Avoiding Social Media Pitfalls in Retirement Planning

Americans are increasingly getting financial and retirement planning guidance from social media, risking exposure to misinformation, harmful advice and outright scams. Alarmingly, this includes almost eight in 10 millennials and Gen Zers. Workers turning to these platforms can undercut the benefit of employer-sponsored financial wellness initiatives and put themselves at risk. But there are ways to help ensure sound advice prevails.

Offer short-form financial literacy content. Don’t rely solely on lengthy written articles and extended information sessions to provide financial wellness programming. When appropriate, offer tips and lessons in convenient, bite-sized formats, such as listicles, easily digestible infographics, or answers to FAQs. 

Incorporate video content. Use platforms like YouTube shorts or Instagram Reels as inspiration and develop quick, informative content on relatable financial subjects. And don’t worry, you won’t need to dance through it like a viral TikTok — just make engaging videos on topics of value to employees. 

Leverage your own influencers. Encourage employees to share success stories or testimonials about using company financial resources and retirement benefits as a way of building trust and credibility in your organization’s voice. Include representation from a diverse cross-section of ages, cultural groups and gender.

Employ gamification. Incorporate gamification elements into financial education. Design interactive quizzes or games that employees can take part in. Create 30-day challenges with tasks aimed at improving financial literacy and wellness, offering incentives for participation and completion.

Launch a Mythbusters Series. Get ahead of misinformation by addressing common financial myths that frequently circulate on social media and debunk them with factual information. Use engaging formats like podcasts, blog posts or even live Q&A sessions where experts tackle these misconceptions and provide clear, accurate and prudent financial guidance.

Develop a Financial Wellness Resource Hub. Build an internal online content hub where employees can easily access a curated collection of reputable financial resources, tools and reading materials in a variety of formats. Regularly update it with fresh content, including articles, guides, calculators, and links to external resources vetted by qualified financial professionals.

Share cautionary tales. Highlight examples in the news of misfortunes that have befallen those following unvetted financial information on social media and stress the importance and value of personalized advice from qualified financial professionals. Share warning signs participants should be on the lookout for, such as a profit incentive for those offering financial advice online or shortcuts to wealth building that seem too good to be true.

If your employees have any interest in financial advice, it’s almost certain that search algorithms are serving up investment and other related content to them on TikTok and other platforms. Do all you can to encourage healthy information hygiene to help foster informed and responsible financial decision-making.

Sources

https://www.forbes.com/advisor/investing/financial-advisor/adults-financial-advice-social-media/

Empowering Gen Z: Setting Your Youngest Participants up for Success

Understandably, companies typically devote considerable attention to assisting participants nearing retirement. But the outsized value of early contributions to retirement readiness means employers should also focus on getting their youngest workers enrolled — and contributing — to their workplace retirement plan as soon as possible.

So, what do we actually know about Gen Zers’ attitudes toward retirement planning and their understanding of employer assistance in this area?

What the Research Says

What Retirement Plan Features Do Employees Really Want?, a survey conducted by the Society of Actuaries and Deloitte Consulting, found that 18- to 24-year-olds were five times more likely than others to be unaware of their employer-sponsored retirement benefits. Additionally, 40% indicated friends and family were among their top three resources for financial advice.

Concerningly, nearly one-quarter of this age segment also listed social media and influencers among their top sources of advice, in contrast to just 7% of the overall population. And unsurprisingly, this group also indicated a lower likelihood of tapping financial advisors for assistance. Taken together, the findings suggest that younger workers may be relatively uninformed about the retirement benefits available to them and are more likely to turn to nonprofessionals for financial advice.

How Plan Sponsors Can Help

Implementing auto-enrollment and auto-escalation features can help get more younger workers into plans, but you’ll want to take additional steps to keep them participating and contributing sufficiently. Organizations should therefore also boost their outreach efforts to this cohort to increase awareness of their employer-sponsored retirement benefits — as well as the advantages of getting an early start. And tailoring the approach and messaging to the preferences of this demographic can make their efforts even more effective.

This can be accomplished by leveraging online resources and video content channels to increase utilization of advisory and financial wellness resources. Short-form videos (in the style of TikTok, YouTube Shorts and Instagram Reels) may be particularly effective for this audience, especially when the messaging comes from their peers. Please be aware that modern-thinking advisers that wish to leverage these means of communication need implement technologies and processes that comply with SEC tracking and record keeping requirements.

Financial wellness topics of particular interest to this age group would likely include managing student loan debt, establishing good credit, saving for milestones like getting married and budgeting for major purchases such as a new car or a first home.

The Good News

One bright spot in research from the Transamerica Center for Retirement Studies suggests that each generation is starting to save a little earlier (Gen Z at 19, millennials at 25, Gen X at 30, baby boomers at 35). And this may mean that your youngest employees could just need a little encouragement — and education — to set them on the right path. By helping address this generation’s unique financial wellness needs, employers can encourage early participation in retirement savings and get them on track toward a more secure future.

Sources:
https://www.soa.org/4963c4/globalassets/assets/files/resources/research-report/2023/ret-plan-features-emp-want.pdf

https://www.businessinsider.com/personal-finance/typical-age-generation-started-saving-for-retirement-2021-8?op=1 

The Retirement Savings Glass Is Only Half Full for Women

According to recent data from the National Council on Aging and the Women's Institute for a Secure Retirement, nearly half of women ages 25 and older lack access to a tax-advantaged, employer-sponsored retirement plan.

