Beginning A New Year…With Excitement!
Welcome to 2012! As we look ahead we are, frankly, anticipating significant steps forward in the quest for retirement dignity for participants in employee-directed retirement (401(k), 403(b), 457) plans. Now, this doesn’t mean we are unaware of or ignoring all the reports of impossibly low retirement plan balances and a decade of near zero percent returns. Rather, we are seeing trends like increased acceptance of automatic enrollment, the use of diversified investment vehicles like asset allocation and target date funds and the utilization of individualized participant investment advice as very positive for the long-term.
Our wish, if we were limited to only one item, would be for universal implementation of automatic increases in participant deferral rates beginning at six percent and rising to 15% over no more than five years. Sound crazy or impossible? Maybe, but it’s what we see as necessary AND attainable. Yes, it’s a cultural shift but one that is both needed and, I absolutely believe, would be welcomed by the vast majority of plan participants. What do I base that on? Well, 2012 marks my 30th year working in the investment and advisory business. I believe all the gray hair and laugh lines say I may have learned something or other along the way. I thought I’d share some of that with you.
Edward M. Lynch, Jr., AIFA®, RF™
Managing Director & Chief Retirement Officer
In the Spotlight: Retirement Income Products
- Deferred fixed annuities: provide a fixed, monthly payment until death. These annuities are usually purchased before retirement.
- Guaranteed minimum income products: guarantee a minimum level of future annual income based on underlying investment performance, similar to a variable annuity.
- Guarantee minimum withdrawal products: guarantee a participant can withdraw a set percentage annually from their investments and never run out of funds.
- Immediate annuity: provide a fixed, monthly payment until death. Generally purchased at retirement.
Many plan providers already offer a variety of retirement income products. And along with more choice comes more fiduciary considerations, such as portability issues and fee transparency.
The guarantee of the annuity is backed by the financial strength of the underlying insurance company. There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract. Withdrawals prior to age 59½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Investment sub-account value will fluctuate with changes in market conditions. Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. The prospectus contains this and other information about the variable annuity.
PSCA Releases Results of Annual Survey of Profit Sharing and 401(k) Plans
The Plan Sponsor Council of America (formerly called the Profit Sharing/401k Council of America) has released its 54th Annual Survey of Profit Sharing and 401(k) Plans. This most recent release reflects the 2010 plan-year experience of 820 companies with 10.5 million participants and $691 billion in plan assets. Highlights of the survey are provided below. For more information, please visitwww.psca.org.
- The average plan has approximately 63 percent of assets invested in equities. 41.8 percent of plans have an automatic enrollment feature. The most common default deferral is 3 percent of pay, and the most common default investment option is a target-date fund.
- 59.2 percent of companies allow for immediate eligibility. Companies are more likely to have a one-year service requirement for non-matching contributions than for matching company contributions.
- Plans offer an average of 18 funds for both participant and company contributions.
- Investment advice is offered by 57.6 percent of respondent companies; 22.3 percent of participants used advice when it was offered.
- Loans are permitted in 88.8 percent of 401(k) plans.
- The average percentage of eligible employees who have a balance in the plan is 86.3 percent. An average of 76.9 percent of eligible employees made contributions to the plan in 2010, when permitted.
- 45.5 percent of plans allow participants to make Roth after-tax contributions. 16.1 percent of participants made Roth contributions when offered the opportunity.
- 63.6 percent of plans now offer a target-date fund as an investment option.
Company Stock and Fiduciary Considerations
In recent years, there has been a substantial increase in litigation involving 401(k) plans that have invested in the stock of their sponsoring company. The only definitive way for plan fiduciaries to avoid liability with respect to plan investments in employer stock is to avoid such investments altogether. Nevertheless, many employers, believing that employer stock is beneficial to their plans, continue to maintain it as an investment.
If company stock is available in your retirement plan, you may wish to consider hiring an independent fiduciary. Best practices dictate that the independent fiduciary should have no actual or perceived relationship with the company or its directors and should have exclusive control over the investment-related decisions for the plan, at least with respect to investment in company stock. This eliminates the concern regarding potential insider information and also helps to shift the fiduciary exposure to the independent fiduciary. That said, until this has been accomplished, your company’s retirement committee likely doesn’t have a choice but to monitor, and make decisions in regards to, company stock (unless the plan document expressly states that the plan must offer company stock). Absent a plan provision requiring company stock, the fiduciaries remain tasked with taking prudent action in the best interests of participants, which includes actions taken with respect to the company stock.
Establishing Your Retirement Plan Committee Charter
As retirement plan consultants we strongly encourage our clients to formally establish a 401(k) Committee. The establishment of a Committee may be formalized by adopting a 401(k) Committee Charter. This Committee Charter helps to protect the Named Fiduciary, typically the Board of Directors, by delegating certain identified fiduciary responsibilities to the Committee. It protects the Committee members by defining the specific duties for which they are responsible. Furthermore, it protects the participants as it provides for orderly and prudent governance of the plan designed for the exclusive best interests of the participants and their beneficiaries, as required by ERISA Section 404(a).Consider the following discussion points:
- Determine the purpose of the Committee (investment related, administrative issues, or both).
- Determine how Committee members are selected (who should/should not be members).
- Is there an ideal number of Committee members?
- What topics should the Committee cover (e.g., review investments, review IPS, identify ongoing participant needs/education, review plan design provisions, review plan/participant demographics vs. objectives, consider trends and legislation which may impact the plan, review and benchmark fees)?
The recent stock market turmoil combined with our litigious society is generating concern on the part of many fiduciaries regarding their potential exposure. Taking a casual approach to plan governance, without a formalized Committee Charter, will not help insulate the company or the plan fiduciaries from participants’ complaints or lawsuits. Please contact us with any questions you may have at (978) 225-8386 or molly.gage@dietzandlynch.com.
Communication Corner: No More Excuses!
This month’s sample employee memo encourages non-participating employees to stop the excuses and begin contributing toward the company’s retirement plan.
Email molly.gage@dietzandlynch.com for copy that you can print and distribute to employees.