The economy continues at its strong pace, keeping unemployment at its lowest rate in nearly 50 years. While this is usually good news, employee financial vulnerability is clouding this sunny forecast. The repercussions are impacting their ability to save for retirement.
Millennials are the most stressed by their financial situations, followed by Gen X and Baby Boomers according to PWC’s 8th annual Employee Financial Wellness Survey released in June 2019 (Figure 1 bottom right). More than 80% of the employees surveyed believe they will have to work during retirement.
Top Two Financial Concerns
The top two financial concerns across age groups are:
- Not having enough emergency savings for unexpected expenses. This is especially true for Millennials and Gen X.
- Not being able to retire when they want to (37% of all employees); 52% of Baby Boomers ranked this as their biggest concern.
Causes of Financial Stress
Nearly 32% of employees surveyed said they are not saving for retirement because they have too many other expenses and too much debt.
- For 19%, retirement readiness is impeded because they are providing financial support to parents, in-laws, or adult children. More than 50% also have to support dependent children.
- Credit card debt is increasing across all generations because it is the only way employees, especially Gen X and Baby Boomers, can afford necessities.
How You Can Help Employees Save More
Employers are finding innovative ways to help employee save:
Adopt PPA Safe Harbor Measures
Leverage Pension Protection Act (PPA) Safe Harbor provisions by:
- Automatically enrolling all employees (not just new hires) in retirement plans.
- Setting an initial contribution amount and automatically increasing that amount over time.
- Reviewing employee group demographics, then setting your Qualified Default Investment Alternative to a target date fund, target risk assess allocation, or separately managed account.
Adopt PPA Safe Harbor Measures
The figure that gets tossed around most often when talking about how much is needed for retirement is $1 million. For some who are unable to save for an emergency, they throw up their hands when they hear that figure, knowing it isn’t achievable.
To help employees set realistic savings goals, employers need to help them project what they will need to have accumulated to live in retirement. There are three general guidelines for calculating retirement goals to make saving for retirement more manageable.
Guideline 1: The 25 Times Rule of Retirement
The 25 Times Rule is one way to help individual employees estimate the nest egg that they need for retirement. The employee simply needs to make a list of current expenses, then multiply that figure by 25. This provides an estimate of the amount of living expenses over 25 years. Though expenses may change in retirement, don’t assume that they necessarily go down. This method assumes employees will withdraw about 4% of their retirement nest egg each year without being in danger of running out of money.
An individual who will have $20,000 a year in expenses, will need roughly $500,000 to retire comfortably for 25 years.
Guideline 2: The 70% Rule of Retirement
Another way to project retirement savings is to estimate that employees will need about 70% of their average income for each year they live in retirement.
If an individual has a median working income of $35,000, he/she would need a little more than $600,000 saved for expenses over a 25 year retirement period.
Guideline 3: The 15% Rule of Retirement
This rule only works if employees have been saving since their twenties or early thirties, or they are currently in that age bracket and are looking for a rule of thumb to build their retirement nest eggs. It is simple: they save 15% of their income every year. This method gives employees the peace of mind that they are saving enough to live comfortably without the burden of reaching a specific target.
Important Considerations: Income and Expenses
Employees’ expenses will be very different once they retire. They won’t have travel to and from work and they won’t have business attire or day care expenses, etc. They can eliminate a mortgage payment by paying off their house. On the other hand, other expenses will go up. Healthcare costs increase with age and Medicare doesn’t cover 100% of healthcare expenses and covers 0% of nursing home expenses. Many people dream of traveling when they retire, which means those expenses will be higher. So, underestimating retirement expenses can cause retirees to go through their savings faster than anticipated.
Income will also be different because employees will not have to pay Social Security and Medicare taxes, which currently consume about 7.5% of their paychecks. Their Social Security income will be taxed at a lower rate than their wages since they will most likely be in a lower tax bracket. They will also not be diverting any of their incomes to retirement or health savings accounts.
How Many Years Should I Plan For?
This is always a difficult subject, but it is necessary to plan for the best when thinking about how long employees will need to fund retirement. Healthy people tend to live longer regardless of age, so that is a consideration when projecting longevity. Another factor is family history—how old are or how long did their parents, grandparents, and siblings live? If they have relatives in their nineties, they should plan to live that long as well.
Calculators and Other Projection Tools
- The Social Security Administration has free calculators that employees can use to understand their projected monthly benefits. Of course, these benefits can change depending on the age that an employee opts to start taking Social Security.
- The Center for Retirement Research at Boston College offers Target Your Retirement, a free, interactive program that helps near retirees develop a reasonable plan for maintaining their standard of living in retirement.
To best help employees create comfortable nest eggs, help them understand the long game of retirement using some of the guidelines provided above. You can also provide easy to use tools that help set realistic goals so employees can feel confident that they are making progress toward their retirement goals.
©2019 Benefit Insights, LLC All rights reserved.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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