[2]
      • Investment Policy Statements are permitted but not required to include policies concerning the use of ESG factors to evaluate investments.
      • If an IPS contains language for evaluating funds based on ESG factors, there is nothing stating that fiduciaries must always adhere to them.
      • Plan fiduciaries should not incur substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment managers.

DOL new proposed rules

The new DOL proposal goes further to add five core new additions to the regulations[3]:

  • New regulatory text to codify the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
  • An express regulatory provision stating that compliance with the exclusive-purpose (i.e., loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
  • A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA.
  • The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal adds new regulatory text on required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among truly economically “indistinguishable” investments.
  • A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal reiterates the Department’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for selecting investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name.

Exclusive Purpose Rule

It is important to always remember that ERISA requires that fiduciaries operate the plan for the exclusive purpose of providing benefits to participants and paying reasonable plan expenses. If a plan committee is going to use ESG as a criteria for it’s selection and monitoring of funds it is important to keep a few rules in mind:

  • Your process must always start with a prudent review of performance, risk and cost factors to select suitable investment options.
  • ESG factors that are pecuniary in nature can be taken into account to the extent that they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. ESG factors can not be weighted more heavily than non-ESG factors. 
  • ESG may be used as a tie-breaker in the event that two investments are “economically indistinguishable”.
    • Keep in mind that the proposed regulation requires new investment analysis and documentation requirements in the rare instance when fiduciaries are choosing among truly economically indistinguishable investments.
  • ESG criteria should not be a consideration in the selection of a QDIA investment.

Where do we go from here?

The new rule proposed by the EBSA is just that, a proposed rule.  There is still a long way to go before it becomes a regulation and these issues tend to be political and can change under different administrations. However, a solid foundation of procedural prudence and keeping the focus on participants’ successful retirement outcomes can be achieved by thoughtful integration of ESG factors into your investment selection process.  Remember to document your decisions and always ensure that first and foremost that the investment selection that you are making does not sacrifice investment return, increase costs or assume additional risk.  

Have questions about your process relating to ESG in your retirement plan?  Email Elazzari@401kimpact.com for an online consultation.

[1] Source: DOL, IB 2015-01,  accessed July 9, 2020,
https://www.federalregister.gov/documents/2015/10/26/2015-27146/interpretive-bulletin-relating-to-the-fiduciary-standard-under-erisa-in-considering-economically,

[2] Source: DOL, IB 2016-01, accessed July 9, 2020.
https://www.dol.gov/sites/dolgov/files/legacy-files/ebsa/2016-31515.pdf

[3] Source: DOL, “U.S. Department of Labor Proposes New Investment Duties Rule,” accessed July 9, 2020,

https://www.dol.gov/newsroom/releases/ebsa/ebsa20200623

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. An Environmental, Social and Governance (ESG) fund’s policy could cause it to perform differently compared to funds that do not have such a policy

Motivating Savings with Financial Wellness and Plan Design

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Resolution season is upon us. January through March are the peak motivation months.  That special time of the year when people are eager to make positive strides toward physical, financial, professional, or personal goals.  On average, 42% of Americans make money-related resolutions.  However, in less than 6 months, half of the once dedicated forget about their goals.[1] But, as we all know, it takes longer than 6 months to reach a meaningful savings goal.

So, how can you, as a plan sponsor, use the resolution momentum to inspire your employees to save for retirement? This article we will discuss holistic ways to promote financial wellness among your employees as well as plan design tips aimed at increasing participation and savings rates.

Employee Savings Goals

We’ve all heard the saying, “if you don’t know where you’re going, any road will get you there.” However, without a financial goal, many are left unprepared and money has a way of slipping away when there is no clear savings path.

As a retirement plan advisor, my job would be so much easier if every one of your employees were focused on saving for retirement; but the reality is, if they are financially stressed, retirement is the last thing on their minds. Depending on the age and financial situation of your workforce, top concerns may range from meeting monthly expenses, to paying off debt or saving for college, to caring for aging parents. It’s important to understand that saving is a journey and even though each of your employees may be in a different spot, however, the act of saving needs to be constant.

TIP: Encourage your employees to maintain an active list of financial goals. This will help them set a savings path and may help you to determine a more focused financial wellness program or specific education topics.

