Administration

2024 Trends in Retirement Plans

As we step into 2024, the world of retirement planning continues to evolve. It’s a great time to look ahead and understand what will guide us in improving retirement outcomes for our clients and their participants. This year, we expect to see a mix of familiar trends from the Secure Act 2.0 and new focuses on personalization and financial wellness. Also, we’re keeping an eye on how the economy will influence our strategies, especially with the upcoming election and the Federal Reserve’s actions against inflation. Here are the major themes we are working on this year:

1. Secure Act Updates

Changes continue to be implemented with the passage of the Secure Act 2.0. Some changes were delayed such as the Roth Catch-up requirement which will take place after 2025, however, there are some mandatory and optional that we are focusing on.

Long Time Part Time Employees.

Employers will now be required to allow long-time part time employees to defer into their 401k if they have worked at least 500 hours of service in each of three consecutive 12 month periods and have attained age 21. That requirement is reduced to two consecutive 12 month periods for plan years after 2025. Additionally, for plan years after December 31, 2024, 403b’s will be required to adopt these new provisions.

Matching contributions on student loan payments

Starting this year, Retirement Plans may treat certain student loan payments as plan contributions for the purpose of match contributions. This provision may mean that employees who make qualified payments on student loans can receive a match even if they were not able to contribute to their plan.

Emergency savings accounts linked to retirement plans

Starting in 2024 the Secure Act 2.0 allows for plan participants to make pre-tax payments to a linked emergency savings account up to $2500 and withdraw up to $1000 without penalty. Providing access to participants to emergency savings when they need it and still save for retirement could help alleviate the anxiety of saving in a retirement plan for lower income workers.

The Secure Act has many other provisions being implemented in 2024 as well. It is important that you discuss with your Administrator to ensure compliance.

2. Personalization

A key area of improvement in the defined contribution space is the increase in levels of personalization at the participant level. By using key demographic information already known by the plan and information received directly from plan participants, 401k and 403b providers can create personalized saving and investment plans for employees at scale. Our approach to personalization is to utilize a tiered approach depending on the level of engagement from plan participants.

Plan-level personalized reporting and engagement

Often times participants are disengaged or recordkeepers don’t have the necessary technological solutions for detailed personalized planning. When that happens, we are finding innovative ways to use readily available plan demographic data to create personalized reports. This strategy enables us to identify participants who need help, so we can proactively reach out to them.

Increased use of Managed Accounts for engaged participants

When participants are engaged and the recordkeeper has appropriate and cost-effective technology solutions, managed accounts can provide an advanced level of personalization for retirement savers. Managed accounts allow professional third-party management of a participants retirement account based on demographic data and input from engaged participants.

When utilizing managed accounts in a retirement plan it is essential to monitor the program to ensure that participants who are paying extra for the service receive additional value through personalization.

3. Focus on Financial Wellness

Technology improvements and engagement

In 2024, there’s a heightened focus on financial wellness within 401(k) and 403(b) plans. Technological solutions are playing a key role, offering sophisticated tools that provide a comprehensive view of an individual’s financial health, including retirement readiness. More providers are entering the market increasing engagement and reducing costs. These new tools are increasing engagement and helping participants create healthier relationships with their money.

Retirement Income hits the mainstream

There is a growing momentum for in-plan retirement income strategies. Plans are increasingly incorporating features that help participants transition their savings into a stable income stream for retirement, addressing concerns about outliving their resources. This shift underscores the evolving role of 401(k) plans from mere savings vehicles to comprehensive retirement planning tools.

As the retirement income market evolves, platforms and investment managers are creating innovative retirement income products at lower costs to benefit more participants.

4. Economic Disruption

The 401(k) landscape in 2024 is also navigating through economic disruptions. The influence of the Federal Presidential election is sure to be contentious and could potentially mean social and economic disruptions through the 2024 election season. 

Furthermore, the Federal Reserve’s efforts to achieve a ‘soft landing’ amidst economic uncertainty are crucial. The Fed’s monetary policies, aimed at stabilizing inflation while avoiding a recession, play a significant role in shaping the investment landscape. Participants and plan sponsors must stay vigilant, adapting their strategies to these evolving economic conditions to safeguard retirement assets.

Conclusion

The 401(k) and 403(b) landscape in 2024 presents both challenges and opportunities. Staying informed and adaptable is key to navigating this dynamic environment. Whether you’re a plan sponsor or a participant, understanding these trends is vital for making strategic decisions that secure a comfortable retirement.

