Benefits July 1, 2024

Providing Retirement Benefits Can Benefit Employers

Tax benefits and new credits aim to offset the cost of setting up new retirement plans and can be a ‘big win’ for plan sponsors.

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Art by Andrea D'Aquino

Retirement plan creation is changing. Both 2019’s Setting Every Community Up for Retirement Enhancement Act and 2022’s SECURE 2.0 Act were designed to incentivize more employers to offer retirement benefits—the incentives are especially significant in SECURE 2.0. New plan sponsors may qualify for a variety of tax credits designed to offset the costs of offering a retirement plan; there are also more choices for plan sponsors to make about what to offer participants.

Incentives for Plan Sponsors

At a high level, the main goal of SECURE 2.0 is to increase retirement savings. To achieve that, lawmakers focused on small and midsize businesses, which have historically been slow to offer retirement plans.

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SECURE 2.0 includes both new tax credits and expansions of existing tax benefits. For employers with up to 50 employees, 100% of startup costs for the plan can be covered during the first three years. Eligible businesses with 51 to 100 employees can qualify for 50% of administrative costs, capped annually at $5,000 per employer for three years.

Depending on the overall size of the plan, there are also tax credits for employer contributions or profit-sharing contributions for the first five years of the plan.

Eric Droblyen, president and CEO at Employee Fiduciary, a bundled 401(k) provider, says it may seem counterintuitive to focus on tax benefits to employers, but small and midsize businesses often cite administrative costs as reason for not offering retirement benefits. “We’re doing a lot of education right now on the tax benefits because many would-be plan sponsors don’t know about them,” he explains. “If you’re worried about cost as an employer, you can get three years with net nothing out of pocket—which is a big win.”

Matthew Hawes, a partner in law firm Morgan Lewis, says it is important for plan sponsors to understand that they will not be penalized for being fast-growing over the tax-credit period. “These credits are tied to the number of participants, but they don’t fall off a cliff once you get to employee 51 or employee 101. The incentive is to start [a retirement plan] earlier in the life cycle of the company—that way, [the plan sponsor can] get the highest benefit and can maintain [the credits] as [the company] grows.”

New Plan Features

Apart from incentives, SECURE 2.0 also created a number of new requirements for plan sponsors. The law includes more than 90 provisions for plan sponsors, recordkeepers and service providers to digest.

One significant change is the addition of automatic enrollment to all new plans.

If an employer has established a plan on or after December 29, 2022, it must include an eligible automatic contribution arrangement beginning in 2025. For brand new plans, setting this up is a matter of including the functionality as they start. But for companies that are creating new plans as a result of a merger or spinoff, it may represent a change. Not all legacy plans have an auto-enrollment feature, and the new rules require it, even if the old plan didn’t have it.

The 2019 SECURE Act also created a new type of multiple employer plan called the pooled employer plan. The goal of this provision is to help smaller-plan sponsors achieve some of the benefits of large-scale plans by cutting down on administrative costs. SECURE 2.0 went further, making this option available to 403(b) plans as well. However, it’s important to note that these plans still have to meet the same requirements of single employer plans and that could make issues like auto-enrollment trickier—at least in the short run.

PEPs are designed to include companies that do not share commonality across ownership or industry. So shared services such as auto-enrollment may require more of a heavy lift if each company has a different payroll or other service providers.

Ari Sonneberg, a partner in The Wagner Law Group, adds that a few other provisions may add some administrative complexity. “Some part-time workers may qualify for retirement benefits, for example. We’re also getting more questions about catch-up Roth contributions. These are provisions that might make an employer question whether or not to offer a plan because they come with a higher administrative burden. But they also expand savings coverage,” he says.

There are also provisions that employers might see as beneficial to hiring and retaining talent, Sonneberg says. SECURE 2.0 expanded the circumstances under which participants may make hardship withdrawals. The law also supports emergency savings accounts and expands the contribution options available for participants who are working to repay student loans.