Savings Buckets

The term savings bucket is not new to you as a plan sponsor, as you may have regular conversations with your recordkeeper about them. However, it may be a brand-new concept for your employees. The three-bucket principal is a way of simplifying the art of saving. First you fill bucket #1 and once it is full, savings begin pouring into bucket #2, then it is on to the final bucket. Each bucket holds savings for a specific goal: Bucket #1 is reserved for Emergency Funds; Bucket #2: The Middle Bucket; Bucket #3: Retirement Bucket.

Plan Goals

Beyond the holistic efforts of financial wellness that address the financial hurdles your employees face, there are steps you can take from a plan level that can motivate positive savings habits. Automatic features such as auto-enrollment and auto-escalation are two plan design features that can help you pursue goals of increasing participation and deferral rates.

Auto-enrollment is an excellent plan design feature to help get new hires saving from the get-go. In fact, Vanguard research shows that plans with auto-enrollment boast participation rates reaching 90% whereas plans with voluntary enrollment fall short at 63% participation.[2] You may also consider adding features that enroll #_ftn1#_ftnref2(or backsweep) workers who may not have been previously enrolled in your 401(k) plan.

Participating in the plan is great, but you want your employees to be saving at the highest possible rate. One way to help is by implementing an auto-escalation feature. Consider enrolling (or re-enrolling) employees into the plan at a modest 5% savings rate, then increase the deferral by a set percentage each year until a more meaningful rate is reached.  Optional formulas:

Deferral GOAL Starting Deferral Annual Increase Years to Accomplish
10% 5% 1% 5 years
10% 5% 2% 2.5 years
15% 5% 2% 5 years

Always Moving Forward

Creating a culture for your employees to save begins with a dialog; we are happy to help with that conversation. At Retirement Impact, we feel that employee education and empowerment starts with the plan sponsor. Thus, we aim to provide resources and tools that help you help your employees move toward their savings goals.

[1] Statistic Brain. “New Year’s Resolution Statistics.” Jan. 2017.

[2] Vanguard. “How America Saves.” June 2017.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

Why Benchmark your 401k

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What is 401(k) benchmarking and why should you do it?

Simply stated, 401k benchmarking is the process of reviewing and evaluating your company retirement plan. It involves taking a look at what you are offering your employees today and deciding if it’s appropriate or needs some updating. There are four main areas to focus on when assessing your retirement plan: 

  1. Plan Design
  2. Service Providers
  3. Funds
  4. Fees

Each aspect of your plan requires a slightly different set of questions and documented responses. To go into detail about each section, we will break this into a two-part series, beginning with Plan Design and Service Providers; but don’t worry, we will discuss Funds and Fees in a separate article. Below we are going to share some best practice questions to help you get started on your benchmarking analysis.

Plan design

When you think about it, plan design is your plan’s framework; it is like the chassis of the vehicle.  Do you think all car frames are the same? Probably not. They vary depending on the type of the vehicle (pickup truck, SUV, cargo van, 18-wheeler, or sports car). The same is true for your retirement plan, the frame (or plan design) must be able to support your end goal. When it comes to 401(k) plan design, some important considerations include:

  • Who is eligible to join the plan?
    • Age?
    • Length of employment?
    • Are employees automatically enrolled?
  • What type of accounts can employees use for savings?
    • Pre-tax
    • Roth
  • Is there a company contribution to employees?
    • Which employees?
    • How is the company sharing the money?
      • Required?
      • Not required?
      • Encouraged, based on employee savings?
    • If an employee leaves, what happens to their account?
      • What is the vesting schedule?
      • If their account is under a $1,000, does the employee receive an automatic distribution?
      • If their account is between $1 – 5k, is it automatically rolled into an IRA?
      • If the account is over $5k, what procedures are in place to keep track of the former employee?
    • What about the required Form 5500 tests?
      • Did we pass?
        • Great! But, could we be more efficient?
      • Did we fail?
        • Next time, how can we avoid corrective distributions?
      • How can use the 401(k) plan be used to reward, retain, and recruit top employee talent?

Once the plan design is aligned to meet the needs of the company and provide a competitive offering to employees, the chassis is set.  But don’t worry, no matter what your plan design framework is like today, it can always be updated – it just may take some professional retooling.