Digging Deeper into the Data

The top reported financial concerns among women, alongside insufficient retirement savings, include housing costs, Social Security and Medicare cuts. But unfortunately, lack of access to retirement plan benefits doesn’t paint a complete picture of the problem. Because even among those women who are eligible for workplace retirement plans, average account balances lag behind those of men by a startling 50%, according to Bank of America's Financial Life Benefits Impact Report. And this disparity can create a chain of negative financial consequences for both female workers and organizations.

Impacts on Women and Employers

The impacts of the shortfall in women’s retirement savings on the overall gender wealth gap are far-reaching, exacerbating their longer-term financial insecurity. Due to their longer average lifespan, women often require larger nest eggs for retirement than men. Therefore, a lack of adequate savings can often translate to a lower quality of life in retirement for women and can also delay their exit from the workforce due to economic necessity, which can then pass on additional costs to employers.

A Multi-pronged Strategy

Beyond closing the gender pay gap, employers can help women better prepare for a more secure retirement in a number of ways:

• Implement auto-enrollment and auto-escalation features to help increase contribution rates among all those who may be contributing insufficiently, including women.

• Encourage saving by offering matching contributions — or increase the match offered.

• Provide financial wellness programming to educate women about the retirement savings gap and steps they can take to close it, including catch-up contributions for all eligible workers.

• Furnish additional education around the areas of concern for women mentioned above.

• Offer family leave to allow for continuing retirement plan contributions during periods of family care (only 24% of private-sector U.S. employers offer this benefit, according to the Department of Labor).

• Institute flexible work arrangements and allow part-time worker inclusion to help women stay in the workforce and continue contributing. 

A Win-win Solution

Implementing measures to address the gender gap in retirement savings can lead to many tangible benefits for organizations, including an increase in productivity and staff retention rates, maintaining a competitive edge in talent acquisition, and more effective and cost-efficient succession planning. In these and many other ways, helping women win at retirement can also yield significant dividends for the businesses that employ them.

Sources:

• https://www.plansponsor.com/nearly-half-of-women-lack-workplace-retirement-plan-access-survey-shows/

• https://newsroom.bankofamerica.com/content/newsroom/press-releases/2023/06/bofa-data-finds-men-s-average-401-k--account-balance-exceeds-wom.html

• https://www.dol.gov/sites/dolgov/files/WB/paid-leave/PaidLeavefactsheet.pdf

A More Nuanced 4% Rule?

In December 2022, Morningstar adjusted its recommended starting annual withdrawal rate for balanced retirement portfolios upward from 3.3% to 3.8%. The revision was based on an assessment of factors including recent equity valuations, bond yields and inflation. This new rate, however, is still less than the 4% figure commonly cited in financial planning literature.

The Backstory

The 4% “rule” was designed to provide a high degree of confidence that (with inflation adjustments) a balanced portfolio would last at least 30 years. It was developed in the 1990s by financial planner William Bengen, based on historical market returns and economic conditions, and published in a paper: Determining Withdrawal Rates Using Historical Data (link below). Since that time, the strategy has come under increased scrutiny with longer lifespans, volatile market returns — and changes in the interest rate environment. It’s also noteworthy that the model didn’t take management fees into account.

A More Individualized Approach

Even with Morningstar’s appreciable .5% increase (and even if the guidance preserves assets over the course of 30 years), retirees may still find themselves under financial pressure due to account balances that have depreciated by more than 20% over the past year in some instances. To illustrate, a first-year withdrawal of 3.3% from a $500,000 nest egg would provide $16,500 in income, while 3.8% of $400,000 (portfolio amount after a 20% loss) reduces that figure to $15,200 — less income at a time when goods and services cost significantly more than they did 12 months ago.

Back testing has determined the 4% rule would have prevented retirees from exhausting their funds over the course of 30-year periods that included the Great Depression and the Great Recession. Nonetheless, Bengen has on occasion increased and decreased his recommended withdrawal rate (and asset allocation) due to more recent economic conditions. It stands to reason that a more dynamic and individualized approach — accounting for market performance, inflation, asset allocation, sequence of returns risks and investors’ specific circumstances — can help optimize withdrawal strategies to meet retirees’ needs.

How Plan Sponsors Can Help

Employers can provide retirement income planning education in a variety of formats, and aimed at varying levels of financial literacy. Additionally, they can host group educational sessions for near-term retirees and encourage them to meet with their advisor during this critical time to tailor their retirement withdrawal strategies to current market conditions and their specific situation.

Even in a changing and often volatile financial landscape, plan sponsors can help participants better prepare for uncertainties that lie in their path. The foundation of this preparedness is robust financial wellness programming that empowers workers to take a more informed and personalized approach to their retirement planning, and recognition that when it comes to cookie-cutter financial advice, some rules are meant to be broken — or at least bent a little.

Your Plan Fiduciary Must-Do and Should-Do Lists

When you’re a plan fiduciary, you are, of course, prioritizing what ERISA law requires of you. You have a checklist of Must-Dos. But there is also a list of things that you can do proactively that will keep the plan—and plan fiduciaries—out of trouble. These tasks aren’t required by law, but they are certainly worth deciding whether you want them to be on your Should-Do list.

