For Financial Professionals in the US

Plan Advisors: 5 Things You Should Talk to Plan Sponsors about this Quarter

Ben Rizzuto, CFP®, CRPS®

Ben Rizzuto, CFP®, CRPS®

Wealth Strategist

Aug 1, 2022
7 minute read

The retirement plan industry continues to evolve, presenting new opportunities for advisors to help create plans that better address participants’ needs. Retirement Director Ben Rizzuto outlines five important developments and trends to consider addressing at your next quarterly investment committee meeting. 

Another quarter gone, another investment committee meeting to schedule. What’s on the agenda?  

For most, the focus will be on how plan investment options fared amid recent market volatility and how participants behaved due to the losses they may have incurred. Beyond those obligatory topics, however, it’s always important to discuss other trends and best practices in the retirement plan market.  

That’s why we publish our Top DC Trends and Developments guide every quarter, and that’s why I’m providing you with five highlights from the report to help you fill out your next meeting agenda.  

1. Have We Left Anyone Behind? 

An essential part of every investment committee meeting is reviewing participation rates. But how can we take that conversation to the next level to make sure we’re not leaving participants behind or vulnerable to unexpected financial issues? 

Implementing auto-enrollment may be a first step. While we in the retirement plan industry talk about this feature regularly, a recent survey showed that only 56% of plans had adopted auto-enrollment.1  

Clearly, there’s still room for growth, and it may be worth talking about with plan sponsors – especially because they haven’t necessarily missed the boat if they don’t offer auto-enrollment now. For example, the city of Milwaukee (which, if you’re into vexillology, has an interesting city flag) only implemented auto-enrollment in 2016 but has increased overall plan participation to 89% in the six years since introducing the feature. Adding auto-enrollment also helped the city improve participation for groups that have typically been left behind when it comes to saving, including women, African Americans and Hispanics.2 

Emergency savings is another area where participants can be left behind. While Americans’ overall financial wellbeing has improved over the last year, 32% still cannot completely cover a $400 unexpected expense with cash on hand.3 

How can plan sponsors help address this issue? Wisconsin-based Forward Bank is one example of a company that is working to support employees in its 401(k) plan who are struggling to cover short-term unexpected expenses. Their “Pay It Forward” program allows participants to confidentially contribute to a fund (which the company matches dollar for dollar) that has been set up to help employees cover major medical expenses and other emergency costs.  

By leveraging the human tendencies of inertia and altruism, these two ideas encourage employees to enroll in the plan and also help ensure that participants feel they are part of supportive and generous organization.  

2. What Are the Goals of Gen X and Millennial Participants?  

Understanding the circumstances and needs of our clients is the first step in finding solutions to their problems. The Gen X and Millennial cohorts represent nearly 43% of the U.S. population and thus make up a large portion of retirement plan participants.4 Given their sheer numbers, it’s important to understand what these generations want and need when it comes to saving and investing.  

A recent study provides some helpful insight into how younger participants are thinking about retirement and what goals they may have for the future. According to Charles Schwab’s “Retirement Reimagined” survey, top priorities for Gen X and Millennials include continuing to travel, having greater flexibility and seeking out new experiences. On the other hand, these groups see less value in owning a permanent home, having a “stereotypical” retirement or attaining a specific nest egg amount.5  

These are the participants that plan sponsors will increasingly be working with over the next few decades. Understanding what they value and how they envision the future can help plan sponsors design a plan that meets their needs, while also helping advisors educate participants on how to work toward their goals. Ideally, when both plan design and educational support are built around these generations’ reimagined vision of retirement, it can lead to greater participant satisfaction.   

3. Retirement Reform EARNs Ability to RISE & SHINE 

The likelihood that our industry will see significant reform in the coming years continues to increase. The U.S. House of Representatives passed the Securing a Strong Retirement Act of 2022 (aka SECURE 2.0) last quarter. This quarter, we saw the passage of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) and the Enhancing American Retirement Now (EARN) Acts, both of which could be reconciled with SECURE 2.0 later this year.  

At this point, plan sponsors would do well to understand the key provisions of each bill and how they differ from each other. For example, the EARN Act would require the Saver’s Tax Credit to be directly deposited into a worker’s IRA or 401(k) account. It would also allow participants to take distributions from retirement accounts to pay for long-term care premiums.  

The RISE & SHINE Act would allow plan assets to be used to pay for certain incidental plan design expenses and would allow retirement plans to include emergency savings accounts to which participants could make pre-tax contributions. 

Should SECURE 2.0 be signed into law, plan sponsors will need to understand how specific provisions would affect their plans and the administration of those plans, as well as the implications for participants and how to communicate them 

 4. A New IRS Program Should Be on Your Radar 

No one wants to be audited, but the IRS has started a new pilot program that may make the process easier. Under the program, which was introduced in June 2022, the IRS will notify employers that it intends to audit their retirement plan, while also allowing 90 days for the company to identify and correct any potential compliance failures. Corrections could be completed through either the Self-Correction Program (SCP) or the Voluntary Correction Program (VCP) with IRS approval. 

The IRS may choose to issue a closing letter or conduct a limited audit if plan sponsors are able to correct issues to their satisfaction. While there is still the chance for a full audit, plan sponsors who receive these pre-examination notices should work quickly with their advisors, lawyers and other service providers to take advantage of the 90-day window. 

5. First Application of Supreme Court Ruling 

As I covered last quarter, the Supreme Court’s recent ruling in the Northwestern University retirement plan lawsuit (Hughes v. Northwestern University, 142 S. Ct. 737, 2022) served as a valuable reminder for plan sponsors of the importance of having an ongoing investment review process in place. 

In June, plan sponsors got their first chance to see how the courts may apply this ruling in the Smith v. CommonSpirit Health case (No. 21-5964, 6th Cir. June 2022). The court chose to uphold a district court’s decision to dismiss the excessive fee case against CommonSpirit, which provides plan sponsors with guidance and some breathing room when it comes to choosing investments for a plan menu. More specifically, the 6th Circuit noted that actively managed funds represent a common fixture in retirement plans, and “there is nothing wrong with permitting employees to choose them in hopes of realizing above-average returns over the course of the long lifespan of a retirement account.” 

While this decision provides more protection to fiduciaries, it is worth reminding plan sponsors that a prudent due diligence process is still needed to select plan investments and then monitor them over time.  

I hope the five ideas outlined above provide you with some topics for your next investment committee meeting. Even if discussion around these topics doesn’t lead to significant changes, I feel exploring them will allow you to demonstrate your value and help the committee work toward creating a better plan for everyone involved.  

For more retirement industry developments and action items, be sure to check out our latest Top DC Trends and Developments guide. 

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