Service providers

Staying with the car analogy, your recordkeeper is like the make or name brand of the car.  Is it a Honda, BMW, Lexus, Toyota, Ford, Audi, Chevy, Porsche, or another vehicle brand?  We are saying it’s the brand because most of the time when an employer is asked, “where is your plan?” they respond with the name of the recordkeeper.  For example, “where is your plan?” “It’s at John Hancock.”  “It’s at Voya.”  “It’s at Fidelity” just to name a few recordkeeper examples.

Just as car manufacturers produce different models of vehicles, the same is true of recordkeepers.  Just because two employers have two retirement plans with John Hancock does not mean that they are the same.  Instead, they could have different platforms, investments, costs, service models, advisors, plan design and more.  The same recordkeeper name does not mean the same plan.  Which is why, it is important for employers to ask questions and find out more information about what is available.

Questions to ask:

  • What products and platforms do you offer?
  • Are there price breaks or concessions based on our plan size?
  • What services are we paying for? Could you provide a list?
  • Have you made any technological enhancements to your service?
    • Uploading contribution files
    • Seamless payroll integration
    • Online account access
    • Cybersecurity, encryption, and fraud prevention
  • What other interesting advancements has your firm made that we should be aware of?

This is not a complete list of questions to ask your recordkeeper; however, it is a start.  The important thing to remember is that if you don’t like the responses – just like shopping for a new car – you can always walk down to the next lot and see what else is available.

Overall, the goal of an employer-sponsored retirement vehicle is to get your employees into a suitable car with appropriate features that give them the gas and ability to drive towards a successful retirement destination.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

Would You Work for Free?

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Would You Work for Free?

Recently, I was on a call with a new prospect, a CPA, discussing his 401k plan.  During our call, we got to the subject of the fees he is currently paying for his 401k plan.

After some back and forth, Mr. CPA told me that he was not paying anything for his 401k plan. When I mentioned, that he may not have a direct bill but the fees are lumped in with the investments, which is typical in older plans, he got angry and ended the call saying: “We’ve been down this road before and we pay NOTHING for our 401k plan.”

This call got me flustered, and I was genuinely upset after hanging up, or rather, getting hung up on!

Given how much attention the 401k industry has paid to fees since Fee Disclosure was introduced in 2012, I thought that we had moved past fees.  I thought employers had at least been given enough information to know that they are paying someone something for their 401k plan.

If a CPA could fall for this sales pitch, Houston, we still have a problem.

So, this begs the question, would you work for free?

I think the obvious answer to that is, No! No one would work for free, nor should they. There are a lot of moving parts to a 401k and the thought that a company would take custody of your money, keep track of your individual employee’s accounts, create a website and mail statements for free doesn’t make sense.

The point is, there are at least 3 different entities that are being paid for from your 401k Plan. They are: The Recordkeeper, The Investment Management Company, and The Advisor.  In some arrangements you will also have a Third-Party Administrator who can get paid from the plan.

I can assure you that none of these parties work for free.  If you don’t receive a bill directly from any of these parties, that means that they are receiving fee’s directly from your plan assets.  This is a process called revenue sharing, and it is the way that plans historically paid for their 401k’s.

A Primer on Revenue Sharing

 Today, most plans are paid for by the revenue from funds in an ERISA bucket or Plan Expense Account or by moving to a more transparent process we call “zero-revenue” which strips out the fee payments from the investments and bills either the company or participants directly for plan related services.  Either way, fees that come from plan assets, need to be accounted for.

All fees aren't bad

Fee’s aren’t inherently bad, but high fees are. Sometimes, you do get what you pay for and there are no rules that say you need to pay the lowest fees possible, but as a sponsor of a 401k or 403b plan, it is your fiduciary duty to understand who is receiving fees from your plan and to ensure that those fees are reasonable for the services that they are providing.

All of these fees can be found on your Fee Disclosure statement that you can get from your provider.  I encourage you to take some time to look at those statements and work with someone who can make sense of the fees and whether you are paying a reasonable amount for services. 

If it sounds too good to be true it may be

The phrase “Too good to be true” should come to mind anytime someone says that they are giving you anything for free.  As a rule of thumb, if someone says that your 401k plan is “Free” they probably don’t want you to take a closer look. 

