THE IMPACT OF DISCLOSURES ON EMPLOYER-SPONSORED RETIREMENT PLANS
Similar to the health and welfare side of benefits, 2012 brought newfound clarity on the retirement side. After navigating several rounds of guidance on retirement issues, plan sponsors were able to begin implementing regulatory requirements relating to the “reasonableness” of fees. First, beginning July 1, 2012, service providers of ERISA-covered plans were required under ERISA 408(b)(2) to provide certain disclosures to plan fiduciaries. These disclosures are meant to provide plan fiduciaries with sufficient information to make well-informed decisions – an obligation under ERISA’s fiduciary provisions – about the service provider, its services and the associated costs, including compensation.
Second, 2012 saw the initial effective date of new regulations under ERISA 404(a)(5) relating to plan sponsor disclosure of fees paid by plan participants, including investment-related disclosures, administrative fee disclosures and transactional administrative fee disclosures. These disclosures are meant to assist participants and their beneficiaries in making informed decisions about their investment choices within a plan.
No one knew what type of reaction to expect from plan sponsors, fiduciaries and participants when the two waves of disclosures were implemented. So far, they have not produced the tsunami of action some predicted. Fidelity Investments, one of the first providers to send out participant disclosures, sent 17 million notices, yet received only 1,200 phone calls with related questions or concerns. In addition, a recent Plan Sponsor Council of America (PSCA) survey indicated that an average of only 1.4 percent of participants asked fee-related questions after receiving their disclosures.38 The survey also found that 95.9 percent of employers reported no change in behavior by participants as a result of the fee disclosure information.39
Initial anecdotal reports indicate that plan sponsors also have not raised many questions with their advisors or their plan providers and record keepers about the new 408(b)(2) disclosures. But there does appear to be an increase in the amount of Request for Information (RFI) or Request for Proposal (RFP) activity among employers. The PSCA survey indicated that 15 percent of employers sent out an RFI/RFP as a result of the fee disclosures (a typical year is around 10 percent).40
However, those statistics do not mean that the disclosures will not ultimately have a huge impact on the world of employer-sponsored qualified retirement plans. As affected parties become more comfortable with disclosures, plan advisors will need to work with plan sponsors to help them further understand the disclosures and seek value in plan investment options and services, and not simply seek out low prices.
Challenges to the Current 401(k) System
Understandably, implementation of the new fee disclosures has not solved all of the challenges in the retirement world. In fact, even though employers have not asked many questions of their advisors and service providers, a recent survey shows that 83 percent of small business owners (those with fewer than 100 employees) were more confused after reading the fee disclosure forms.41 Their confusion centered on the meaning and fairness of the fees. Also, 68 percent of those owners stated that they would not know how to answer their employees’ questions relating to the plan fees.42
Additionally, there are still unanswered questions with respect to the definition of “fiduciary” for the purpose of ERISA’s fiduciary obligations. Much-anticipated guidance on this issue is expected from the U.S. Department of Labor (DOL) in 2013, which could expand the compliance obligations to a broader base of fiduciaries.
With Americans’ confidence in their ability to retire comfortably stagnant at historically low levels (just 14 percent are very confident they will have enough money to live comfortably in retirement43), many have begun to rethink the entire system by which retirement benefits are offered. Indeed, some in Washington and in the media are questioning the effectiveness of the current 401(k) system.
As a result of the questioning, alternative systems have been mentioned. One suggested system is to cap employee and employer retirement contributions at a certain level — for example, $20,000 per year or 20 percent of compensation, whichever is less. This, in essence, is a reduction or elimination of the tax deductibility of retirement plan contributions, which is problematic for two reasons. First, it would limit retirement contributions overall, which clearly would not result in Americans becoming more retirement ready. Second, a cap may act as a disincentive for employers, and without incentive, employers may choose to no longer offer a plan at all.
Another suggested system, which has several variations, is to have companies offer an individual retirement account (IRA) to each employee. These IRAs would be required, professionally managed and come with a guaranteed rate of return and pay out annuities.
All of the retirement reform talk in Washington and in the media, together with the unanswered questions on the definition of “fiduciary,” has been confusing to employers. This is particularly true considering the fee disclosures discussed above, which puts the onus on employers to gather all of the information and determine if their fees are reasonable. With all of the confusion and added obligations, some 401(k) sponsors might consider dropping their plans altogether.
However, if employers drop these plans (or if lawmakers or regulators eliminate or reduce them), where does that leave our country? What happens when workers are no longer able to physically work, and they do not have adequate retirement savings? Where are they going to look for help? The logical answer is the government, which would ultimately result in a higher overall burden on taxpayers. Further, the current system is established and, as discussed below, pointed toward success. Therefore, it is important that our country addresses individuals’ savings needs now through the current system rather than taking additional time to build a new system, as some have suggested.
