“I’m going to work until I’m dead.” It’s a phrase you’ve likely heard before. In fact, according to a CareerBuilder survey, one-third of employees 60 or older, plan to work until at least age 70. While not dead, 70 is a full five years past the “normal” retirement age. Additionally, 20 percent of respondents believed they’ll never be able to retire.
So, whether you enjoy your work, or just don’t have enough retirement savings, many Americans believe they will have to work long past age 65. One of the problems with this line of thinking (there are many problems with it) is the fact that few people get to choose when they retire.
There’s a myriad of reasons workers don’t get to choose their retirement date. People have to deal with health and personal issues, positions are consolidated, and companies close. No matter the reason, employees are retiring before they want, and often, before they’re ready.
With the faltering of Social Security in recent years, the role of the employer in an individual’s retirement planning has increased dramatically. As a result, the employer-sponsored 401(k) has become an important savings vehicle for many Americans. Still, the rules of 401(k)s have been in flux recently.
Here is the latest in retirement planning news you need to know.
A recent survey from Willis Towers Watson found 73 percent of plan sponsors now automatically enroll new participants. Up from 52 percent in 2009. But do the benefits of auto-enrollment outweigh the disadvantages? Is the increase in auto-enrollment helpful to both employers and employees?
Auto-enrollment means that every new employee, upon hire, is automatically enrolled in the company retirement plan, unless they elect otherwise. It’s important to note, a business can never force an employee into a plan enrollment. They must always have the choice to opt out if they desire.
There are several benefits auto-enrollment gives your employees. This feature, first, helps by giving your staff an automatic amount of savings. Similarly, if your company has a matching policy, your employees are essentially getting free money. Another plus of auto-enrollment is there will be more participation in the plan.
Naturally, when your staff is enrolled automatically, it makes it more likely they will stay in the plan. For the employer, there are multiple tax breaks. These tax breaks include a $1,500 tax credit and tax-deductible employer match.
Still, it is imperative to know that auto-enrollment isn’t a retirement cure-all. This feature doesn’t stop workers from creating debt with their personal funds. And the biggest hang-up, for employers, is cost. Implementing and managing an auto-enroll feature in your retirement plan can be costly for employers.
Another 401(k) feature that’s on the rise is automatic contribution escalation. In the previously mentioned survey, 60 percent of employers now offer auto-escalation, a six percent increase since 2014. Auto-escalation is an especially crucial feature considering the current state of retirement savings in America.
We already know that Americans aren’t saving enough. But even those employed with an organization that has a retirement plan, aren’t saving what they should be. Analyses from Fidelity discovered about one in five workers aren’t contributing enough money to get the full company match (usually four to six percent of pretax earnings). Basically, these employees are throwing away “free” money.
Automatic escalation works by automatically raising the percentage of an employees’ pay they invest into their 401(k) plan. The primary purpose of auto-escalation is to push employees past a state of “savings stasis.” As we know, many workers aren’t even saving enough to get the employer match.
And many more are only saving up to that matching line. Most advisors recommend employees save at least 10 percent of their pretax earnings. Auto-escalation is a less painful way to nudge employees into saving more. Because organizations can time the automatic increases to coincide with an individual’s yearly pay increase, they can reduce the effect on an employee’s take-home pay.
New provisions included in the budget law passed February 9, makes it easier for employees to make hardship withdrawals from their employer-sponsored 401(k) and 403(b) plans. The new budget act will let participants withdraw their own money, any earnings on their money, and company contributions as part of the withdrawal.
Under previous rules for defined contribution plans, hardship distributions were limited to the elective deferral amount contributed by plan participants. And employees were prohibited from making contributions for six months after making a hardship withdrawal.
So, with the new rules, employees who take a hardship withdrawal won’t have to suspend their contributions. Subsequently, workers will continue to receive the company match, and don’t have to remember to rejoin the plan, after the suspension ends.
According to James Klein, president of the American Benefits Council, these provisions will benefit employees. Now workers facing emergencies or financial crises can put the money they withdraw back into their plan and allow them to continue to save for retirement.
The budget act will result in five significant changes for defined contribution retirement plans, according to SHRM. These changes:
- Remove the six-month prohibition on contributions to retirement plans after a hardship withdrawal.
- Remove the requirement for participants first to take a loan.
- Permit employers to extend hardship distributions to amounts not previously permitted.
- Provide relief for a withdrawn federal tax levy on retirement plan assets.
- Provides a California wildfire relief fund.
A 2018 survey from the Callan Institute found the number of employers who calculated 401(k) and similar plan fees rose to 83 percent, last year. This number represents an increase of four percent over the previous year. Additionally, after reviewing these fees, 40 percent of plan sponsors took actions such as renegotiating fees.
And, as Jamie McAllister (senior vice president at Callan) claims, there should continue to be increased pressure on administrative, investment, and management fees. She noted:
- Over 50 percent of sponsors intend to renegotiate administrative and record-keeping fees
- Around 40 percent expect to renegotiate investment management fees
It’s important that plan sponsors consistently calculate plan fees to ensure you’re running the best policy for your employees. And it’s equally imperative to sit down and renegotiate plan fees when applicable, to keep rates sensible.
It’s 2018, your employees don’t, and shouldn’t, have to work until they’re dead. All of this retirement planning news highlights the potential of 401(k)s and similar defined contribution plans to positively affect the financial health of your employees. Visit The Olson Group for more analysis when the IRS announces further retirement planning news.