What does it really take to retire?

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What does it really take to retire?

As a plan sponsor, your employees rely heavily on your guidance; after all, you manage the plan that may offer their best shot at a successful retirement. When the 401(k) plan was introduced in the mid-80s, it was not intended as a standalone solution. However, as time evolved, defined contribution (DC) plans became the primary savings vehicle for Americans, while originally, they were intended to be a part of a three-pillar system including defined benefit (DB) and social security. Saving for retirement now rests predominately on your employees and they look to you for guidance.

Are you helping position them for success?

It may not come as a surprise that 81% of Americans say they don’t know how much money they’ll need in retirement.[1]  But let’s be honest, most people’s minds begin to drift when you start talking large numbers and percentages. So, let’s break it down in a way that may actually make an impact on your employees!

Average American income = $55,775
Annual Monthly Weekly
$55,775 $4,647 $1,161

source: Department of Numbers. “US Household Income.$55,775” Sept 2016.

Average Retirement account balance = $95,776 ÷ Average years in retirement (18)
Annual Monthly Weekly
$5,320 $443 $110

Source: Morrissey, Monique. “The State of American Retirement.” March 2016.

How much do they really need to retire?

The short answer: many industry experts suggest putting away 10 percent annually or more for a meaningful retirement, but the average deferral rate is only 4%.[1] So where is the disconnect? Often plan sponsors fear push back from employees when it comes to making plan adjustments that may decrease their weekly paychecks. However, surveys reveal that participants look to their employers for nudges to save.[2]

3 tips to encourage more savings

A helpful way to encourage more savings without adding a large cost to the plan is through effective plan design. In a previous article, we discussed six plan design basics to help you build a custom plan. In this article, we challenge you to explore a few advanced plan design features.  You may consider stretching the company match, implementing auto-escalation, or offering a cash balance plan. 

Stretch the match

It’s been long accepted that you should “contribute to the employer match.” As an employer, why not act on this popular belief? If your plan utilizes a typical match formula of dollar for dollar up to 3% of pay, you may consider a stretch option. For example, you could match fifty cents on the dollar up to 6% of pay. This simple scenario would keep employer contributions at 3% of pay; and with the stretched formula, employees would be incentivized to save more.

Auto-escalation

If you were to announce to your employees that their next paycheck would reflect a 10% deferral into their 401k, you may have a small revolt on your hands. And rightly so. 76% of Americans live paycheck to paycheck (including 30% of people who earn more than $100,000 a year)[3]

You may consider a more subtle approach that would enroll your employees at 4% and automatically increase each year by 1% until they reach that a target rate of 10%. Your employees may even thank you. Based on a survey by American Century, seven in ten participants showed interest in a regular, incremental automatic deferral increase.[4]

Cash Balance plan

A cash balance plan may induce a bit of nostalgia from the yesteryears of the traditional pension plan, but with a 401(k)-style twist: they combine the higher benefit limits of a DB plan with some of the flexibility and portability of a 401(k) or profit sharing plan. This unique plan design option may help business owners with a significant tax deduction for employee contributions, plus generous tax-deferred retirement contributions for themselves.

Inspiring Savings

Inspiring your employees to save may seem daunting at times, especially if you fear push back on implementing new strategies. But, a significant point of offering a retirement plan is to help your employees get closer to their retirement goals. Exploring options such as those in this article may help you reach organizational goals such as recruiting and retaining valuable employees while helping them to pursue their goal of a successful retirement.

For information or help in implementing these plan design features, feel free to contact us to setup a conversation.

[1] Age Wave/Merrill Lynch, “Finances in Retirement: New Challenges, New Solutions,” 2017

[2] American Century Investments. “Fourth Annual Plan Participant Study Results.” Aug. 2016

[3] Johnson, Angela. “76% of Americans are living paycheck-to-paycheck.” CNN Money. June 2013.

[4] American Century Investments. “Fourth Annual Plan Participant Study Results.” Aug. 2016.