“If you’re setting up a new plan, there is an opportunity here to say to current employees and potential future employees that the company now has a plan with a lot of bells and whistles, which could make [a company] stand out competitively,” Sonneberg says. “But there are some trade-offs in terms of total cost and administrative burden. When you add more features, both of those things will increase.”

Growing Pains

With 90 provisions to understand and implement, sources say, the defined contribution retirement industry is starting a transition period that could last a couple of years. Recordkeepers and other service providers have been in a scramble to make sure their systems and software can support the new provisions, but not everyone is fully up and running yet. Service providers and employers are still awaiting guidance from the IRS and Department of Labor on some provisions. 

“It makes it difficult for us as recordkeepers to be waiting on this stuff because we’re supposed to be in a position to be able to say to plan sponsors, ‘Here are the steps and here is the guidance,’ but we don’t have all of that yet,” says Droblyen.

He adds that if plan sponsors want to get started this year or next year, they might want to begin as simply as possible and add features later. “If there is documentation in place and plan sponsors can show good-faith compliance, we have seen regulators be relatively lenient during times like this, but it’s important to remember that’s not a permanent solution. Plans eventually have to be fully compliant.”

Michael Gorman, an associate at Morgan Lewis, agrees. “We saw the IRS announce an ‘administrative transition period’ for Roth catch-up contributions, which they had never done before. So, could we assume they do something similar for other provisions? It’s possible because they’ve crossed the Rubicon,” he says. “But we always tell our clients that they still have to be prepared to implement such that they can because a transition period may not be possible for every provision.”

Benefits July 1, 2024

Upcoming Trends in Plan Design: From the Perspective of a Retiring Plan Sponsor

Carl Gagnon, assistant vice president of global financial well-being and retirement programs at Unum Group, reflects on his tenure and provides insight into the future of plan design.

Reported by
Art by Andrea D'Aquino

Known for innovative plan design ideas and offering a wide swath of benefits to his employees, Carl Gagnon, assistant vice president of global financial well-being and retirement programs at Unum Group, is retiring and stepping down from his plan sponsor role after nearly 20 years at the company.

Gagnon will now pass the torch to Ben Roberge, previously the director of financial and retirement programs at the insurance company, who will continue to carry out many of the plan initiatives that Gagnon spearheaded.

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Reflecting on his time in the industry and looking ahead to the future, Gagnon predicts that upcoming trends in plan design will include more innovation with in-plan retirement income options, increased focus on emergency savings, creating more equitable match formulas and more.

In-Plan Guaranteed Income

Instead of encouraging participants to withdraw money from the plan and pursue retirement income options in the retail market, Gagnon believes the “tide has turned significantly” and that recordkeepers and other firms are developing more in-plan solutions.

In May, Unum launched an in-plan immediate annuity with Fidelity on the 401(k) side, and Gagnon says there has been a lot of interest in it from participants. By next spring, Gagnon says the company intends to change the plan’s target-date lineup and move away from Vanguard and work instead with State Street to provide a qualified longevity annuity contract.

State Street offers target-date funds that are built to prepare for annuitization, and Gagnon says they are less expensive than the Vanguard passive funds, which Unum offers currently.

He says this will then provide Unum’s participants with “all three pieces” of deaccumulation. This includes a regular drawdown solution where people can withdraw income either every two weeks, mimicking Unum’s typical pay cycle, monthly or annually, as well as the QLAC option and the immediate annuity.

“I honestly think employees are better served in retirement from staying in plans that are professionally managed [and] have fiduciary oversight,” Gagnon says. “When I leave Unum, I’m eating my own cooking. When I’m retiring, I’m keeping my assets in the Unum 401(k) plan because they’re low cost, institutionally managed, great governance and oversight. Why would I go to the retail market where I’m going to spend multiples of five and 10 times more?”

Shelly-Ann Eweka, senior director of the TIAA Institute, says in addition to plan design features like automatic enrollment and automatic escalation, including an annuity option within a defined contribution plan is particularly important when looking to improve retirement outcomes, especially for women, who face greater longevity risk than men.