Current System – Pointed Toward Success
While the current system might not be perfect, it is certainly not broken. Today, over 61 million American workers – 75 percent of whom earn less than $100,000 per year – participate in a 401(k) plan.44 In addition, retirement savings now represents over 65 percent of American families’ financial assets.45 Data also shows that workers are far less inclined to save for retirement if there is no plan available at work. According to the Employee Benefit Research Institute (EBRI), one segment of the workforce (those earning between $30,000 and $50,000) was 65 percent more likely to save for retirement if a 401(k) was available at work. 46
In addition, the suggested alternative systems do not pose viable alternatives to the current system. Take the proposal to cap retirement contribution levels. According to EBRI’s retirement confidence survey, 1 in 4 full-time workers saving for retirement said they would reduce, or totally eliminate, their retirement savings plan contributions if the tax deductibility of retirement contributions is limited or eliminated.47 In addition, studies show that reducing or eliminating the tax deductibility for retirement plan contributions would lead employers to reduce or eliminate their retirement plan involvement — which would lead to fewer employers sponsoring and contributing to the retirement savings of Americans.48 With less support from employers, it would be unlikely that American workers would become more ready for retirement.
An even more compelling statistic is that for those workers who do not have access to a 401(k), less than 5 percent of them save for retirement on their own.49 Thus, even if the proposed “auto-enroll” IRA is implemented in place of the 401(k), the IRA contribution rates would be lower than those of a 401(k) plan. Further, IRAs encourage less employer involvement, since there is no employer match component for employees contributing to their IRAs — a consequence that surely cannot be seen as furthering Americans’ retirement readiness.
So while some workers may have inadequate retirement savings, there are many positive signs and trends within the current system. Most notably, even during the last few years of the “Great Recession,” many Americans saw an increase in total household retirement savings.50 The positive trends suggest that the system is effective. That said, there is no question that the system can be improved, and employers need to play a key role in that improvement.
Employers as the Keystone in Retirement Readiness
Overall, if employers are eliminated from the retirement-readiness equation for American workers, who or what entity will step in? Despite the numerous proposed alternatives, none introduce a viable replacement to the employer. Rather, the discussion above provides a collective nod to the central role that employers play in workers’ retirement readiness. In addition, if employee wellness – both from a health and a financial perspective – is essential to the success of a business, employers have an even greater incentive to fill the role of retirement benefits facilitator. As employers embrace their keystone role, they will reap the benefits of a healthy and strong employee base.
Several studies support the notion that a retirement-ready employee base results in a stronger business. Specifically, those studies conclude that financial distress, including retirement unpreparedness, causes distractions that interrupt employee performance, attendance and overall productivity. One study states that 60 percent of workers are experiencing moderate to high levels of financial stress, and that up to 80 percent of those financially stressed workers spend time worrying about and dealing with financial issues instead of working.51 That study estimates that financially stressed workers waste up to 25 percent of their work time dealing with personal financial matters.52
In addition, MetLife’s 2012 annual study of employee benefits trends states that 22 percent of employees said they took unexpected time off of work in the past 12 months to deal with a financial issue.53 In addition, that same 22 percent said they spend more time than they think they should at work on personal financial issues.
Clearly, taking unexpected time off of work or spending excess work time on non-work-related issues is detrimental to the employer’s productivity and growth. Although some financial issues may arise at unexpected times or may be unrelated to retirement, providing a generous retirement plan option and encouraging employees to participate in that option can only help reduce such financial stress on employees. Such a reduction in stress will likely result in lower absenteeism and presenteeism (attending work while sick) and higher productivity.
If employers do not offer retirement benefits or fail to encourage employees to participate, it is more likely that employees will have financial stress. Like removing the keystone from an arch, the result will be problematic. Instead, employers should establish, maintain and encourage participation in retirement plans for employees, all of which result in more stable and productive employees. Ultimately, stable and productive employees can help lead to a stable and productive business.
38 “Plan Sponsor Council of America Fee Disclosure Snapshot Survey Results,” (October 2012).
41 shareBUILDER 401K National Survey, (September 2012).
43 “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Ruth Helman, Mathew Greenwald & Associates; and Craig Copeland and Jack VanDerhei, Employee Benefit Research Institute. Issue Brief, (March 2012), No. 369.
44 “Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2011,” Craig Copeland, Employee Benefit Research Institute Issue Brief, (November 2012).
47 “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” Ruth Helman, Mathew Greenwald & Associates; and Craig Copeland and Jack VanDerhei, Employee Benefit Research Institute, Issue Brief, (March 2012), No. 369.
48 “Attitudes of Employee Benefits Decision Makers Toward Retirement Plan Tax Proposals,” Mathew Greenwald & Associates, Inc. and the American Benefits Institute (2012).
49 “Employment-Based Retirement Plan Participation: Geographic Differences and Trends 2010,” Craig Copeland, Employee Benefit Research Institute, Issue Brief, (October 2010), No. 348.
50 “Weathering the Economic Storm: Retirement Plans in the U.S. 2007 – 2012,” 13th Annual Transamerica Retirement Survey (November 2012), Transamerica Center for Retirement Studies.
51 “Financial Distress Among American Workers,” E. Thomas Garman, et. al., (March 3, 2005).
53 “The 10th Annual Study of Employee Benefits Trends: Seeing Opportunity in Shifting Tides,” MetLife (2012).
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