Trends in Retirement Plans
By Kyle Corum, Principal, CPA, CFE
As I write this, an American retail icon, Toys-R-Us, is going through bankruptcy liquidation. There are many reasons why this is happening. Toys-R-Us failed to see the changes that were coming at them, and before they knew it, they were passed by the likes of Walmart, Target, and Amazon.
The same can be said for the ever-changing landscape in retirement plans. With so many different options (auto this, auto that, this fund, that fund – you get the picture), it can be hard to stay up-to-date on everything. Here are a few trends arising related to retirement plans you should be aware of so your retirement plan does not fall behind your competitors or your participants’ needs:
Roth 401(k) features – There are many studies that have published similar data, but most recently, an article published in Plan Sponsor Council of America (PSCA) found that 63% of all plans offered a Roth option in their retirement plan compared to just 30% 10 years earlier.
This may be of particular interest now that the Tax Reform has passed. With many Americans moving into lower tax brackets, the benefit of the pre-tax deduction from a 401(k) is lessened. And with the probability of high tax brackets in the future, why not take advantage of the Roth now? The Roth option may not suit all participants, but having this as an offering bolsters your plan options for your participants.
Revenue Sharing and ERISA Budget Accounts – This may be the most widely-contested term in a retirement plan. Should you or shouldn’t you have it? Revenue sharing is complex and can be difficult to understand. It is confusing because revenue sharing payments can be hidden in the expense ratios, and therefore, not transparent to the participant. The industry is taking notice. In an article I read recently, it was noted that the use of revenue sharing in a 401(k) plan has decreased to 27% in 2017 from 66% in 2012. Some funds that pay revenue sharing subsidize other funds in the plan that do not pay them. Thus, the expenses among participants is not fair. More plans are moving to a per head fee to make the fees more transparent. Please keep in mind that not all revenue sharing is bad. Talk with your Plan’s Advisor on the best use of these monies.
In addition, Plans are creating an ERISA budget account to pay for fees. This is like a checking account in the Plan (not an investment option) that accumulates revenue generated, and then is used to pay for qualified plan expenses or pays the excess back to the participants. This keeps everything out in the open and transparent for the participant.
Automatic features – Here is a great article to read on the behavioral science that went into developing some of the auto-enrollment and escalation features.
Auto-enrollment and auto-escalation features in plans are on the rise. It has been reported that participation rates for plans with auto-enroll is 90%, and the participation rate drops to 63% without the automatic enrollment feature. This is huge for many plans and for participants.
The default deferral rate plays an important role as well. Studies have shown that most employees will not change their deferral rate. If you set it too low, they will stay there. Set it too high, and they may opt out of the plan altogether. Think about what is best for the employee when setting this default rate.
Fees – It seems that any time you mention retirement plans, fees have to be mentioned. Keep in mind that you have a fiduciary responsibility to monitor fees, but less is not always best. Be sure to choose a provider with experience and knowledge, and most of all be sure the provider’s client-service model lines up with your plan strategies. Many providers cut fees at the expense of client service. If you have not benchmarked your plan’s investment or advisor fees in a while, it may be time to do it now.
Kyle Corum Principal, CPA, CFE
Kyle Corum is a Principal with BRC and is the leader of the Firm’s Advisory Services practice, which includes a variety of different types of engagements including: Cybersecurity Due diligence for mergers and acquisitions Fraud and Forensic Investigations Agreed upon procedures Internal control reviews and analysis Outsource CFO and Controller duties Litigation support Shareholder […]