Q: I read with great interest your Ask the Experts column on match maximization, which raised the possibility of plan sponsors providing a so-called “true-up” contribution for those who do not make deferrals evenly throughout the year and are thus shortchanged on their match. We currently do not provide a “true-up” on our match but are considering it, since many of our participants have been repeatedly shortchanged, despite our advising such participants of the issue.
However, we also have several participants who take total account distributions immediately upon termination of employment, so adding a true-up at that point would create issues with our plan recordkeeper. Could we have a “last-day” requirement for the true-up contribution under our non-safe harbor plan that would require that a participant be employed on the last day of the plan year in order to receive the allocation?
Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
A: Yes: In general, you can have a “last-day” requirement for a true-up contribution. Of course, your plan document should contain language that specifically states that a participant is required to be employed on the last day of the plan year in order to receive the true-up allocation.
Note that this provision should be separate and distinct from any other “last-day” requirements that may be present in your plan in order to receive an employer contribution (as there are often exceptions to such requirements, such as termination on account of death, disability and/or retirement). Also, note that adding a “last-day” requirement for your true-up could raise nondiscrimination testing concerns, so be sure to discuss any changes with your plan counsel.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.
Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.
How Should Plan Sponsors Communicate When the Market Plunges?
Hits to the stock market mean participants will see retirement savings losses, so plan sponsors should have a communication plan in placeto steady reactions.
With the stock market taking major hits over the last few days of trading, retirement plan participants will likely see a decline in their 401(k) assets and, as a result, feel concerned about their retirement savings.
The Dow Jones Industrial Average was down 1,033.99 points when the market closed on Monday, and the S&P 500 was down by 3.00%. The Nasdaq also slid 3.43%.
In addition, U.S. hiring fell in July, as the unemployment rate rose to 4.3% in July, the highest it has been since October 2021, the Department of Labor reported on August 2.
Megan Yost, a senior vice president and engagement strategist at Segal Benz, suggests that plan sponsors check in with their recordkeepers to see if they can provide any materials for participants about navigating volatile markets. She says it is important to remind participants to try not to react too quickly.
“I [recommend] checking with the recordkeepers to see what their plans are and … put a plan in place to reassure participants that downturns happen and how downturns are normal,” Yost says.
Focus on the Long-Term
Yost says it is important for participants to be educated that selling stocks or pulling money out of the market after a sell off can result in missing a rally when the stock market goes back up, and they should be encouraged to stick to their long-term retirement investment strategy.
“I’d also suggest that recordkeepers or plan sponsors remind participants about financial advice they make available to participants,” says Yost. “A lot of plans have unbiased advice, whether through a financial wellness platform or through the recordkeeper, and it’s [good to] remind people of these resources. If they have questions about what’s happening in the market or what would be best for their situation, they can talk to someone before making any quick decisions.”
Emily Phillips, a senior director at WTW Investments, says it is important for plan sponsors to strike a balance between drawing attention to market volatility and reassuring participants. She says plan sponsors should lean into reminding participants about the long-term goals they established and ensuring they have the right risk profile.
“If you’re seeing a lot of volatility in your portfolio and you can’t handle that, maybe you ought to be at a lower risk profile all of the time—not just this week or however long the volatility persists,” says Phillips.
Rob Austin, head of thought leadership at Alight Solutions, agrees that even though the market will be volatile on a day-to-day basis, it should not change an investor’s forecast for retirement, which may be 30 or more years down the road.
Austin also touted managed accounts, arguing that the advice component can help “talk people off a ledge” during market downturns.
“If you look back at 2020, when the market really went haywire with the coronavirus, people who had managed accounts called in a lot but did not make trades and just wanted somebody to reassure them,” says Austin.
He also says having access to a fiduciary through a managed account is helpful on the individual participant level.
Use Available Tools
In addition, Austin says a useful plan feature during difficult market times is automatic rebalancing, which helps participants maintain their preferred asset mix. Austin says this feature is offered in about 70% of plans, but only about 10% to 11% of people use auto-rebalancing.
If someone has a portfolio consisting of 70% equities and 30% fixed income, for example, Austin says a participant could opt in to auto-rebalancing every 90 days, or a different period of time, at which point the mix will be reallocated back to 70/30 if it has market moves have adjusted it away from that original allocation.
“I tend to see people [rebalancing] quarterly, about 90 days, because that’s a long enough time where you’re going to see some movement, but not too long where you’re not capturing those changes,” he says.
Austin expects investors to make a lot of trades this week while the markets are down, locking in losses as opposed to trading when the market is at a higher point. He says Friday’s selloff prompted a moderately-high trading day (1.7x average) and often when there is a large market downturn on a Friday, higher-than-normal trading activity occurs on the following Monday because people submit trades over the weekend.
He, too, says communication is key. Some plan sponsors who use Alight as their recordkeeper have set up messaging triggers for when the S&P 500 Index falls by 2% in a day, for example. Austin says when this happens, Alight will share messages on the recordkeeping platform to encourage people to maintain a long-term focus, despite changes in the market.
Always Be Prepared
Shlomo Benartzi, a behavioral economist and a professor at the UCLA School of Management, says the “best medicine” in volatile markets is prevention and that plan sponsors should not wait for markets to go down and then scramble to figure out what to tell participants. He emphasizes that communication needs to be ongoing and established before major downturns occur.
“Markets will keep going up and down, and we need to be thinking ahead of time,” says Benartzi. “Communication mechanisms should almost foster number numbness and get people to get used to not following the ups and downs [of the market] and think in the long term.”
He says this sort of messaging should be drafted well in advanced and be tested, so that when markets drop, plan sponsors are communicating in the most effective way possible.
“I truly believe that we should, as an industry, plan ongoing communications that actually foster long-term thinking … and set the panic-management system ahead of time so that you know when the market drops, which messages you can send and test,” Benartzi says.
He adds that leveraging technology such as personalized videos can be an effective way to communicate with participants who may not have access to an adviser.