Top 401k Trends in 2023

As 2023 continues to unfold, shifts in the 401k landscape are redefining how we plan for retirement. Today, we delve into the top 4 trends that are shaping fiduciary governance for 401k Trends in 2023: Retirement Income Solutions, SECURE Act 2.0 updates, Fallout from the Supreme Court ruling in Hughes v. Northwestern, and the rising importance of data privacy.

1. Retirement Income Solutions:

Guaranteed income solutions are gaining traction as participants seek the comfort of predictable payouts in their golden years. Employers are increasingly integrating these solutions into their 401k plans, leveraging innovative annuity products and bond ladders. The trend recognizes that a secure retirement isn’t just about accumulating wealth; it’s about ensuring that wealth translates into a stable income. However, with the rise of such solutions, plan fiduciaries must consider the added complexity and work to ensure these options are in the best interest of the participants.

2. Secure Act 2.0 Updates:

 The Secure Act 2.0 was signed into law in December 2022 and includes several updates that plan sponsors should be aware of. One of the most significant updates is the increase in the age for required minimum distributions (RMDs) from 72 to 73 starting on January 1, 2023, and then further to 75 starting on January 1, 2033. It is important to note that recordkeepers must make changs to their systems to accommodate these new regulations.

3. Active Funds: Are They Worth the Premium?

Despite the trend towards low-cost passive funds, active funds maintain a substantial presence in 401k plans. These funds, characterized by hands-on management and potentially higher returns, often come with higher fees. As fiduciaries, it’s essential to scrutinize these options thoroughly. Are the potential returns justifying the cost? Regularly benchmarking fund performance and fees is crucial to ensure participants are receiving value for the fees they are paying.  It is also important to note that all investments must be appropriate for the plan’s participants, as determined by the recent Northwestern Supreme Court case. 

4. Data Sharing and Participant Privacy:

As digital transformations permeate the financial sector, participant data privacy is paramount. Increased data sharing between plan administrators, payroll providers, and third-party service providers can enhance the participant experience. But it also necessitates robust safeguards to protect sensitive information. Fiduciaries must ensure data privacy policies are in place and enforced. In 2023, striking a balance between personalized services and data security is a challenge that every plan sponsor needs to meet.

In conclusion, 2023 is proving to be a dynamic year for 401k plans. These 401k trends in 2023 underscore the need for fiduciaries to stay informed and adaptable, continually working to ensure plans meet the evolving needs of their participants while protecting their interests. Staying ahead of these developments is key to providing a retirement plan that is not just compliant, but also helps provide better outcomes for your employees. 

SECURE Act 2.0 Webinar recap

Recap: SECURE Act 2.0 Webinar

Greetings fellow business owners, have you heard the news about the Secure Act 2.0? This newly enacted law is a game-changer when it comes to retirement plans, and it has some exciting provisions that could benefit you and your employees.

Secure Act 2.0 includes provisions to expand plan coverage, increase retirement savings, preserve retirement income, and simplify retirement plan rules for plan sponsors. This means that it’s now easier than ever for your employees to save for their future, and it’s simpler for you to offer retirement plans to your workforce. Plus, there are new tax credits for small businesses that make it even more enticing to provide retirement plans to your employees.

One of the most significant changes is the ability to allow employer matching or non-elective contributions to be treated as Roth contributions. This is a fantastic way to help your employees save more money for their future, while also providing tax benefits for your business. Additionally, the IRS is changing the penalty for failure to take a Required Minimum Distribution (RMD) from 50% to 25%, which can be a significant relief for those who may have overlooked this requirement in the past.

Furthermore, new 401(k) plans must include an auto-enrollment feature after the 2022 plan year, making it easier for your employees to start saving for their future. And for those who like to keep things interesting, Secure Act 2.0 also allows Simple IRAs to include Roth contributions, 401(k) plans to upgrade to a 401(k) plan during the year, and 529 plans to rollover to Roth IRAs.

However, it’s important to note that implementing these changes isn’t as simple as flipping a switch. Plan sponsors must decide which provisions to add to their plans and coordinate with payroll departments and plan providers to implement the changes. Also, plans must provide a paper benefit statement at least once a year for defined contribution plans and once every three years for DB plans.

In conclusion, Secure Act 2.0 is a fantastic opportunity to enhance your retirement plans and help your employees save more money for their future. If you’re interested in taking advantage of the new changes, make sure to talk to your plan provider or financial advisor about how to implement these provisions in a way that benefits both your employees and your business.

Would You Work for Free?

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. 

Mid Year Plan Checkup

Your Mid-year 401(k) Plan Check-up and Tune-up

As we round the corner to 2018, I can’t help but wonder, where did the year go? It feels like January and New Year’s resolutions were just yesterday.  Alas, those days have come and gone, and the “next” New Year is only a few months ahead.  This means now is the time to focus on benchmarking, evaluating your plan, reflecting on what you had hoped to accomplish, and putting 2018 plans together to work towards enhancing retirement plan success.

