United States: Sharpening Your Edge In Retirement Benefits

Businesses that want to effectively recruit and retain employees know they need to offer and support leading-edge retirement benefits. That means retirement plans should be structured for the future, helping employers manage the administrative load and employees manage their retirement savings more effectively. Options include automatically enrolling employees in the plan, enabling the purchase of an annuity from the plan and encouraging employees who switch employers to either leave the funds behind or roll them into another 401(k) instead of into an IRA so that their money is kept in one place and invested in prescreened investment alternatives.

Employers often benchmark their plans to determine how well the plans stack up against other plans in their industry. As employers decide whether to upgrade their plan benefits, they should keep in mind the myriad rules and regulations that may apply to their 401(k) plans. Plan documents must be written to comply with all requirements in the Internal Revenue Code in form and must also be administered to comply with its written terms. See the IRS's list of general plan responsibilities for sponsors.

Features for the future

According to a June 2016 survey by the Transamerica Center for Retirement Studies, "The Current State of 401(k)s: The Employer's Perspective," 74% of employers offer a 401(k) or similar plans to their employees, yet only 38% of them extend eligibility to part-time workers. Most plan sponsors that don't extend eligibility to part-time employees have no plans to do so, citing impracticality, cost and high turnover among part-time employees. Businesses should consider that providing coverage to part-time workers could not only boost their attractiveness as employers, but also alleviate the administrative burden of monitoring these workers' hours in order to meet the compliance testing required when part-time workers are excluded.

Additionally, automatic enrollment and automatic deferral percentage escalation may minimize the employer's administrative burden created when employees are enrolled on a case-by-case basis rather than automatically. These features help employees increase their savings without requiring them to take any action. They help employers manage the risk of plan errors caused by missed deferrals from participants who would be manually added to the plan and improve employee participation. Finally, automatic enrollment and escalation may help plans pass nondiscrimination testing.

Plan sponsors are required to disclose certain information to their employees, so effective employee communication and education are additional benefits in running a successful 401(k) plan. The Transamerica survey found that plan sponsors could do more with retirement transition assistance as employees approaching retirement face challenging decisions. Former employees could also benefit from clear and simple materials regarding distribution, withdrawal and payout options, and IRA providers.

If companies help their employees smoothly transition into retirement, they're less likely to need to maintain records for former employees because of account balances. Messaging and communication should be targeted, because younger participants are more used to electronic and digital media, while older participants approaching retirement may prefer printed materials and/or onsite learning.

Getting results while staying in compliance

Beyond operating their 401(k) plans to ensure compliance with the Internal Revenue Code and Employee Retirement Income Security Act (ERISA), businesses should consider designing and/or redesigning plans in ways that help them stay competitive in attracting talent. Plan sponsors can take actions including the following to make the most of benefits while managing the risk in administering 401(k) plans:

  • Become familiar with the plan document so that inconsistencies with plan form and operation can be more easily spotted.
  • Use gap analysis and benchmarking studies to compare the plan's features to the HR business strategy and industry.
  • Use formal review procedures such as hiring consultants to perform compliance reviews to make sure the terms of the written plan are followed.
  • Conduct a service review of current providers and submit a request for proposal if fees and services could be negotiated more favorably.
  • Review and understand what your service agreement does and doesn't cover to keep certain administrative duties (e.g., Form 5500 reporting, nondiscrimination testing and plan notices to participants) from slipping through the cracks.
  • Review nondiscrimination testing to explore potential plan amendments that may benefit plan operation.
  • Train fiduciary or HR staff.

With the help of your benefit adviser, if you identify a mistake in administering your plan, you can use the IRS Employee Plans Compliance Resolution System (EPCRS) to correct it and avoid the consequences of plan disqualification. The EPCRS allows retirement plan sponsors to correct plan mistakes and continue to provide retirement benefits on a tax-favored basis.

Failing to comply with the highly complex laws can result in significant tax penalties. Therefore, it's critical to understand the current plan document, conduct regular reviews to avoid surprises and address any issues. Engaging a consultant can help with performing reviews, identifying issues and prioritizing efforts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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