So here are some things to remember that you must do and some related things to consider whether you could do as a plan fiduciary and the reasons we think they are worth considering.

 1.      You must have a named fiduciary.

ERISA requires one named fiduciary to be the plan’s decision maker and to act in the best interest of the plan participants and beneficiaries. And a named fiduciary with expertise will be able to make prudent such decisions.

 You could delegate to a plan, or investment, committee to support the named fiduciary in making those decisions.

This is especially helpful if the named fiduciary somehow lacks the expertise, or time, required to make prudent decisions. ERISA does not require you to make these decisions alone if you are not equipped or duly qualified to do so. ERISA does expect that in in such a scenario, those delegated the responsibilities will undertake them in a manner that leads to prudent decisions that are in the best interest of the plan’s stakeholders.

 Insider tip: Make sure that the committee members you choose are indeed able to contribute effectively and efficiently to the process.

If it proves to be more time consuming or cumbersome than helpful, maybe this committee isn’t what you need. You can always remind committee members that there may be personal liability associated with failure to meet fiduciary responsibilities under ERISA; this prompts dropout from members who are not wholly competent and confident in their own participation.

 2.      You must have prudent decision making processes if you have a committee.

Now, if you do have a committee (and we think it’s a smart choice to have one), it is important to convene periodic meetings and to document the outcomes of the processes undertaken at these meetings. A committee without regular, productive, organized meetings is bound to drop a ball, and this could be worse than not having a committee in the first place.

 You could make your committee as effective as possible by following intuitive committee best practices.

Designate roles, organize meetings, take notes, and execute your action items. Forming a committee shows a concerted effort that avoids any appearance that a plan is not being managed well. Following this intuitive process will keep everyone out of the ERISA spotlight. 

 Insider tip: now that the meeting minutes prove a prudent process.

Minutes provide all past and present committee members with a record for when decisions were made, why, and by whom.  Minutes are useful as a reflective vehicle for reassessing a choice when the times comes.

 3.      You must conduct yourself as though you have an investment policy statement established.

While the law does not mandate that you have a written investment policy statement (IPS), it’s a wise move to put one in place. Many a fiduciary has been glad to have had a set of investment guidelines to refer to because ERISA does expect for the fiduciary to act as though there is a guidebook in place, to undertake a prudent process.

For example, when you conduct your regular review of a plan’s investment options and see that one or more funds no longer meet the criteria established for the plan. Your IPS is going to be your guide in evaluating—and documenting—when and why to drop a fund or choose to leave it on the menu. In an audit, you will be able to show that you followed a set of preestablished guidelines to lead you to your prudent decision.

 You could create a user friendly IPS during a downtime when perspective and learnings are well aligned.

A good IPS sets down prudent standards that are established either in practice or in writing when there is time to think proactively about what decisions should be made so that those decision don’t end up being made reactively. The key to the winning IPS is that it is there for you when you need it—thought of, and written, long before you need it.

 Insider tip: If you have an IPS, make sure you follow it.

The Department of Labor often requests a copy of the plan’s IPS upon beginning an audit—even though, we mentioned above, one is not required by law. So if you do end up developing an investment policy statement, make sure the Committee refers to and abides by it because it will be considered by the auditors. 

 Sources:

https://nevinandfred.com

Let’s Talk One Percent

Since the contribution limits were recently raised by 10% 401(k), 403(b) and most 457 plans (to $22,500), we thought now might be a good time to share creative ways to communicate to your participants the benefits of increasing contributions to their retirement plan. These new, higher limits could strengthen their retirement goal, but participants might not be too keen on squirreling away too much right now, and that’s understandable.

As participants consider their elections at open enrollment, they’re likely weighing which benefits they’ll keep and what they’ll drop as they enter 2023 with a market that continues to fluctuate and grocery prices that remain uncomfortably high. The good news that is inflation seems to be calming down, and some analysts expect it will continue to cool.1 This means it could be a good time to start contributing to a retirement plan or to increase contributions—even if it’s only by 1%.

Communicating the Payoff/Benefit of Just 1%

You can help participants conservatively establish a good habit of regular contribution increases now and down the road by identifying the difference just 1% can make. Here are three talking points:

Some workers may decide to visit their contributions twice per year: they start the New Year off with a win by increasing contributions 1%, and on their birthday, they give themselves an additional gift of contributing another 1%. We’ve included a 3-slide graphic that really drives home how much 1% can grow over time.

 A 35-year-old earning $60,000 per year could have an additional $85,500 in their retirement fund at 67 if they increased their contributions by 1%, according to calculations from Fidelity Investments.2,3 

 That number ($85,000), by the way, is close to what the average American’s total retirement savings is today, which is 11% lower than last year’s average of $98,000, according to a recent survey that Harris Poll took of 2400 adults over the age of 18.4 This means that people are dipping into their savings, so promoting the long-term growth potential of retirement account contributions may ease concerns around these dwindling savings numbers.

