Ahhh…retirement.
Some dream of long walks on the beach, sailing around Europe and doing whatever you want to do with no work obligations.
Doesn’t that sound great?
To achieve the dreams of retirement, one must start saving for retirement.
Employers and employees both would like to realize this dream of retiring one day. However, the age that employees are starting to save for retirement is being delayed due to one major factor: student loan repayment.
Retirement savings are scarce for millennials.
Saving for retirement can be tough, especially when attempting to pay off student loan debt while struggling to afford rent on an apartment.
Nearly half (42%) of 18 to 29 year old’s have no retirement savings, according to the 2019 Economic Well-being Report from the Federal Reserve. Notably, as you can see in the chart below, that number drops in half to 26% of people ages 30-44 without retirement savings.
Board of Governors of the Federal Reserve System; U.S. Government Publishing Office, Washington. This link shows the report on the economic well-being of U.S. households in 2018 – May 2019. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-retirement.htm
84% of American adults report that student loans are negatively impacting the amount they can save for retirement, according to recent research from the MIT AgeLab.
73% say they are not maximizing their retirement savings and will begin or start increasing their retirement savings once their student loans are paid off. The study also finds that 26% point to the need to pay off student loan debt as a reason to not be saving for retirement altogether.
But once they get to start contributing to their retirement, they may learn that the business they work for does not offer retirement benefits.
42% of small businesses currently offer retirement benefits.
Only four in ten small businesses offer retirement benefits to their employees, according to LIMRA research. In that same study, 40% of small business employers believe that retirement benefits are more important now than three years ago. This should increase the opportunities for many Americans to gain access to retirement benefits through their employers.
Recognizing this retirement plan gap, some states across the country are mandating retirement plans.
State-Mandated Retirement Plans
10 states across the country have mandated that an employer must offer a retirement plan in some form. These states are:
- California
- Connecticut
- Illinois
- Maryland
- Massachusetts
- New Jersey
- New York
- Oregon
- Vermont
- Washington
Generally, these states require a 3% mandatory employee contribution. The states often provide their retirement plans, usually in the form of an IRA, for employers to offer to their employees. There is little to no cost for the employer to offer the retirement plan; it is generally just the time that it takes to set up payroll deductions.
Although this is a starting point, it probably will not meet all of the various needs of your employees. 401(k) plans allow higher contribution limits and are generally the most popular retirement account. The government has recognized this need for a better option for many small businesses.
The SECURE Act.
President Trump signed the year-end spending bill that implemented the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. It is widely regarded as the most significant piece of legislation to affect retirement plans in a long time, and it passed very quickly through the U.S. House.
The proposed bill modifies the requirements of employer-provided retirement plans and Individual Retirement Accounts (IRA) to make retirement plans more appealing for most employers and individuals. It helps to alleviate the six issues below.
Ability to Pool Plans
Small businesses can pool together to create Multiple Employer Plans (MEPs) just like businesses pool together to offer health care. The small businesses can be in different states and different industries and still come together to offer a retirement plan.
This proposal protects businesses from penalties for other members’ violations. This has certainly increased the appeal for employers to join a multiple employer plan.
New Tax Credits
If you were a business that did not have a retirement plan and now implemented a new retirement plan, you would receive a $5,000 tax credit. This was previously a $500 tax credit.
There is also an additional $500 tax credit you can receive when your business adopts an automatic enrollment for the plan. Automatic enrollment would be when a new hire is automatically enrolled in a retirement plan.
Small Business Flexibility
Many of the rules for 401(k)s and retirement plans are rigid and restrictive. Once you’ve started for the year, you cannot make any changes. This new proposal would allow for provisions to include mid-year changes and relax some of the restrictions that have turned business owners away in the past.
New Annuity Based Rules
The bill also provides new safe harbor provisions that would allow you to select an annuity as a retirement plan option.
Greater Flexibility with Part-Time Employees
The current threshold for eligibility for part-time employees is 1,000 hours of service in a year. Under the proposed legislation, that number would be reduced to 500 hours per year over three consecutive years. They recognized that many employers have great long-term part-time employees that would enjoy the benefit of being offered a retirement plan.
Removal of Age Limitations on IRA Contributions
Currently, traditional IRAs bar contributions once the account holder hits 70.5 years old. By removing this age limit, it provides for a greater amount of options for these individuals to be able to contribute even outside of the retirement plan they may have with their employer.
The bottom line is that many employers would benefit from their employees to have access to a vehicle that would enable them to save money.
Areas to focus on.
Whether you are offering a retirement plan today or are considering offering one, please note the following four areas of importance for you as you make ongoing decisions for your company.
Investment Analysis
Past performance is not indicative of future results, right? What you currently experience in an investment return does not guarantee that you are going to see the same return in the next 12 months.
When implementing a retirement plan for the first time or if you are currently offering one, do an honest assessment of the investments you are choosing. As the plan sponsor of a retirement plan, you would be considered the fiduciary of choosing those investments.
Therefore, it is important for you to benchmark the portfolio that is in your plan with the indexes, such as DOW JONES and S&P. Benchmarking allows you to develop a portfolio of investment products, varied from conservative to aggressive, that will better complement the retirement needs of your diverse workforce.
Your portfolio review of your retirement plan should be done annually for you to maintain fiduciary responsibility with your portfolio. You should be considering other investment options as well.
Some investment options include:
Annuities
Annuities can be a great investment since they provide opportunities for employees to select a multitude of investments within that annuity.
Mutual Funds
Mutual fund families, like Fidelity and Vanguard, are another popular choice among employers.