“Women have been living longer [and] having access to lifetime income is crucial for them because Social Security is never enough for anybody to live off by itself, [and] it wasn’t designed for that,” Eweka says.

She adds that plan sponsors should focus on embedding a lifetime income component into the default investment in their plans so that they can offer participants the option to easily annuitize at retirement.

Equitable Plan Design

As recent Vanguard data revealed that employer contributions in two-thirds of plans exacerbate pay inequity, with 44% of dollars accruing to the top 20% of earners, Gagnon predicts there will continue to be discussion around this issue.

He says companies, including Unum, have begun discussing with their recordkeepers ways in which match formulas can be adjusted to make it more equitable for lower-paid employees.

Vanguard suggested strategies like offering a dollar-cap formula, which is only used in 4% of plans, to allow for employer contributions subject to a dollar cap that is below the maximum contribution limits per statute. For example, a plan could offer a 10% match on 6% of pay, subject to a dollar cap of $6,000. This way, the $6,000 is not based on income, but rather something anyone in the plan could obtain.

David O’Meara, head of defined contribution investment strategy at Willis Towers Watson, says a lot of employers are looking at this issue now and realizing that they are not just serving one homogenous group of employees.

He says he has seen some companies move away from a match and implement non-elective employer contributions. He has also seen others implement a multi-tiered match where they might match 100% on the first few percentage points of employee contributions and then might match 50% on the next two percentage points This approach takes into account that lower-compensated employees tend to have a harder time saving for retirement, and a tiered approach might incentive them, he says.

“We’re finding more of our clients are looking deeply into those different pockets of individuals, trying to understand where they’re at,” O’Meara says. “And this is bigger than the defined contribution plan. It has to do with all of the benefits being delivered to them and how [employers] can best meet their needs.”

Gagnon expects that in order to get more people into their retirement plans and ensure that those participants are investing properly, more plans will look into using re-enrollment and rebalancing.

However, Gagnon says re-enrollment is tough because if participants cannot afford to contribute but are re-enrolled at 5%, for example, it might frustrate them and make them go back to contributing nothing.

“There are a lot of employees that still live paycheck to paycheck, and you’ve got to take that into account,” Gagnon says. “I think rebalancing their accounts is a much better approach. If they’re in target-dates, that’s fine, but if they’re inappropriately investing for their age, we may look at them and rebalance … I think more companies will look at rebalancing on a regular basis, like every couple of years.”

Emergency Savings, Auto-Portability

For some plans, O’Meara says creating more equity in plan design means offering an emergency savings program.

Unum launched its emergency savings program a little over a year ago, allowing participants to contribute any amount up to $10,000 to an account that can be used to pay for any unforeseen expenses. New employees are auto-enrolled into the 401(k) at a 5% deferral rate, with 1% of post-tax savings going into the emergency savings account.

Gagnon says first-year employee turnover rates for those that were automatically enrolled into the emergency savings plan were significantly lower, almost 40%, than turnover rates for first-year employees who were not auto-enrolled into the emergency savings plan.

“[Participants] who take the time to automate and build in that emergency savings are [40%] as likely to leave the company compared to those people who don’t because they’re building financial well-being; they’re building some comfort level,” Gagnon says.

Unum also recently joined the Portability Services Network, which Gagnon suggests may also become a trend with other plans. In the network, Unum in June started to automate rollovers for people entering the company with balances of under $7,000 that they are rolling into the Unum plan funds accumulated in a former employer’s plan.

“We think that’s going to be extremely attractive to our new hires,” Gagnon says. “We’re trying to make it easier for our employees to consolidate their assets into one plan and into one company so they can manage it all.”

Gagnon says while his retirement was effective July 1, he will still be available to Roberge to help with the transition. Roberge is also in the process of hiring someone to backfill his old position. After some time off, Gagnon plans to stay active in the industry, by writing articles, speaking and consulting.

 

 

 

 

 

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