 Translating “Savings Today” into “Comfortable Future”

Finally, you already know how important it is to consider the demographic you’re focusing on regarding retirement account contributions based on which generation they represent. One commonality, however, is that the Boomer and Millennial alike are living in the now—the right now—especially after Covid showed us all that our right now can be reorganized without warning. Schroders’ head of US defined contribution, Deb Boyden, told EBN that we need to rethink how to “reach investors that have the mindset of living in the moment. … [We] need help translating their savings today into what that means for the future.”5

 Sources:

1.  https://advisors.voya.com/insights/market-insights/inflation-finally-moves-lower-will-it-last?et_sid=0033l00002xJ6DSAA0&et_jid=115215&utm_source=sfmc&utm_term=Inflation+Finally+Moves+Lower+CTA&utm_content=8463&utm_id=5d0fbcd2-a054-40ff-91f2-109529096981&sfmc_id=25437759&sfmc_activityid=c10bcc95-d4da-4f21-9d18-e11d718c1bf0&utm_medium=email&utm_campaign=ICP%20Fixed%20Income%20TL%20Inflation%20Whitepaper

2.  https://www.cnbc.com/2020/01/23/why-you-should-increase-your-401k-or-ira-contributions-by-1percent.html

3.  https://www.fidelity.com/viewpoints/retirement/save-more

4.  https://www.plansponsor.com/retirement-assets-expectations-higher-2022/

5.  https://www.benefitnews.com/news/millennials-and-baby-boomers-are-not-saving-enough-for-retirement

IPS Still Adds Value

Investment policy statements (IPSs) are commonplace among retirement plans — with around 83% providing one. And that number tends to be even higher among bigger plans. Financial powerhouse Goldman Sachs is one of the larger employers that doesn’t utilize an IPS. In fact, this was the subject of a recently dismissed lawsuit by a former Goldman employee, whose attorney alleged that the company violated ERISA by, among other things, failing to adopt an IPS.

The federal judge in the Goldman Sachs case reaffirmed that “the Department of Labor has never taken the position that an IPS is required to satisfy a fiduciary's duties.” Moreover, the absence of an IPS was not, in and of itself, sufficient cause for the case to proceed. Nonetheless, that doesn’t undercut the potential advantages of establishing an IPS.

Roadmap for your plan. An IPS offers guidelines to assist advisors and fiduciaries in selecting and monitoring investments — and provides documentation that serves as an objective framework for various aspects of plan decision-making. In essence, it helps to create evidence of a prudent process.

Clarification of roles. By clearly outlining the roles and responsibilities of parties involved with the plan’s investment process, an IPS can help increase plan oversight and accountability. And it offers guidance that can assist both advisors and fiduciaries.

An aid in communication. An IPS can help onboard new committee members more quickly and efficiently. It’s also a useful vehicle to provide employees with information about the plan’s investments and management.

A tool for improvement. The creation of an IPS requires thoughtful consideration of the plan and investment details. This means that during the process, you may uncover plan weaknesses or find opportunities for improvement that you might not have otherwise.

Potential risk mitigation. In addition to providing valuable information to aid in plan management, having an IPS could help protect your organization. It offers an extra level of oversight in the form of a paper trail that can serve as documentation that you’re upholding your fiduciary duty should allegations of impropriety arise.

Ask TRG Investment Advisors About the Advantages of an IPS

We can provide more information about an IPS and how it can assist key stakeholders within your organization and help strengthen your plan. While simply having an IPS can’t fully insulate you from the risks of an ERISA lawsuit, it may offer an additional layer of protection, clarify plan decision-making, and help your organization better define and meet business objectives.

Sources:

https://www.pionline.com/courts/judge-rejects-401k-lawsuit-against-goldman-sachs  

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/401kinvestmentstatement.aspx

Have You Met Your Match?

Just how important is a 401(k) match to your employees? It appears to be top of mind, according to Principal’s 2021 Retirement Security Survey. The study’s results show that the match matters most, as the top retirement plan considerations of survey participants when considering a new job are as follows: employer match (91%), eligibility requirements (80%), vesting requirements (74%), investment options (73%) and withdrawal options at job change or retirement (70%). 

Moreover, one in four respondents indicated that they were considering retiring from their job or looking for a new one over the next 12 to 18 months. In an especially tight labor market, this means employers need to do all they can to attract top talent to their organizations. 

How Do You Stack Up? 

With employer match on the minds of workers, and many considering making a career move in the near future, it makes the following question all the more important: “What are your competitors doing to assist their workers in planning for retirement?” Here’s a roundup of some recent data on employer trends.  

Employer contributions. According to U.S. News & World Report, the average 401(k) employee contributions for Vanguard retirement plans in 2020 was 7%, with employers contributing an additional 4% to their accounts. Still, total contributions continue to fall short of the goal of 15% of annual income frequently recommended by many financial advisors. 

Match formulas. T. Rowe Price’s Reference Point benchmarking report of 674 retirement plans, published in June 2021 details the top five employer-match formulas for their defined contribution plans in 2020:  

50% up to 6% (20%) 

100% up to 3% + 50% up to the next 2% (19%) 

100% up to 4% (12%) 

100% up to 6% (11%) 

100% up to 5% (9%) 

Vesting schedules. XpertHr’s 2021 Employee Benefit Survey, as reported by CNBC, asked 452 U.S. employers how long their matches take to vest. Results were as follows: immediate (28%), one year (13%), two years (7%), three years (14%), four years (6%), five years (17%), six years (10%) and unknown (5%). 

Show Them the Money 

According to CNBC, more than 40% of workers say it would take “a miracle” for them to be financially prepared for retirement. At this time, it’s advisable to look at your retention numbers and peruse your exit interviews. Are many human resource losses likely related to a perceived weakness in your retirement plan? Compare your defined contribution offering, especially in the above spheres, to what other organizations in your industry and area are doing. Because it’s more than likely that, if you don’t, at least some of your current employees will be in the near future. 

