Saturday, March 17, 2018

'Missing' Inaction

While it’s hardly a new topic, the subject of missing participants is much in the news today – and arguably a growing concern for plan sponsors, particularly with the expansion of automatic enrollment.

Earlier this year the Government Accountability Office published a report – and some recommendations – on the subject of (re)connecting participants with their “lost” account balances. That report noted that from 2004 through 2013, more than 25 million participants in workplace plans separated from an employer and left at least one retirement account behind, “despite efforts of sponsors and regulators to help participants manage their accounts.” The report acknowledged that there are costs involved in searching for these “lost” participants, going on to note that there are no standard practices for the frequency or method of conducting searches.

Once upon a time the IRS provided letter-forwarding services to help locate missing plan participants, but with the Aug. 31, 2012, release of Revenue Procedure 2012-35, the IRS stopped this letter forwarding program. Moreover, while the Labor Department has provided guidance to plan sponsors of terminated DC plans about locating missing participants and unclaimed accounts, they have yet to do so regarding ongoing plans.

That said, the GAO reported that they had been informed by DOL officials that they are conducting investigations of steps taken by ongoing plans to find missing participants under their authority to oversee compliance with ERISA’s fiduciary requirement that plans be administered for the exclusive purpose of providing benefits.1

In fact, the Labor Department’s Employee Benefit Security Administration’s Chicago Regional office adopted a “missing participant” regional initiative in fiscal year 2017, and – working with the PBGC, has reportedly recovered nearly $6.3 million for 133 participants, according to Bloomberg Businessweek.

More recently Sens. Elizabeth Warren (D-MA) and Steve Daines (R-MT) reintroduced the bipartisan Retirement Savings Lost and Found Act, noting that many Americans leave their jobs each year without giving their employers directions with what to do with their retirement accounts – a trend the bill’s sponsors say has increased with the expansion of auto enrollment. The legislation calls for the creation of a national online lost and found for Americans’ retirement accounts – and claims to leverage data employers are already required to report to do so (though the devil may lie in the details). The legislation also purports to clarify the responsibilities employers and plan administrators have to connect former employees with their neglected accounts.

Indeed, in such matters, plan sponsors often feel trapped between the proverbial rock and the hard place – pressed hard on the one hand by regulators to locate these former participants (and potential beneficiaries) – on another by state agencies with an avid interest in the escheatment of those funds – and often squeezed by the growing costs not only of trying to locate these participants, but the costs of distributing a wide assortment of plan notices, not to mention the ongoing costs of maintaining these accounts in potential perpetuity.

Little wonder that among its recent recommendations, the GAO recommended that the Secretary of Labor “issue guidance on the obligations under the Employee Retirement Income Security Act of 1974 of sponsors of ongoing plans to prevent, search for, and pay costs associated with locating missing participants.”

Said another way, what’s “missing” is more than former participants – it’s some safe harbor guidance that would provide some comfort and structure to those trying to reasonably fulfill their duties as plan fiduciaries – an ongoing concern for plans2 that are an ongoing concern.

- Nevin E. Adams, JD
  1.  Speaking of missing participants, the headlines of late have focused on issues regarding defined benefit participants. Most notably perhaps, MetLife disclosed last year that it failed to locate some group annuity clients that had likely moved or changed jobs. Nor was this a recent problem – the issue, which the firm said involved some 13,500 pension clients, was attributed to a “faulty system” that the firm had been using for a quarter century – a system that assumed that if the firm was unsuccessful in contacting participants twice that the individual would never respond, and that therefore weren’t going to claim benefits. In fact, the Labor Department’s push for companies sponsoring pension plans to find missing participants cited above reportedly influenced MetLife’s decision to conduct the review. Enter Secretary of the Commonwealth William F. Galvin, who just announced that his office discovered “hundreds of Massachusetts retirees” who are owed pension payments by MetLife. Galvin noted that the regulator planned to look into what MetLife had done in the past to locate and pay the retirees. 
  • He also said his office’s investigation has been expanded to look into other firms who provide  retirement payments, including Prudential, Transamerica, Principal Financial, and Mass Mutual.
  1. You may recall that last fall the Pension Benefit Guaranty Corporation (PBGC), the nation’s private pension plan insurer, announced the expansion of its Missing Participants Program beyond its historical focus on PBGC-insured single-employer plans as part of the standard termination process to cover defined contribution plans (e.g., 401(k) plans) and certain other defined benefit plans that end on or after Jan. 1, 2018. However, this only deals with terminating defined contribution plans.

