Keeping Retirees in Your Retirement Plan
According to T. Rowe Price, some sponsors may anticipate that their relationship with participants — as well as their responsibilities toward them — will naturally wind down at retirement, even though only about one in five sponsors prefer participants to leave their plans when they exit the workforce. Sponsors should carefully weigh the pros and cons of encouraging retirees to remain on board.
The Participant Perspective
Participants might be encouraged to linger in their company plan to take advantage of increased access to certain types of investment vehicles, such as stable-value funds and collective investment trusts. A 401(k) typically has lower fees than an IRA and often comes with complimentary advisory services. The increased fiduciary responsibility required of a qualified retirement plan also provides a greater level of investor protection than an IRA.
Pros for Employers
It’s not just employees who may benefit from staying on a company’s 401(k) plan after retirement — employers can too.
Lower administrative fees. The primary benefit for employers when retirees keep funds in their retirement plan account is the overall boost that these participants can give to total assets, which in turn assists in maintaining a healthy plan. Having higher pooled assets, bolstered by retiree funds, can help sponsors negotiate with financial service providers. This increased bargaining power could help sponsors lower their fees and administrative costs.
Greater access to institutional share classes. Keeping retiree dollars in plan can also increase access to more preferential share classes. This can lower fees even more for all participants.
Cons for Employers
Although sponsors can use retiree funds as leverage for lower fees, there can also be drawbacks to keeping retirees on your books. Before deciding how to proceed, employers should consider these factors.
Additional responsibilities and needs. The most noteworthy drawback to keeping retirees’ assets in the plan is the continued administrate burden — tracking and monitoring retirees’ accounts, providing disclosures and maintaining regulatory compliance. Additionally, sponsors should consider the need for specific communications with participants as they approach retirement. The inclusion of retirees in a plan may require the addition or expansion of resources, services, and solutions.
Risk and liability. In addition to having the responsibility to track and monitor plan funds, sponsors are potentially liable for them as well. Sponsors who invite retirees to stay active in their company’s 401(k) should prepare for the risk and liability of these assets. This can be more difficult with retirees than current employees, as retirees typically have less direct contact than current staff — if participants become difficult to locate past retirement for disbursals and disclosures, the responsibility lies with the employer to make reasonable attempts to track them down.
Weighing the Pros and Cons
The decision to invite retirees to remain in a company’s 401(k) plan depends on many factors, but the most important one is often the size of the plan itself. Sponsors who manage larger plans often have the resources to provide administrative services and cover participant fees, whereas sponsors of smaller plans may be more concerned with their administrative responsibilities. If you’re considering whether to encourage retirees to stay in your plan, weigh the pros and cons carefully.
Helping Employees Pay Down Student Debt
The ever-growing burden of student loan debt looms menacingly over many Americans, crippling their ability to save for retirement and other financial goals. According to Bankrate, around 60% of Americans who have student debt have delayed saving for major milestones because of it. While young people bear the most debt, they’re not the only ones affected by far as roughly 25% of baby boomers are still paying down student loans. Some employers are taking a more proactive approach to investing in their employees by enacting programs that allow workers to direct retirement plan contributions toward paying down their debt.
The Problem with Debt
Student loans can be difficult debt to pay off. Tuition has skyrocketed in the last few decades, meaning many students have to borrow much more to earn their degree. Although interest rates for these loans are typically lower than they are for credit cards, the high principal means interest accrues quickly and sizably over time. They also can’t usually be discharged through bankruptcy, and forgiveness programs have specific criteria for which only some workers will qualify.
The student debt crisis has a broad cross-generational impact. Many older Americans are delaying retirement because of the financial impact of their loans. Younger people are foregoing attempts to save money while they try to get out from under student debt.
A Flexible Solution
Some forward-thinking organizations are now offering solutions that can be tailored to their employees’ needs, including an option to pay student debt using employer matching contributions. Thrive, for example, allows participants to allocate some or all of their employer match to student loan debt, a college fund or even an emergency savings account. This way, participants can take advantage of retirement plans by using matching contributions to help reduce debt or save money for other goals.
Thrive’s turnkey solution helps provide debt relief without increasing your retirement plan’s administrative workload. Employees simply enroll though Thrive’s online portal to set up a payroll deduction. Thrive communicates with the existing payroll service to match the contribution and takes care of administration, reporting and payment to employees’ registered account. And thanks to pandemic relief legislation, up to $5,250 in tax-free annual matching contributions can be directed toward student loan repayment through 2025. *
Advantages for Employers
According to Forbes, happy employees are up to 20% more productive at work than unhappy ones. Considering that student loan debt is a major contributor to stress, allowing employees to take charge of their finances in this way may help alleviate a significant stressor for many workers.
Plan sponsors who seek a unique way to invest in their personnel may want to consider a flexible contribution program like Thrive. By helping employees pay down their debt with match dollars, organizations can provide proactive, actionable, and concrete solutions to enhance their workers’ financial wellness. In turn they can enjoy increased employee satisfaction and productivity — and even bolster recruitment and retention efforts.
Revenue Sharing Decisions
As a result of the significant rise in revenue sharing litigation it behooves plan fiduciaries to confirm and document the prudence and appropriateness of any revenue sharing arrangement.
Revenue sharing is the sharing of fees from one service provider (e.g., an investment fund manager) to another service provider (e.g., your record keeper). Revenue sharing may be built into a fund’s asset-based expense ratio if a plan utilizes a higher cost share class. The revenue sharing is often used to offset plan-related expenses rather than having the plan sponsor or participant making direct payment for specific plan services.
A growing number of lawsuits allege that fiduciaries breached their duties of prudence by utilizing investment share classes with “excessive” revenue sharing. It is important to understand that ERISA does not prohibit plans from using revenue sharing to pay plan fees, but plan fiduciaries must be prepared to verify that their compensation arrangements are reasonable and prudent, as these fees are being paid from plan assets. Plan sponsors should be ready to show the prudent process utilized to justify the use of revenue sharing and the ongoing monitoring they undertake to ensure they do not become excessive with the growth of a plan. In the event that a plan sponsor cannot show the prudence of using revenue sharing it is important to know that the Department of Labor (DOL) may find issue with its use and issue directives to plan sponsors to make a plan “whole” via threatened legal actions. In addition, plan participants may initiate class action lawsuits against plan fiduciaries as well.
According to a recent survey from Vanderbilt University, the National Bureau of Economic Research (NBER); and the Board of Governors of the Federal Reserve System more than half the plans surveyed utilize revenue-sharing arrangements with at least one fund on the menu*.
The strongest position for a fiduciary is to have a documented and deliberate decision-making process that considers all relevant factors documenting prudence and the rationale for utilizing revenue sharing.
*A copy of the research paper is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3752296