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.

Planning Financial Futures

 Do you spend more time planning your annual vacation than you do thinking about your personal finances? If so, you’re not alone. A lot of people put off financial planning or avoid it altogether.

 Personal financial planning is an ongoing, lifelong process. If we break it down into small, achievable tasks, it’s a lot less daunting and can pay huge dividends to you and your family.

 Resolve to make yourself financially fit in 2022:

 The following personal finance calendar may help you get started. 

Thanks for the Memories: Gratitude and Financial Wellness

So much about financial wellness has to do with cultivating a mindset that favors delayed versus immediate gratification. In the language of behavioral economics, the tendency to prefer short-term rewards is called hyperbolic discounting. This often leads to more impulsive decision-making, and it can feed excessive personal debt and hamper retirement readiness over time, whereas those (typically in the minority) who will wait for a larger reward are frequently described as “present-based.” 

So how do you help your employees resist the “urge to splurge” and prioritize saving for retirement instead? It certainly seems like a tall order, given that it runs counter to tenets of fundamental human psychology. But what if the answer could be as simple as a little well-timed gratitude? 

Interestingly, research out of the University of California, Riverside, Harvard Kennedy School and Northeastern University suggests that may just be the case. In a revealing experiment, subjects were offered either $54 immediately or $80 in a month. The participants were randomly divided into two groups and asked to write about an event from their past that elicited either happy, neutral or grateful feelings. Depending on what they wrote about, the researchers found that the subjects made quite different money decisions. 

Those directed to write about a “grateful” memory were more likely to wait for the larger, delayed payout. Interestingly, subjects in the happy memory group were just as impatient as the neutral memory group. These findings are striking, especially given that that the recalled memory didn’t have to be spending- or even money-related. 

But how do these findings relate to financial decision making in the real world? 

The Price of Impatience

While in this study the “cost” of impatience was limited to $26, employees that struggle with delaying gratification and prioritizing saving for the future will no doubt pay a much higher price. They may need to remain in the workforce longer. They’ll also likely experience higher levels of stress, especially as they approach the date they hoped to retire by. They may also accrue excessive debt, which may adversely impact their standard of living — especially during their golden years. 

How Employers Can Help

According to Forbes, building a culture of gratitude in the workplace has a tremendous upside — for both workers and employers. Employees tend to find working in a more grateful environment a more positive and rewarding experience. And being appreciated by people other than one’s supervisor can provide a boost in morale. Teamwork is encouraged even as it exists alongside healthy competition. And while all of these organizational benefits take hold, it turns out that you may also be helping workers with their long-term financial decision making. 

Companies are creating ecosystems of gratitude in a variety of ways. Some have instituted “Thankful Thursdays,” where employees have the chance to publicly show appreciation for coworkers who’ve gone above and beyond with an award or small prize, followed by snacks for all as a tangible show of thanks on behalf of the company. 

Fostering a culture of gratitude is like financial wellness programming “with benefits” — ones that can enhance your entire organization. 

Retirees’ Retirement Asset Withdrawal Rate: Will Your Money Last?

For many years the investment advisory community has proposed that if retirees withdrew their retirement assets at the rate of 4% annually there is a high probability that assets would last to normal life expectancy.  

The 4% “rule” is not a one-size-fits-all solution, and there are several variables to consider, but it could at least provide a starting point to be adjusted based on individual circumstance. 

This starting point is based on actuarial tables and thousands of return based scenarios. The rule determined that a 65-year-old retiree withdrawing at the rate of 4% annually (inflation adjusted) had a high likelihood of not outliving their retirement assets based on current life expectancy, assuming no portfolio changes. 

However, in previous generations retirees could live off bond portfolios that yielded 4% to 5%. Currently, 10-year bond yields are closer to 1.5%, producing potential negative returns after inflation. As we begin 2022, we see annual inflation is close to 7% annually for 2021. As a result, it becomes appropriate to review these basic assumptions. 

Based on Morningstar’s research, the projected starting safe withdrawal rate for the next 30 years is 2.7% for assets in a cash account. The highest safe withdrawal rate is 3.3% for portfolios with 40% to 60% in stocks. But even so, if you retire soon, this fixed withdrawal rate is not certain as there is much uncertainty about inflation and potential market volatility. 

Any current projection should assume potential variability in income from year to year. One approach worthy of consideration and that can lead to a higher rate gives retirees an opportunity to increase the subsequent year’s withdrawal when the portfolio has done better than projected and to reduce withdrawals when underperforming. 

Certainly, this is a difficult time to project long range withdrawal rates and the current bond market is not as reliable as in the past, but the S&P 500 in 2021 did end up 26.9%, which virtually no one projected. 

Bottom line…don’t simply assume the “old law” of 4% withdrawal rates going forward. Assess your retirement income needs and adjust as appropriate going forward. Consider current portfolio alterations, acknowledge fixed vs. discretionary expenses, and be flexible but diligent in your retirement planning. You may want to seek professional advice if you are close to retirement. An error in planning, at this stage, can be more costly than this potentially transitory inflation and bond yield environment. 

If you are not near retirement…. save more so you can withstand future unexpected financial events and have a wonderful retirement experience.

