By: Michael Rom – Managing Director, Pensionmark
As we quickly turn the page on the past year employers are seeking ways to enhance their benefit offering and not miss out on key opportunities to improve their competitiveness.
In this annual industry update, we highlight several evolving trends we see gaining traction within the 401(k) space that employers are embracing in order to better meet the financial needs of today’s worker. We also cover several administrative issues that may create additional workload and challenges that employers should be aware.
First, let’s look at some growing trends…
The COVID pandemic heightened the tremendous financial stress and anxiety that employees deal with and the direct impact it has on their health and wellbeing.1
Employees with access to worksite retirement plans, and directly affected by COVID, were afforded some liquidity features through loans and withdrawal provisions afforded under the CARES Act, but the demand is rapidly growing for broader employer support.
Financial Wellness initiatives that address employee finances on a more holistic level, helping individuals become more efficient and confident with personal finances is a growing need with 87% of employees stating that it is important that employers offer financial wellness benefits such as budgeting, emergency savings accounts and student loan repayment assistance.2
And employers agree, as over 75% of plan sponsors report in a recent survey that providing or enhancing financial planning and advice capabilities is a key priority for 2021.3
Check out Pensionmark’s employee wellness services.
Student Loan Programs
Approximately 43 million people owe a staggering $1.6 trillion in student debt and it has a major impact on an individual’s ability to meet other financial goals.4
In 2020, the CARES Act provided employers with a student loan program allowing a tax-free benefit to employers and employees as a way to deal with the huge student debt problem that individuals face.
Employers can deduct up to $5,250 per employee for student loan payments and employees receive the money tax free. The stimulus package at year-end 2020 extends this benefit for another five years through 2026.5
We see significant growth in employers adopting some form of student loan repayment counseling and payment solutions to address this ongoing financial challenge.
Personalization of Investment Strategies
Since inception, Target Date Funds (TDF) have gained wide popularity with plan participants for ease of choice as a well-diversified and professionally managed portfolio.
The downside for TDF’s relate to the limitation of a single variable (retirement date) as the sole determinant for an investment decision. With technology and data collection advancements, recordkeepers are gaining more robust insight on an individual’s unique situation, leading to a more personalized, managed retirement account option.6
Look for more acceptance and growth of managed retirement accounts, perhaps even replacing TDFs due to the personalization that such portfolios can achieve, especially for those participants approaching retirement with more widely varied circumstances and seeking custom decumulation strategies. (Image is for illustrative purposes only)
Retirement Income Solutions
The SECURE Act, signed in late 2019, provided the impetus for growth in retirement income solutions.
The need by participants to safely transition their accumulated savings into a secure and predictable retirement income to cover monthly expenses is a paramount challenge for today’s retirees.7
So, with the SECURE Act introducing fiduciary safeguards for employers to select market solutions and establishing the requirement to provide participants with income projections on their benefit statements, we can expect retirement income solutions to become a more standard offering within 401(k) plans.
Automation in Retirement Plans
Auto-enrolled plans are becoming the norm, leading to higher participation rates, improved asset allocation and ultimately better outcomes.8 We can expect to see automation extend to other facets of plan design which may lead to auto decumulation through some form of annuitization.
Employers need to be aware that automation affords them greater wherewithal to influence participant success but also creates more scrutiny and over the decisions they make.
Expanded Retirement Plan Coverage
The SECURE Act, and recent legislation undertaken by several States, is focused on addressing the lack of retirement plan coverage for nearly 35% of American workers.9 Small employers in particular have declined to offer their employees with retirement plans due to cost, liability and administrative burdens. Several states including California are mandating that employers with five or more employees offer a retirement program or register for the State-run program.
The SECURE Act established pooled employer plans (“PEPs”) which will allow non-affiliated companies to join a single retirement plan. While PEPs are just rolling out in 2021, we can envision that a number of employers may view PEPs as an attractive solution and more extensive tax credits as an incentive to offer their employees a retirement benefit.
Now let’s take a look at some 401(k) issues that employers need to be aware…
CARES Act Provisions
The CARES Act provided several optional provisions that may have affected participant loans and distributions during 2020.
The Act had temporarily increased the maximum loan limit and extended the repayment period. In addition, it allowed individuals with existing loans to temporarily suspend payments during the year.
Employers need to be aware that these CARES Act provisions ended on December 31, 2020 and subsequent loan repayments must be adjusted to reflect the delay and any interest accrued.
Also, all Required Minimum Distributions (“RMDs”) waived during 2020 but must be reinstated for 2021.
Part-Time Employee Eligibility
Under the SECURE Act, 401(k) plans must now allow part time employees who work at least 500 hours for three consecutive years to make elective deferral contributions.
Beginning in 2021, employers need to start tracking hours for part time employees in order to determine eligibility in 2024. For employers that do not track hours, the IRS allows you to use several equivalency methods.
It should be noted that plan sponsors can exclude this class of part time employees from receiving employer contributions along and exclude from nondiscrimination and coverage testing.
Regulators are becoming more focused than ever on employer efforts to find terminated employees who remain in the retirement plan and are to receive promised benefits.10
The Department of Labor (DOL) refers to these as “missing participants” and is focusing more enforcement attention on this issue and requiring companies to make concerted efforts toward locating these individuals.
Just this month, the DOL has prescribed a list of best practices that fiduciaries should consider as steps to help reduce missing participant issues and ensure they receive the promised benefits.
Large recordkeepers continue to consolidate at a rapid pace as they face the pressure of declining margins and the required investment to remain a viable player in the business. We expect this trend to continue and possibly accelerate in 2021.11
The problem for employers is that they face potentially difficult decisions when their service provider merges with another recordkeeper due to fiduciary considerations along with the operational disruption that can result.
The IRS has substantially increased the penalties that employers face for retirement plan returns and notices.
Employers should be aware that these penalties have been increased tenfold! As an example, a late 5500 filing will result in an increased penalty from $25 per day to $250 per day.
So, employers be warned, not meeting IRS deadlines will be a costly mistake going forward.