Many American workers participate in company retirement plans, methodically contributing to their accounts over time to fund for life after work. Beyond benefiting from employer-funded plans, retirees commonly draw from additional savings tucked away in IRAs or after-tax savings accounts as well. Add Social Security payments to the mix and it should be a recipe for a secure retirement, right? While many retirees thoroughly plan for their retirement, the rising cost of living and unforeseen expenses can mean the retirement income may fall short of anticipated needs. The difference between your retirement income and actual expenses is known as your Retirement Income Gap.
What can cause a shortfall?
Along with unexpected expenses, increased life expectancy and inflation top the list of culprits that can erode the purchasing power of your retirement account. In the US, average life expectancy is just under age 80 and is the age commonly used as a target for planning. But, that average includes the number of people who die young and unfortunately never see their retirement years. For those that have reached age 65, the Social Security Administration estimates that men will live to approximately age 84 and women to about 86, presenting a significant difference in the estimation of years in retirement. Additionally, in the last decade the US inflation rate has been historically low, averaging just 1.7 percent per year. This may lead savers to believe that this trend will continue into retirement. For the 12 months leading up to June 2018, the U.S. Labor Department published a 2.9 percent inflation rate, which is more in line with the U.S. historical average of 3.2 percent. That doesn’t sound so bad until you realize that at this rate prices will double every 20 years.
How can participants avoid a shortfall? Making sound decisions about the areas of retirement planning that employees can control goes a long way. Let’s look at the two biggest sources of retirement income and some guidance on how to maximize their benefits.
Social Security – Timing is everything
Social Security is the most common source of retirement income for those over age 65, with 88 percent of retirees relying on these monthly payments. Since workers can apply for Social Security as early as age 62, the most popular claiming age, it’s important to understand the effect that claiming early has on the amount of monthly benefit received. Generally speaking, people think of retirement age as 65. But, with Social Security the full retirement age varies depending on when you were born. Full retirement age is important since it is the age at which a person may first become entitled to unreduced retirement benefits.
What happens if you claim early?
Let’s take Joe Worker who was born in 1954. His full retirement age for Social Security benefits is age 66. If Joe started to take his benefit at age 62, his monthly benefit would be reduced by 25% for his lifetime. If Joe waited until he was age 66, he would receive his full benefit, 25% more, over his lifetime.
Additionally, if Joe deferred his benefit start date until age 70, he could earn “delayed credits” of about six to eight percent per year in addition to his cost of living adjustments. At age 70, Joe’s monthly benefit would be 66 percent higher than it would be at 62! Truly, when it comes to Social Security, timing is everything.
Social Security strategies and claiming choices can be extremely complicated, especially when you add in the strategies available to married couples. There are several calculators and available software services to help with this important analysis such as socialsecuritychoices.com and SSA.gov.
In 2018, the maximum Social Security benefit an individual can receive is $2,788 per month, or $33,456 per year. These benefits were never intended to fully replace one’s prior earnings. In fact, according to the Social Security Administration, this benefit only compensates for about 40 percent of an average wage earner’s income after retiring. Unless employees plan to reduce their lifestyle expenses, Social Security retirement benefits probably won’t cover all, or possibly even a majority, of future living costs. Let’s try to close the gap a bit further.
Retirement Accounts
If your employees are relying on their 401(k) plan to close the retirement income gap, then committing to contributing early and consistently is key. While 401(k) plans are one of the best available retirement savings options for many, only 32 percent of American workers are participating in one. That is a surprisingly small number given that 59 percent of workers have access to these types of plans.
Saving early, consistently, and aggressively really helps. But, what’s the reality? A recent study by Vanguard entitled “How America Saves” showed the average 401(k) account balance by age group. Even at age 65 the average account balance was just under $197,000. If we use an average life expectancy in retirement of 20 years, these funds could provide an additional $9,850 per year (without investment growth). Add this to the maximum Social Security benefit of $33,456 and the resulting annual income is $43,306, not a particularly robust retirement income.
The income gap is markedly larger for female employees. A recent Student Loan Hero study found that women had about one-half the amount in retirement savings as their male counterparts. The low savings level is even further compounded by the fact that, on average, women live longer than men. The reasons for this short fall can stem from time away from the workforce for family reasons, but the women surveyed also cited a lack of knowledge about investing as a deterrent to joining their employer retirement plans or investing in an IRA account.
What can employees do to boost their savings?
It’s great if you started young, deferred 20% of your pay, and invested well. However, that may not be the case for many employees. Here are a few useful tips to get that retirement savings number up:
- Start Saving Now
Reengage with those employees that are not participating in your retirement plan. Encourage them to get their benefit information from the Social Security Administration so they understand the baseline amount that will be forthcoming. All employees who are eligible for Social Security benefits can access their information by creating a secure account at SSA.gov. - Increase Contribution Levels
American culture has not taught us to be great savers. Though Americans aren’t the worst around the globe, countries like Japan have average savings rates of nearly 50% of their income! If you have employees deferring 1 to 3 percent of their pay, encourage them to bump up their rate. - Catch-up Contributions
Catch-up contributions are appropriately named! They were created to help employees who are age 50 or older “catch-up” for retirement. Not only can an individual defer $18,500 into a 401(k) plan in 2018, they can also contribute an additional $6,000 per year as a catch-up contribution. - Take advantage of Equity Investments
Be sure to speak with the plan’s advisor about the investment options available. With a low interest rate environment still in existence, fixed investment returns can erode retirement account growth. Taking advantage of equity-based investments can help grow your account through greater investment returns.
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.
We’re leaders in retirement plan administration.
How can we help you get where you want to go?
Phone: (732) 747-1540
Email: [email protected]
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
© 2025 Benefit Insights, LLC. All Rights Reserved.
© 2026 Red Bank Pension Services. All rights reserved. Website by GSM Marketing