Common Fiduciary Errors

An ounce of prevention is worth a pound of cure. This saying is universal, and certainly applies to fiduciary responsibility. Beginning the year with an eye towards avoiding some of the most common errors makes sense. Most fiduciary errors are unintentional or even well meaning. Here are some examples.

Following Plan Documents and Communicating Changes

Possibly the most frequent source of fiduciary breach, interpretation of plan provisions is not always intuitive. The remittance of participant deferrals “as soon as administratively possible” means as soon as possible, not as soon as convenient. A common response when a plan administrator is asked how they determined applicability of a specific plan provision (e.g., eligibility for employer match) is “the prior administrator told me how to do it”. This response does not necessarily instill confidence that it is being handled correctly. Many administrative errors go on for years, and every year not corrected is another fiduciary breach. A common example is the management of plan forfeitures (non-vested assets left in plan by a terminated participant). The rule is to allocate these assets annually at years end. This can be a costly and administratively cumbersome correction, but all too often it’s not accomplished annually which violates the rule forbidding plan unallocated assets.

The definition of compensation in the plan document may not be the same definition used by your payroll department/service. Furthermore, many plans and employers have different naming conventions for the various money types: deferrals, employer match, bonuses, pre-tax health insurance premiums, FBA plan, commissions and tips, or fees for professional services may be included as compensation. When plan documents are changed or updated, compensation administration needs to follow.  It is a good idea to check this periodically to ensure consistency.

Participant loans are another area that can cause issues, especially if more than one loan is allowed at a time or loan payback is allowed to continue post termination of service.

Often, plan operations do not match up with the plan terms. This includes the terms in plan documents, the summary plan description, loan procedures, and an Investment Policy Statement (IPS).

Changes in the plan should be communicated to plan participants. A summary of material modifications should be given to plan participants within 210 days after the end of the plan year in which the modifications were adopted.

Participant Eligibility

Plan documents should have a definition of employees (hours worked or elapsed time) and the requirement for eligibility to participate and employer contributions. The manner in which hours are calculated, hiring dates, or compensation calculations could be problematic. ERISA does not recognize the term “part-time employee.” It strictly takes into consideration hours worked or elapsed time to determine eligibility for deferrals and employer match. In addition, the SECURE Act just created additional requirements as regards long-term part-time employees’ eligibility.

ERISA Reporting and Recordkeeping

Employers are required to maintain records relating to employee benefit plans per ERISA. Record maintenance varies by type of document for both plan level and participant level records. Plans with 100 participants or more must file Form 5500 Annual Returns/Reports of Employee Benefit Plan and conduct an annual audit. Smaller plans must also file annual reports, with plans with less than 100 participants filing Form 5500-SF.

Investment Policy Statement

Maintaining and following an IPS is of utmost importance. There have been successful lawsuits where an employer acted in the best interest of participants, but IPS had requirements that the fiduciaries failed to follow to the letter and the result was costly to plan sponsors.

Understanding and Discharging ERISA Fiduciary Responsibilities

Many plan sponsors and fiduciaries are not fully aware of their roles/responsibilities. ERISA law pertaining to DC plans is quite complex and sometimes unintuitive and unclear (What does “procedural prudence” really mean?). Our Fiduciary Fitness Program is designed to gauge the fiduciary health of your plan, explain applicable fiduciary mitigation strategies, and to remedy, and hopefully avoid, fiduciary breaches. It is quite comprehensive, clear, and includes the ERISA required documentation

Correcting ERISA Compliance Mistakes

Many ERISA compliance problems can be corrected through voluntary compliance programs, when detected early by the plan, to reduce the potential for fines and penalties. The Department of Labor has the Delinquent Filer Voluntary Compliance Program (DFVCP) and the Voluntary Fiduciary Correction Program (VFCP). Through these programs, Plan Administrators can file delinquent annual reports through the DFVCP, and the VFCP allows fiduciaries to take corrective measures resulting from certain specified fiduciary violations for relief from enforcement actions. In addition, the Internal Revenue Service (IRS), through the Employee Plans Compliance Resolution System (EPCRS), has both the Voluntary Compliance Program (VCP) and Self Correction Program (SCP) which allow plan sponsors and other plan fiduciaries to correct failures in the plan's operational compliance prior to being discovered by the IRS.

The best answer to these concerns is to avoid fiduciary breaches. The retirement plan advisory service model provided by The Richards Group is a roadmap that may detect the possible emergence of potential fiduciary breaches before they manifest and consult on options to avoid these breaches altogether.

Allowable Plan Expenses: Can the Plan Pay?

The payment of expenses by an ERISA plan (401(k), defined benefit plan, money purchase plan, etc.) out of plan assets is subject to ERISA’s fiduciary rules. The “exclusive benefit rule” requires a plan’s assets be used exclusively for providing benefits. ERISA also imposes upon fiduciaries the duty to defray reasonable expenses of plan administration. General principles of allowable expenses include the following:

• The expenses must be necessary for the administration of the plan.

• The plan’s document and trust agreement must permit use of plan assets for payment of expenses.

• The expenses must be reasonable and incurred primarily for the benefit of participants/beneficiaries.

• The expense cannot be the result of a transaction that is a prohibited transaction under ERISA, or it must qualify under an exemption from the prohibited transaction rules.