Customizing Plan Design

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No "One Size Fits All" Plan

Retirement plans come in all shapes and sizes: DC Plans, DB Plans, Non-Qual, 401(k), 403(b), 401(a), 457, SEP IRA, Simple IRA, Roth IRA, Cash Balance, HSA… and any other number letter combinations that you can think of. The simple truth is that there is no one-size-fits-all version of a retirement plan; and as a plan sponsor, you need to select a benefit plan that is appropriate for your company and its participants. It is important to understand the basics of plan design, work with a knowledgeable advisor, and evaluate your plan based upon your specific needs.

While designing your company’s 401k plan, six major elements must be defined: eligibility, compensation, contributions, vesting, distributions and loans.

Eligibility | Who can enter the plan and when?

Pretty simple and first on the list is addressing which employees are able to enter the plan and when they are able to do so. Depending on the demographic and culture of your workforce, you may elect certain eligibility requirements such as age, tenure, or full-time employment status. Plan sponsors may choose to grant immediate eligibility or require a waiting period before new employees are allowed to participate in the plan.

Tip: Auto-Enrollment

Compensation | What part of the paycheck?

Next, you must decide what types of compensation will be used in the plan and how they are taxed. Certain types of compensation may be excluded for plan purposes without issue; these may include: compensation earned prior to plan entry and fringe benefits, even bonus and overtime (if special annual testing is passed)[1].

 

Contributions | Who is putting money into the plan and how?

Your plan may permit both employee and employer contributions. Any employer contributions must be allocated to participant accounts pursuant to a formula in the plan document.

Contributions can be broken into 4 major groups: elective deferrals, employer matching, safe harbor and non-elective (profit sharing) contributions.  Each of these groups has its own unique formulas and feature options that can be applied to help maximize savings. It is important to remember that all money entering the plan is subject to annual limits.[2]

Vesting | When do employer contributions become employee assets?

Participants are only entitled to the vested portion of their account balance upon exiting the plan; the remaining unvested portion must be forfeited to the plan. Sponsors can choose to reallocate these forfeitures to pay plan expenses or reduce employer contributions (e.g., the funds may be used as matching contributions for other employees).

Employee contributions and most safe harbor contributions must always be 100% immediately vested. However, plan sponsors may elect a vesting schedule appropriate to specific company needs for matching and profit sharing contributions.

Broadly speaking, there are two kinds of vesting schedules: graded vesting and cliff vesting. Regardless of schedule, a participant must become 100% vested when they reach “normal retirement age.”

Distributions | When can money be withdrawn?

Distribution is a fancy word the IRS and the financial industry use to discuss withdrawing money from the plan.  Generally, employees are eligible to take penalty-free distributions at age 59½, but it is not until age 70½ that the IRS requires employees to take distributions.

Often, plans will only permit a lump sum distribution when a participant separates from service and is entitled to a distribution. Under the lump sum option, a participant must take their entire vested account balance in a single distribution. Other distribution forms available include installment payments and partial payments.

You can permit a participant to take a distribution while still employed. These are called “in-service” distributions. These distributions must be available upon the attainment of a certain age (59 ½ or greater) or a “hardship” event. Eligible hardship events are defined by law.

A plan may permit the involuntary cash-out of small account balances. Balances under $1,000 may be distributed in cash to the participant. Balances under $5,000 may be involuntarily rolled into an IRA for the benefit of the participant.

Loans | Can employees borrow from their savings?

Retirement loans are popular among employees but often add administrative complexity for plan administrators. Employers may need to sign off on loan requests and deduct loan payments from payrolls. Offering retirement plan loans is not required: as a plan sponsor you have the authority to allow them or not.  

Understanding these 6 key elements can help you to customize a plan unique to your company’s specific needs. Beyond these basics you may even consider implementing advanced plan design options such as auto-features, enhanced matching formulas, or offering a cash balance plan. [We will dive into those options in an upcoming article. Be sure to connect with us on LinkedIn or visit our blog to stay informed.] 

We pride ourselves in being knowledgeable advisors and would be happy to walk through a plan design questionnaire to help develop a plan that is right for you and your employees because in the end, the whole point of your company’s plan is getting everyone successfully to retirement!

[1] Mitte, Ed. “CPE_Compensation.” IRS.gov. Summer 2013.

[2] Internal Revenue Service. “401(k) Plans: Deferrals and matching when compensation exceeds annual limit.“ 2017.

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