Help Improve Employees’ Retirement Outcomes

Why now may be the time to consider reenrollment

Today, people are living longer, with more time spent in retirement: Average U.S. life expectancy was 79 in 2015 – it will jump to 104 for those born today.1 However, many aren’t prepared. Two in five households approaching retirement have no retirement savings at all.2

For the U.S. workers who are saving for retirement, creating more ways for them to save is critical in helping to close the “retirement readiness gap” – the $4.13 trillion between what households have saved and what they might need to finance longer lives.3 Defined contribution plans play an important role in helping to close that gap for millions of people, including some of the employees in your plan.

Your employees want to retire on their own terms. The combination of age-appropriate investment choices and added savings – not just one or the other – is key to improving their potential to meet their retirement aspirations. You may wish to consider reenrollment as a way to help guide your employees toward these objectives. Additionally, reenrollment can be a useful tool that can help you bring your best thinking and recommendations to the broadest number of employees. By creating a new baseline for savings and diversification, it can help you more efficiently manage a diverse workforce into retirement.

You’ve no doubt heard about the trend toward reenrollment, and  you’ve likely thought about pursuing it for your plan. But if you’re like many plan sponsors, you’ve been wondering about the best way to do so. Raymond James has helped plan sponsors through every stage of the reenrollment process – from design and preparing for implementation to execution. With your desire to bring the best of your plan to your employees and our reenrollment experience, we can partner to help your employees close their retirement readiness gap.

1World Economic Forum, “We Will Live to 100,” 2017. 2AARP. 3Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model®, Employee Benefit Research Institute, News from EBRI, March 12, 2015.

Closing the retirement readiness gap

Reenrollment can help reduce the $4.13-trillion gap between what households have saved and what they might need to finance longer lives.

5 habits of successful 401(k) plan sponsors

As a plan sponsor, your 401(k) participants depend on you to help create the retirements they envision. The good news is that many of these participants likely recognize the importance of saving for retirement. In fact, with retirement lasting longer than ever, 401(k) millionaires – those with at least $1 million in their retirement accounts – have become increasingly common.

While the rising prevalence of 401(k) millionaires is largely due to the good practices of plan participants and favorable market conditions, it’s important to note that 401(k) plan sponsors also play an essential role in helping participants achieve success. Below, we explore how sponsors have helped countless plan participants save for their dream retirements by:
1. AUTO-ENROLLING PARTICIPANTS
Plan sponsors who auto-enroll their participants – allowing them to opt out of the plan instead of having to opt in – often see a much higher savings rate among their participants than other plan sponsors. A recent study found that since 2008, the average savings rate among employees automatically enrolled in their employer-sponsored retirement savings plan has risen from 4% to 6.7%, and 63% of automatically enrolled participants have increased their savings rate1 in the past 10 years. A separate study found that participation rates among new hires nearly doubled to 93% under automatic enrollment, compared with 47% under voluntary enrollment.2
2. AUTOMATICALLY INCREASING PARTICIPANT CONTRIBUTION RATES
Successful 401(k) participants tend to increase their contribution rates as their incomes increase and heir financial needs evolve. While the most diligent savers will make these changes on their own, the most effective plan sponsors automatically increase their participants’ savings rates over time. Research into retirement savings has helped establish the importance of increasing savings rates over time. One study found that participants who are currently contributing less than 3% to a retirement plan are on track to replace only 59% of their income in retirement, whereas those who contribute 10% or more are on track to replace 128% of their income. The same study showed that participants on a defined contribution plan with auto escalation are on track to replace 107% of their income.3
3. OFFERING TARGET-DATE FUNDS
Automatic enrollment programs tend to work better when the qualified default investment alternative (QDIA) is a carefully selected investment option. In many cases, a well-managed target-date fund is the most effective choice for participants. Although not all target-date funds are created equal, they all offer distinct advantages over a do-it-yourself approach, including asset allocation, investment selection and automatic rebalancing as participants near retirement. Additionally, since target date funds are professionally managed, participants don’t have to put as much effort into monitoring and adjusting their investment choices over time.
4. OFFERING AUTOMATIC ROLLOVERS
Plan sponsors who offer automatic rollovers help ensure that participants retain access to their hard-earned savings. This is especially important considering that many employees don’t realize that switching jobs means their 401(k) accounts can remain with their former employers indefinitely. In fact, a recent study showed 50% of American adults who’ve participated in a 401(k) or equivalent retirement plan left an account at a previous employer. And nearly a quarter left between $10,000 and $50,000 in these accounts.4 Other events, such as a participant name change or a plan termination, can also make it difficult for participants to track down their accounts. In the past, 401(k) participants were required to consent to rolling a balance of less than $5,000 into their new employer’s retirement plan. Fortunately, new guidance from the Department of Labor is making it easier for employers to transfer former employees’ small-balance 401(k) funds to their new employer’s 401(k) plans, provided the employees do not opt out of the transfer.
5. DISCOURAGING EARLY WITHDRAWALS
Participants are more likely to meet their retirement goals when they stay the course and avoid making early withdrawals from heir 401(k) plans. While plan sponsors can’t prohibit early withdrawals, they can educate participants on the drawbacks of doing so. In addition to the associated taxes and penalties – as well as the risk of not saving enough for retirement –successful plan sponsors can help participants save money and preserve their future retirements by sharing alternative solutions to early withdrawals.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