In light of today’s plan fee environment, it is incumbent upon fiduciaries to request full disclosure of fees and expenses, how they breakdown with services provided, as well as a request for full explanation of who will be the recipient of fees. Ultimately, the ability to pay expenses from a plan trust is a facts and circumstances determination that needs to be made by plan fiduciaries. Because it is possible that the DOL may challenge such determinations it is important that fiduciaries consult ERISA counsel prior to paying questionable expenses from a plan trust and document the decision and reasoning.

For more information on this topic, contact your financial professional.

Participant Corner: Three Tax Tips that Can Help as You Approach or Begin Retirement

Retirement is a whole new phase of life. You’ll experience many new things, and you’ll leave others behind – but what you won’t avoid is taxes. If you’ve followed the advice of retirement plan consultants, you’re probably saving in tax-advantaged retirement accounts. These types of accounts defer taxes until withdrawal, and you’ll probably withdraw funds in retirement. Also, you may have to pay taxes on other types of income - Social Security, pension payments, or salary from a part-time job. With that in mind, it makes sense for you to develop a retirement income strategy.

Consider when to start taking Social Security. The longer you wait to begin your benefits (up to age 70), the greater your benefits will be. Remember, though, that currently up to 85 percent of your Social Security income is considered taxable if your income is over $34,000 each year.

Be cognizant of what tax bracket you fall into. You may be in a lower tax bracket in retirement, so you’ll want to monitor your income levels (Social Security, pensions, annuity payments) and any withdrawals to make sure you don’t take out so much that you get bumped into a higher bracket.

Think about your withdrawal sequence. Generally speaking, you should take withdrawals in the following order:

• Start with your required minimum distributions (RMDs) from retirement accounts. You’re required to take these after all.

• Since you’re paying taxes on taxable accounts, make this the second fund you withdraw from.

• Withdraw from tax-deferred retirement accounts like IRAs, 401(k)s, or 403(b)s third. You’ll pay income tax on withdrawals, but do this before touching Roth accounts.

• Lastly, withdraw from tax-exempt retirement accounts like Roth IRAs or 401(k)s. Saving these  accounts for last makes sense, as you can take withdrawals without tax penalties. These accounts can also be used for estate planning.

These factors are complex, and you may want to consult a tax professional to help you apply these tips to your own financial situation. You can test different strategies and see which ones can help you minimize the taxes you’ll pay on your savings and benefits.

For more information on retirement tax tips, contact your plan advisor.

Beat Rising Healthcare Costs with a Financial Wellness Program

Healthcare costs are on the rise, and employers expect double-digit growth in the next decade. As a result, there’s a growing trend toward financial wellness programs included with employee benefits, as this both benefits employees and minimizes a company’s fiduciary risk. In addition to these growing trends, workers are beginning to look for the during job searches.

If your business doesn’t invest in financial wellness for your team, you may find it difficult to attract and retain the best employees. For fiduciaries, this is a great time to conduct in-depth research about financial wellness programs and recommend the best one to your employer. Considering starting a financial wellness program? Here are a few things to consider before starting a program of your own.

Financial Education. Financial education is nothing new in the business world. For decades employers have invested in seminars and workshops to assist employees with their financial health. The new era of financial wellness goes beyond traditional training classes for budgeting, paying off debt and amassing an emergency fund. It emphasizes the need for your employees to not only plan for retirement but enjoy financial health prior, thus developing happy, loyal and productive workers.

Wellness Assessment Check-Ups. Traditional financial workplace training typically lacks follow-up. Newer wellness programs include regular assessments, where participants review the progress they’ve made on each of their goals. Afterwards, employees possess the data needed to create a roadmap for future financial plans. It’s important for employers to tailor educational programs to the unique needs of their employees, guaranteeing everyone receives appropriate advice and assistance.

For more information on financial wellness programs, contact your plan advisor.

Four Tips for Increasing Your Retirement Dollars

1.    Don’t Cash Out Retirement Plans When Changing Employment

When you leave a job, the vested benefits in your retirement plan are an enticing source of money. It may be difficult to resist the urge to take that money as cash, particularly if retirement is many years away. If you do decide to cash out, understand that you will very likely be required to pay federal income taxes, state income taxes, and a 10 percent penalty if under age 59½. This can cut into your investments significantly and negatively impact your retirement savings goals! In California, for example, with an estimated 8 percent state income tax, someone in the 28 percent federal tax bracket would lose 46 percent of the amount withdrawn. When changing jobs, you generally have three options to keep your retirement money invested – you can leave the money in your previous employer’s plan, roll it over into an IRA, or transfer the money to your new employer’s plan.

2.    Take Your Time: Give Your Money More Time to Accumulate

When you give your money more time to accumulate, the earnings on your investments, and the annual compounding of those earnings can make a big difference in your final return. Consider a hypothetical investor named Chris who saved $2,000 per year for a little over eight years. Continuing to grow at 8 percent for the next 31 years, the value of the account grew to $279,781. Contrast that example with Pat, who put off saving for retirement for eight years, began to save a little in the ninth and religiously saved $2,000 per year for the next 31 years. He also earned 8 percent on his savings throughout. What is Pat’s account value at the end of 40 years? Pat ended up with the same $279,781 that Chris had accumulated, but Pat invested $63,138 to get there and Chris invested only $16,862!