Saturday, March 10, 2018

‘False’ Start?

There’s a new proposal being floated that proponents say would “increase retirement income security and reform Social Security.” And yes, a mandate is involved.

The proposal involves something tagged “Supplemental Transition Accounts for Retirement” (a.k.a. “START”), and it’s being touted by AARP. The proposal is the work of Jason Fichtner of George Mason University, Bill Gale of the Brookings Institute and Gary Koening of AARP’s Public Policy Institute. The basic concept is to help people postpone claiming Social Security benefits (the most common age to start claiming remains 62) since – as an executive summary of the proposal indicates – between the ages of 62 and 70, monthly Social Security benefits increase by about 7% to 8% for each one-year delay in claiming.

This is accomplished by creating the aforementioned START accounts, which are funded by a new layer of mandated withholding: 1% each from workers and employers (2% combined) up to the annual maximum subject to Social Security payroll tax (self-employed individuals pay both parts, as they currently do with Social Security). Worker contributions are post-tax and employer contributions are pre-tax – oh, and there is a federal government contribution for lower income workers (up to 1% for married filing jointly with adjusted gross income less than $40,000) as well.

Individuals wouldn’t be directing these investments. Rather, they would be “professionally managed in a pooled account with an emphasis on keeping administrative fees as low as possible,” with the oversight of an “independent board” that would “select the private investment firm(s) responsible for managing START assets” and setting the investment guidelines.

So, what would this mean for retirement security? Well, START’s proponents claim that the proposal would “reduce poverty significantly for people ages 62 and over “under current law’s scheduled benefits,” raising the net per-capita cash income the most for older Americans with the lowest lifetime earnings by 10% on average and 15% at the median in 2065 compared to scheduled benefits under current law.

Now, it’s not hard to imagine that an additional 2% mandated savings would improve outcomes – certainly postponing drawing on Social Security benefits alone would serve to increase the monthly benefits by some factor (though actuarially speaking, it shouldn’t have much impact on the fund itself). Not to mention those who aren’t currently saving at all (we’ll just assume they can come up with the 1% mandate) – and there’s that additional government “match” for lower income workers to add to the outcome mix.

And yet, the proposal’s authors would appear to claim more. While they make their comparison to “scheduled benefits under current law,” which would seem to infer a comparison of the additional mandate and timing to that available under Social Security, the executive summary of the proposal notes that the Urban Institute analyzed the proposal based on assumptions ranging from one where employees reduce their contribution either to zero or by the amount of the START contributions, whichever is smaller.

Said another way, the analysis – and those rosy outcomes – assumes that workers confronted with the mandate will not reduce their workplace contributions by an amount larger than the mandate. Nor is it clear from the report that the analysis makes any allowance for the reduction in employer matching contributions that might accompany reductions by workers in their 401(k) savings – not to mention employers who might well see a need to reduce their workplace savings plan match because they are now required to put an additional 1% into these new mandatory accounts.

As retirement income security projections go, that doesn’t seem like a very good place to… start.

- Nevin E. Adams, JD

Saturday, March 03, 2018

5 Key Industry Trends You May Have Missed

The Plan Sponsor Council of America recently released its 60th Annual Survey of Profit-Sharing and 401(k) Plans, documenting increases in participation, deferral rates, target-date funds, automatic enrollment and advisor hiring, among other key trends.