All investments are subject to risk, including loss. Asset allocation and diversification does not ensure a profit or protect against a loss. There is no assurance that any investment strategy will be successful.

  1. https://www.planadviser.com/automatic-enrollment-helping-participants-increase-retirement-savings/
  2. https://institutional.vanguard.com/iam/pdf/CIRAE.pdf
  3. https://www.plansponsor.com/increased-savings-rates-auto-escalation-can-boost-retirement-income/
  4. https://www.benefitspro.com/2013/05/09/orphaned-401k-accounts-stacking-up/?slreturn=20191021184458

Solving Complex Challenges with Simple Solutions

As an employer and sponsor of a retirement plan, your company shoulders a great many responsibilities. Among them: listening to the needs of your employees, selecting appropriate retirement plan service provider(s), choosing and monitoring investments, keeping up with legislative changes, ensuring your plan is administered properly, and educating and informing plan participants – all at a reasonable cost.

Fiduciaries under ERISA are held to a high standard and breach of fiduciary duty could result in personal liability. One way to reduce the scope of fiduciary liability is to hire prudent professionals, including for example, non-discretionary investment advisors or discretionary investment managers.

Some plan sponsors are looking for assistance with their fiduciary responsibilities, but want to maintain discretion and control of the investment lineup. In this instance a 3(21) fiduciary could help with regards to the recommendation and, monitoring of plan investments. Others want to shift responsibilities to a third party due to their lack of expertise and time or, fear of exposure to liability. A 3(38) fiduciary, by taking full discretion for investment selection, monitoring and replacement, helps to ensure that investment selection fiduciary responsibilities* are being met, all while saving you time so you can use it more effectively.

It is important to understand the difference between hiring an advisor who is willing to act in a fiduciary capacity vs hiring an advisor that simply takes on a “broker of record” role.

 

Running a retirement plan can be complex, but engaging a 3(38) or 3(21) fiduciary is a simple solution. Remember that not all fiduciaries are created equal. Do your homework upfront and periodically conduct your own due diligence. *As set forth in, and subject to, applicable agreements.

All investments are subject to risk, including loss. Asset allocation and diversification does not ensure a profit or protect against a loss. There is not assurance that any investment strategy will be successful. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV (Part 2A) as well as the client agreement.

Don’t Go It Alone

Sponsoring a retirement plan is one of the more challenging endeavors an employer can undertake. However, the advantages of offering a plan are undeniable – not only does it offer a savings vehicle for you and your employees, the tax advantages may help both your business and participants.

Administering a plan and managing the assets require specific actions and come with considerable responsibilities. The Employee Retirement Income Security Act of 1974 (ERISA) has set standards of conduct for fiduciaries, those who manage the retirement plan and its assets, and as the sponsor of your company’s retirement plan, those standards are yours to uphold.

Fortunately, you don’t have to do it alone.

Although the retirement plan sponsor bears ultimate responsibility for making decisions about the plan and managing its investments, they also have the ability to shift some or all of the investment fiduciary responsibility by hiring fiduciary professionals.

Ask yourself these questions:
  • How do you know if your plan is effectively preparing your employees for retirement?
  • Is your process to select and monitor service providers or investments prudent?
  • Does your company have the resources and knowledge to handle these responsibilities alone?
  • Do you understand your fiduciary liability to effectively sponsor a retirement plan?