3.    Don’t Rely on Other Income Sources, and Don’t Count on Social Security

While politicians may talk about Social Security being protected, for anyone 50 or under it’s likely that the program will be different from its current form by the time you retire. According to the Social Security Administration, Social Security benefits represent about 34 percent of income for Americans over the age of 65. The remaining income comes predominately from pensions and investments. They also state that by 2035, the number of Americans 65 and older will increase from approximately 48 million today to over 79 million. While the dollars-and-cents result of this growth is hard to determine, it is clear that investing for retirement is a prudent course of action.

4.    Consider Hiring a Financial Advisor!

Historically, investors with a financial advisor have tended to “stay the course”, employing a long-term investment strategy and avoiding overreaction to short-term market fluctuations. A financial advisor also can help you determine your risk tolerance and assist you in selecting the investments that suit your financial needs at every stage of your life.

For more information on retirement tips, contact your plan advisor.

3(38) or 3(21): Which Fiduciary Service is Right for You?

Looking to reduce your fiduciary risk as a plan sponsor? A little outside help can yield big reductions in risk, provide the best for the people on your company’s payroll, and help you feel good about your qualified retirement plan. Remember though, what’s good for the plan participants isn’t always best for the company – and as the plan sponsor, the company takes on substantial legal and financial liabilities. If you’re listed as the plan administrator, some of those liabilities accrue to you as well. Best practices suggests that any plan sponsor who doesn’t possess the technical knowledge and experience to manage investments consider hiring an advisor – and your choice of advisor can significantly lower your fiduciary risk.

Why hire a fiduciary?

Hiring an outside fiduciary can reduce some or most of that liability by putting the plan in the hands of a professional that affirmatively accepts fiduciary responsibility in section 3(21) and 3(38) of the Employee Retirement Income Security Act of 1974 (ERISA). These 3(21) and 3(38) fiduciaries are not stockbrokers; instead of taking commissions on investments purchased for your plan, they’re compensated by a stated fee. This helps reduce potential conflicts of interest in constructing and managing your plan’s investments.

What’s the difference between a 3(38) Fiduciary and a 3(21) Fiduciary?

There are two types of fiduciaries recognized under ERISA standards. A 3(21) fiduciary advises and makes recommendations, but as the plan sponsor still have ultimate responsibility for the legal operation of the plan and making plan-level investment choices. A 3(38) fiduciary takes over management of plan investments, makes investment choices, executes investments and monitors their performance. The 3(38) advisor is solely authorized to make (and is responsible for) those decisions. Because they have this responsibility, they can often be in a position to act more quickly in terms of making any changes to the plan, since such decisions need not go through the plan sponsor’s committee for any approval process. A 3(38) fiduciary may also be advantageous for smaller firms with fewer resources in their benefits department. Hiring a 3(21) fiduciary relieves the plan sponsor of part of the labor and part of the investment fiduciary responsibility, and provides the plan fiduciary a professional opinion in decision-making. A 3(38) fiduciary relieves the vast majority of the labor and almost all of the responsibilities. In short, whereas a 3(21) fiduciary advises and assists; a 3(38) fiduciary can function in a broader role for plan sponsors.

Remember – even if you hire a fiduciary, you’re still involved.

With a 3(38) fiduciary, the sponsor is still required to provide oversight of the fiduciary. Also, hiring a 3(38) fiduciary doesn’t relieve the sponsor from liability for poor investment decisions made by participants. However, ERISA Section 404(c) does create a “safe harbor” for plan sponsors if they meet specific requirements that include stipulations regarding investment selection, plan administration and certain disclosures.

What about Full Service Fiduciaries?

Firms that offer both 3(21) and 3(38) fiduciary services may also provide professional investment advice through staff or partnerships along with educational services to help meet the section 404(c) safe harbor standards. With the help of these outside professionals, you can lower your fiduciary risk by doing right by your employees while addressing all applicable regulations.

For more information about hiring a fiduciary, or questions regarding 3(21) or 3(38) fiduciaries reach out to your plan advisor.

Visualizing Retirement

What are your participants saving for? Oftentimes, retirement planning success is measured solely by financial metrics. This article from Retirement Times explores the non-financial side of planning for retirement.

ERISA Fidelity Bond versus Fiduciary Liability Insurance

Plan sponsors often ask, “Is an ERISA fidelity bond the same thing as fiduciary liability insurance?” The answer is no, they are not the same. The two insure different people and have different requirements under the terms of ERISA.

An ERISA fidelity bond is required under ERISA Section 412. Its purpose is to protect the plan, and therefore the participants. It does this by ensuring that every fiduciary of an employee benefit plan, and every person who handles funds or other property of the plan, be bonded. This protects the plan from risk of loss due to fraud or dishonesty on the part of the bonded individuals. The amount of the fidelity bond is 10 percent of the plan assets (with a $1,000 minimum) and is capped at $500,000 (or $1,000,000 for plans with company stock).

Fiduciary liability insurance protects the fiduciaries (not the plan or participants) from a breach of their fiduciary responsibilities with respect to the plan. Remember that fiduciaries may be held personally liable for losses incurred by a plan as a result of their fiduciary failures. Unlike a fidelity bond, fiduciary liability insurance is not required under ERISA. The Department of Labor may ask whether the plan fiduciaries have insurance in the event of an investigation. It’s important that fiduciary liability insurance explicitly covers “ERISA” claims. Review of any policy, including E&O policies, should look for language that may void the coverage in the event a plan has ever been out of compliance (something virtually all plans experience at some point in their existence).