Age-Based or Target-Dated Funds
In a Fidelity research report, 52% of individuals had their savings in target-date funds. These are mutual funds that allocate your money based on a specific future date, such as a retirement date. This means that the money will shift to more conservative investments as the target date is approached.
Exchange-Traded Funds (ETFs).
You can invest in broader industries with a smaller amount of money.
2. Cost Analysis
As an employer, you must consider all the costs of a retirement plan when making your decision. You should consider all the costs that you pay as an employer but also those that are paid by the employee.
For the employer, you are going to have hard costs that will include a monthly administrative fee. They are generally broken down per employee or account. Other hard costs can be Form 5500 filing, document amendments, etc.
You also have the cost of doing business, which is compliance risk. If you have a 401(k) or a 403(b), those are considered ERISA qualified plans. Under the Employee Retirement Income Security Act of 1974 (ERISA), you will need to perform the specific compliance requirements like distributing plan documents, a bonding requirement and acting as the fiduciary. Combining the additional cost of the compliance requirements and administrative fees, implementing a retirement plan is still a low overall business expense to the employer.
For the employee, there can potentially be some upfront costs, surrender fees or account fees. Generally, all plans will have investment management fees. This is the expense when contributing dollars into mutual funds, and those funds will carry expenses that will be taken directly out of the assets that they put their money in.
3. Compliance Analysis
When you adopt a retirement plan, it will automatically create fiduciary responsibilities under ERISA. You will need to take full responsibility under the type of retirement plan that you are offering, which is why performing a cost and investment analysis every year is very important for your fiduciary duties.
You also want to be sure that you are processing payroll deductions in a timely manner. How timely? As soon as possible. You need to take every reasonable means to process the dollars from payroll into the retirement plan as quickly as possible. The Department of Labor (DOL) provides a seven-business day safe harbor rule if the employer has under 100 participants.
The maximum deadline that isn’t safe harbor states that the contribution must be deposited into the account no later than 15 business days of the month following the month in which the contribution was deducted.
The last item to ensure is that you are performing the 5500 filings each year. The only exception is for those with a Solo 401(k) with less than $250K in assets.
4. Key Deadlines
Form 5500 filing
The Form 5500 Filing is a filing that goes through the DOL and the IRS to let them know that you have a plan. It details the assets that you have in the plan, the number of participants, and more. This needs to be filed each year and the due date is the last day of the seventh month after your plan year ends. If you need an extension, it must be filed before the end of the seventh month, and it would grant you another 2.5 months.
Nondiscrimination testing
Another annual requirement is Nondiscrimination Testing (NDT). The IRS requires this to ensure that the benefits employers are providing are not benefiting the highly compensated employees more than the rest of the employees.
Distribution of notices
Many retirement plans are ERISA-qualified, so ERISA will dictate the type of communication that needs to be distributed to employees. The premise of ERISA is that employers provide detailed disclosure, communication and transparency to the covered individuals and dependents within their plan. Of note, educate employees about the investments, as well as the eligibility and the fees that come along with it.
Five notices to be conscientious of are as follows:
- Summary Annual Report (SAR)
Must be distributed once a 5500 Filing has been made. This is the summary of the IRS Form 5500 that needs to be distributed to the employees within 9 months of the close of the plan year.
- Fee Disclosure Notice
The 408(b)(2) is distributed to the employer and the 404a-5 goes to the employee. As the employer, you will want to have as much information as you can get about the plan fees and the investments. Your employees would want to have that same type of information. Once you understand all your plan services, you will need to document the plan fees and ensure that they are reasonable for the services that are being provided.
Employers provide a qualified default investment alternative for an employee that chooses no specific option; the funds would be automatically sent into this default investment alternative. The DOL has provided four types of vehicles for this:
- Target-date/Age-date Fund
- Professionally Managed Investments
- Balance Funds
- Capital Preservation Products (Money Market)
If you are changing an employee’s qualified investment alternative, you need to provide notice 60 days in advance.
This needs to be provided 30 days, but not more than 90 days, before the beginning of the plan year. It needs to be provided every year. This is the key notice that provides, in writing, the employees’ rights and obligations under their plan.
- Document Restatement Deadlines
You will need to be able to show that you, as the employer, have adopted a written plan document, that it is up-to-date, and that the plan document complies with the IRS code.
The IRS has created a cycle in which these document restatements are to be made. Every six years, for pre-approved plans, you need to restate your plan. If you have a customized plan that goes outside of what the IRS has already approved, then you must restate that every five years. The next cycle of document restatement will be set for April 2022.
Wrap-up.
Whether you have a plan in place already or if you are thinking about adding a retirement plan to your company, we recommend you consider a few more things. The tight labor market that we are in as of this blog post is making a more competitive labor market, and your current labor base is demanding better benefits. You may want to consider reviewing and updating your benefit program if you have not already.
A retirement plan is a very inexpensive offering that you can add as part of your overall benefit offering for your employees. For those of you that already have a retirement plan in place, you want to think about the 4 keys areas discussed above. Ultimately, states are already mandating retirement plans. Monitor your state legislation because as of this blog posting, there are approximately a dozen more states where legislation is being proposed.
If you want to offer your employees retirement plan options, consider looking outside of the state-mandated plan offerings and building something yourself.
Enhance your benefits offering with PrimePay.
PrimePay has a passion for retirement plans. We have put forth a very strong offering for employers of all sizes. We have a vast offering and it is customized to fit every employer’s needs.
PrimePay’s Retirement Plan Services include:
- Personal Design & Implementation of the Plan
- Open Enrollment Support
- Mutual Fund Monitoring & Reporting
- Signature-ready Form 5500 for Year-end Reporting
- Daily Processing & Movements of Contributions
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