Here are five key trends highlighted in the survey that you may have missed.

Automatic enrollment is still (mostly) a large plan thing.

One of the most celebrated plan design features of the 401(k) era is automatic enrollment. Nearly as old as the 401(k) itself, once upon a time (when it wasn’t as popular) it was called a “negative election.” Regardless of the name, the concept has been extraordinarily effective at not only getting, but keeping, workers saving via their workplace retirement plans. However, adoption of the design, after a surge in the wake of the passage of the Pension Protection Act of 2006, now seems to have plateaued.

A decade ago, only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. Now more than half (60%) do – and that increases to 70% among plans with more than 5,000 participants. However, only a third of plans with fewer than 50 workers do.

For some potential explanations – see Why Doesn’t Every Plan Have Automatic Enrollment?

Auto-escalation is escalating.

An incredible three-quarters of plans with automatic enrollment auto-escalate the deferral rate over time, compared with less than half (49.7%) a decade ago, according to the PSCA survey.

However, only one-third do so for all participants.

As for the rest, one in eight do so for under-contributing participants, and a third do so only if the participant elects to do so.

Plans are curing a fault with the default.

While you see surveys suggesting that a greater variety of default contribution rates is emerging, the most common rate today – as it was prior to the PPA – is 3%. There is some interesting history on how that 3% rate originally came to be, but the reality today is that it has been chosen because it is seen as a rate that is small enough that participants won’t be willing to go in and opt out – and, after the PPA, we have some law to sanction that as a target.

Sure enough, the PSCA survey found that the most common default deferral rate remains 3% (36.4%). However, more than half of plans now have a default deferral rate higher than 3%. Indeed, the second most common default (22.2%) is now 6%.

Roths remain on the rise.

Nearly two-thirds of plan sponsors now provide a Roth 401(k) option. In fact, in just a decade, the percentage of plans offering such an option has more than doubled; from about 30% in 2007 to 63.1% now.

Pre-tax treatment has, of course, been the norm in 401(k) plans since their introduction in the early 1980s. On the other hand, the Roth 401(k) wasn’t introduced until the Economic Growth and Tax Relief Reconciliation Act of 2001, and even in that legislation wasn’t slated to become effective until 2006 (and at that time was still slated to sunset in 2010). Significantly, participant take-up, which just a few years ago hovered in the single digits, is now in the 15-20% range (18.1% according to the PSCA survey, somewhat higher among smaller plans).

While industry surveys during the tax reform debate (including a flash poll from PSCA) indicated a fair degree of employer concern about the potential impact of so-called “Rothification” on participation, that doesn't seem to be slowing the opportunity for individuals to take advantage of tax diversification.

It’s (still) what goes in, not what comes out that ‘matters.’

It’s said that what’s measured matters – and yet, despite all the buzz around financial wellness, and a growing emphasis on outcomes, the latter still has a way to go in terms of being an established plan success benchmark.

Consider that in this year’s PSCA survey, a whopping 89.6% of plans cite participation rate as a benchmark to determine plan success – and even more (93.2%) of the largest plans rely on that gauge. Deferral rates were a distant second (72.6%), and average account balances ranked third (55%).

What about outcomes? Only a quarter of plans used that as a benchmark, though a third of the largest plans (33.8%) did.
Industry surveys, particularly those with a broad range of plan types and providers, and with the perspective of decades such as the PSCA survey provide an invaluable sense not only of where we are, but where we have been.

However, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD

More information about the Plan Sponsor Council of America’s 60th Annual Survey of Profit Sharing and 401(k) Plans is available at

NOTE: There will be a special workshop exploring the survey results and the implications for advisors at the NAPA 401(k) SUMMIT, April 15-17, 2018 in Nashville, Tennessee. If you haven’t registered, there’s still time (but the hotel blocks are filling) at