Even if your company has professionals with retirement plan expertise who are dedicated to managing your employee retirement plan, you should consider hiring a retirement plan advisor who can assist with various aspects of maintaining your company’s retirement plan. A dedicated retirement plan advisor can provide services designed to meet the unique needs of plan sponsors, their companies and plan fiduciaries, including fiduciary investment advice. In addition, a retirement plan advisor can provide an extra layer of protection and expertise that can be crucial to implementing an effective and efficient retirement plan.

If it sounds like maintaining an appropriate retirement plan for your company is a daunting task, that’s because it is – especially when you consider everything else that goes into running a successful business. The team at the Corporate Advisors Group can help optimize your retirement plan to better prepare your employees for retirement. This will help you to attract and retain top talent, which ultimately helps to save time and money.

All investments are subject to risk, including loss. Asset allocation and diversification does not ensure a profit or protect against a loss. There is not assurance that any investment strategy will be successful.

Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV (Part 2A) as well as the client agreement.

3 Ways to Reduce Plan Costs

Ensuring that a plan’s fees costs are “reasonable” is one of the principal duties of a retirement plan fiduciary. This would seem simple enough, yet ERISA does not define reasonable and regulators simply provide broad, general guidance relating to the matter. This leaves plan sponsors with little to no direction as to where to begin.

Plan sponsors, in conjunction with a strong retirement plan consultant, should establish an objective process for monitoring the fees and services provided by each one of the plan’s service providers. These service providers may include retirement plan advisors, record-keepers, third-party administrators (TPAs), investment managers, auditors, attorneys, or any firm or person being paid from plan assets. For many plan fiduciaries, an objective process typically includes the following steps with respect to investment options:

Critically review your investments.

First, utilize an open architecture investment platform with access to the entire investment universe. Investment management fees have continued to trend downward, year after year. Plan sponsors should take advantage of these improvements. Collective investment trusts (CITs) now offer plan sponsors and participants the ability to drive down costs through the elimination of some of the regulatory requirements that mutual funds are subject to. Plan sponsors should also strongly consider the use of passive investments, also known as index funds. Passive investments offer plan participants the opportunity to gain broad exposure to markets at low costs. Integrating these index funds into an investment menu helps to lower plan costs and offer cost conscious participants an avenue to gain diversification at competitive costs. Passive investments can offer exposure to a variety of asset classes such as Target Date Funds, U.S. Stocks, International Stocks, and Fixed Income. Passive investments can make a great impact across investment menus but plan sponsors should thoroughly vet these vehicles to ensure that participants are getting a solid, strong investment. Retirement plan consultants should be constantly engaged in the monitoring and benchmarking of vehicles and your record-keeper’s investment platform.

Renegotiate fees with plan service providers by benchmarking their services.

This can be done through request for proposals (RFPs or RFIs) or by simply benchmarking, where formal proposals are not requested. Plan sponsors should work to ensure that their plan is being treated like a new plan, with pricing to reflect that. When benchmarking fees, fiduciaries should look not only at the fees charged, but to the value of the services rendered. Remember, reasonable fees don’t always mean the lowest. Plan sponsors need to focus on the competency of their service providers, the suite of services offered, and the value provided to plan participants.

Hire an advisor!

Many people may think that hiring an advisor would increase plan costs. However, an effective advisor is your advocate. You don’t need the expertise to manage investment costs or the time to renegotiate with record-keepers, your advisor will quarterback this process on your behalf. And hiring a co-fiduciary reduces your own liability which reduces your risks over time.

All investments are subject to risk, including loss. Asset allocation and diversification does not ensure a profit or protect against a loss. There is not assurance that any investment strategy will be successful. Collective Investment Trusts (CITs) are not governed by certain regulatory requirements; and therefore, do not receive their protections. Target date funds seek to maximize assets for retirement in the approximate year (Target Date) listed in the fund name. The fund will gradually shift its focus from more aggressive investments to more conservative ones as the target date approaches. Investment in a target maturity fund is not guaranteed at any time including on or after the target date. Diversification does not guarantee a profit nor protect against loss. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. The value of fixed income securities fluctuates and investors may receive more or less than their original investments if sold prior to maturity. Bonds are subject to price change and availability. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV (Part 2A) as well as the client agreement.

Contact Us For An Easier Retirement Plan




    Contact Us For An Easier Retirement Plan