Three Point Check-Up

Let’s not ignore the elephant in the room: cost.  If it’s been a while since you have price evaluated your company’s retirement plan, this is a great time to open the hood and find out exactly what you are paying.  As an ERISA plan fiduciary, you have a duty to understand your costs and determine reasonableness.[1] 

Some areas to review include:

  • Investment expense ratios
  • Recordkeeper asset charges and fixed dollar costs
  • Advisor commissions and/or fees
  • Third Party Administrator (TPA) invoices

Your service provider partners are consistently making improvements to their offerings, including better user interfaces on their websites, an increased ability to take on administrative tasks (thus freeing up more of your time), and working towards better communication programs to promote retirement readiness. It’s important to conduct a cost analysis to review how much your plan is paying and match services to align with your plan’s needs.

Tune-Up: Cost Reasonableness

Conduct a cost analysis for your company’s retirement plan.  Benchmark your plan compared to other plans of similar size, industry, and demographic.  Document the process.  Determine the value of the services and assess fee reasonableness.  There is value and there is cost.  Remember cheaper is not always better. Match value and cost to determine fee reasonableness.

According to a recent study, the #2 concern of plan sponsors is: retirement readiness.[2]  This is your employee’s ability of to actually retire.  During your next committee meeting, look at your participant data and discuss retirement readiness. 

Some questions to consider include:

  • What percentage of employees are participating in the plan?
  • What is the plan’s average deferral percentage?
  • Are your employee’s investments properly diversified?
  • What is the targeted income replacement ratio for our employees?

A best practice when reviewing participation, deferral, and allocation is to remember the 90-10-90 rule.  This means that 90%+ of your employees are participating in the plan, employees are deferring 10%+ of their income to their retirement savings, and 90% of the participants are invested in appropriate portfolio allocations.

Tune-Up: Retirement Readiness

If your plan has less than 90% participation rate, you might consider a backsweep campaign.  This could be a great January 1st initiative that aligns with the top New Year’s resolution: save more money.[3] 

Next, as a plan sponsor, you could add an automatic auto-escalation feature to your plan.  Talk with your service provider, advisor, and Third Party Administrator (TPA) about how to add this progressive feature. Consider helping your employees boost their savings rates by adopting a 2% auto-increase strategy. 

Re-enrollment is a great way to engage employees who might have a “set-it and forget-it” approach to investing. This  process reinvests all participants into your plan’s Qualified Default Investment Alterative (QDIA).  This is a Safe Harbor provision that could add a layer of plan protection for you as the plan fiduciary.[4]

Tune-Up: Plan Design

The last check-up to consider is plan design. Is it meeting your plan objectives? Did you have corrective distributions last year?  Do you want to reward top talent employees?  Would you like to put away more for specific groups of employees?  As an employer, would you like to contribute less?  Most importantly, what is the goal of your company’s retirement plan?

By having a conversation with your TPA and reviewing your plan design now (most deadlines for plan design changes are October, so schedule your meetings today), you can update your plan information and be ready to implement it by January 2018.  Your TPA will need your company’s census data and a clear understanding of what you would like to achieve. 

Whether there are little changes to profit sharing or larger updates, like new comparability cross-tested plan design, it all starts with a conversation.  Setup a call with your TPA to discuss your plan objectives and how best to align your business goals with your plan design objectives.

Start Early to Maximize Success

December will be here soon enough, so don’t get caught asking yourself, “Where did the year go?”  Work with a qualified retirement plan advisor to discuss your retirement plan’s cost reasonableness, retirement readiness statistics, and proactive plan design options.  These are three key metrics to overall plan success that may help your firm become an employer of choice.

For information or help in evaluating these check-up and tune-up ideas, feel free to contact us to setup a conversation.

[1] “Understanding Retirement Plan Fees and Expenses.” Department of Labor. https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/undrstndgrtrmnt.pdf

[2] “Sponsor Perceptions of Retirement Plan Services” VOYA. January 2017.

[3] “2017 New Year’s Resolutions: The Most Popular and How To Stick to Them.” NBC News. http://www.nbcnews.com/business/consumer/2017-new-year-s-resolutions-most-popular-how-stick-them-n701891

[4] “Using Re-enrollment to Improve Participant Investing and Provide Fiduciary Protections.” Drinker Biddle & Reath LLP. https://am.jpmorgan.com/blob-gim/1383280097884/83456/WP-RE-ENROLL.pdf

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