Benefits November 5, 2020

Best of PSNC 2020: Structuring Your Plan for Different Participant Needs

Plan sponsors should not forget the needs of older workers when offering financial wellness and emergency savings help.

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At the “Structuring Your Plan for Different Participant Needs” panel held on the second day of the 2020 Best of PSNC (PLANSPONSOR National Conference), Scott Thoma, principal of client needs research at Edward Jones, said retirement plan sponsors should be sensitive to the changing needs of retirees and how these needs impact those close to retirement. After surveying 9,000 adults with Age Wave on their views about retirement, he said Edward Jones discovered that concerns extend beyond finances to include health, family and purpose.

“The majority say it is just a new chapter in their life,” Thoma said. “Retirement doesn’t mean the same thing as it used to. Retirees now view it as an opportunity for freedom and flexibility to be able to do the things they want to be fulfilled. It is the intersection of ‘When do I have enough saved’ and ‘Have I had enough.’ We found in our survey that nearly 90% of adults in the U.S. and Canada want to use their talents to stay engaged in their community. Many look for new careers and opportunities.”

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Steve Vernon, president of Rest-of-Life Communications and a research scholar at the Stanford Center on Longevity, said plan sponsors can play a big role with respect to these goals by giving retirees alternative ways to work, including part-time or seasonably.

He also said that the time has come for retirement plans to offer at least three retirement income options: “installment payments; some kind of an annuity, be it in-plan or out of plan; and some kind of a temporary payout to bridge living expenses before people begin taking their Social Security benefits. By offering at least those three options, plan sponsors can meet the needs of plan participants with varying goals. I think this is the next evolution of retirement plans.”

As to how the pandemic has impacted retirement savings for the participants in the plans he serves, Paul D’Aiutolo, senior vice president of wealth management at the D’Aiutolo, Malcolm & Associates Investment Consulting Group, said “a handful of participants who kept their jobs and received stimulus money had a positive experience. For those who lost their jobs or were put on furlough, they are now thinking differently about retirement.”

Vernon said some financial wellness programs have morphed as a result of the pandemic, and many plan sponsors are “now addressing the needs of older workers as they approach retirement. They face higher stakes that are much more complex than saving and budgeting, such as deciding when to retire, when to begin taking Social Security benefits, how to pay for medical expenses and manage Medicare, how to make their savings last throughout a long retirement and which living expenses they should reduce. Plan sponsors are in a key position to help them with these questions through a financial wellness program. I believe the next evolution of financial wellness programs will focus on the needs of retirees.”

D’Aiutolo said, “The pandemic has highlighted the need to have emergency savings. Should employees prioritize paying down debt, starting an emergency savings fund or other financial goals before saving for retirement? Every employee has uniquely different DNA. The best thing we can do when helping them answer this question is to help them understand their individual priorities and goals.”

Vernon said he tells younger people who do not have an emergency savings account, “Retirement is later. Immediate needs are now. Ideally, I would like people to do both [save for retirement and an emergency savings fund] at once. If you had to choose, I would recommend building the emergency fund first, so you don’t dip into your retirement savings later.”

Thoma said people should have three to six months’ worth of emergency savings. For those who cannot decide which financial goal to handle first, he recommends saving up at least one month of savings for an emergency. “That gives you at least some form of stability,” he said. “Then, I would recommend contributing enough to their retirement plan to at least get the match. Next, for those who are carrying debt with high interest rates, I would say focus on paying that down, and then I would help them understand the trade-offs of their decision about what to do with their next dollar.”

As to what tools retirement plan sponsors have at their disposal to help people begin an emergency savings account, D’Aiutolo said he is a big advocate of after-tax savings in sidecar accounts that are run alongside a 401(k) and that can be set up to have automatic contributions every payroll period. D’Aiutolo said he also recommends that sponsors tout traditional bank or savings accounts, and make emergency savings a linchpin of their financial wellness programs.

Vernon added that giving participants access to a credit union or a payroll deduction system are two other good alternatives. “But it is also important for sponsors to communicate the importance of emergency savings,” Vernon said.

Compliance November 5, 2020

Finding the Right Plan Auditor

While implementing a request for proposals (RFP) isn’t necessary for every plan, issuing one can be a crucial step in determining a quality plan auditor.

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Under the Employee Retirement Income Security Act (ERISA), employee benefit plans with 100 or more participants are required to file a financial audit as part their yearly Form 5500 series filing. Doing so demands hiring an independent auditor.

A financial audit is an accountability tool that ensures a company or entity’s financial statement is accurate. Aside from helping improve plan management, streamlining plan operations and identifying errors, an audit ensures the plan administrator is carrying out its fiduciary responsibility in completing a Form 5500, says Ian MacKay, director of the AICPA Employee Benefit Plan Audit Quality Center.

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The AICPA, or the American Institute of Certified Public Accountants, recently pushed a report emphasizing the importance of a quality plan auditor. In the report, the AICPA breaks down why specific processes, such as a request for proposals (RFPs), are imperative for some plans. While an RFP is not required, some administrators may consider it appropriate to ensure an auditor’s credibility.

MacKay explains that neither ERISA nor the Department of Labor (DOL) require plan sponsors to issue an RFP. “It’s more of the plan fiduciaries and what the plan sponsors think is appropriate,” he says. “A lot may depend on changes of the audit firm or changes in the plan itself.”

Barry Klein, a partner with Carr, Riggs & Ingram LLC, says that while there is no requirement when it comes to the RFP process, plan administrators need to understand their fiduciary duties under ERISA to remain in compliance. Ensuring the plan is properly audited is a part of an administrator’s fiduciary responsibility. If they fail to do so, the administrator risks penalties and potential fiduciary threats. “You want a quality plan auditor because you have a fiduciary responsibility to submit the plan as properly audited,” he says.

If a plan is implementing an RFP, MacKay urges administrators to ensure it includes specific plan details. This will help auditors have a better understanding of the plan they would potentially work with, including the type of plan, plan year end, size and name of any professionals, including custodians, recordkeepers, investment managers and third-party administrators (TPAs).

“Plans will vary from one to the other,” MacKay says. “It’s better to describe as much as you know about the plan, such as the administrator or any other unique things about the plan, so that when the audit firm responds, it has a better sense of the environment and the situation so it can put together a more appropriate proposal.”

When preparing the RFP, the AICPA recommends administrators clearly communicate facts and conditions surrounding the engagement, state objectives and requirements, and include the information needed to properly evaluate the proposal. The AICPA also recommends administrators require the proposals to be presented in a common format to allow for efficient evaluation and comparison.

If the DOL finds that the Form 5500 is professionally substandard and rejects the filing, the plan will accrue penalties until the administrator fixes the noted issue and goes through another audit, Klein says. “It’s a situation you don’t really want to be in as a plan sponsor or fiduciary,” he adds.

With that in mind, some plan sponsors determine it’s crucial that they work with a reliable auditor. The AICPA report lists several key qualifications to look out for when selecting an auditor, including experience, professional development, independence and licensing.

MacKay recommends administrators look for an auditor that has a good understanding of ERISA and DOL regulations, along with unique auditing reporting. “They want to make sure the audit firm knows the auditing process well and has experience,” he says. “If they had experience with the audit firm before, how was the quality of service? Did it meet the expectations of the plan sponsor and administrator?”

It’s also important to determine the terms of the engagement, including the length of time the contract will cover. Depending on the contract, administrators may need to enact RFPs every three to five years, MacKay notes. “Different plan sponsors will have different policies for RFPs, whether it’s every three or five years,” he says.

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