Opinions December 6, 2017

When Creating a 401(k) Engagement Strategy, Don’t Forget Those Outside the Plan

Many current 401(k) engagement strategies ignore those employees who would like to save in a 401(k) but feel as though they can’t.

Reported by

In the defined contribution (DC) world, we focus a great deal of our time and energy on plan participants. We continually ask ourselves, how can we help them make the most of their 401(k) account to achieve a comfortable retirement? Plan sponsors launch websites full of useful resources and offer professional advice and other design elements as part of their plan—and these efforts go a long way in helping the participant save more and stress less. But despite these efforts, there is one problem that affects many current 401(k) engagement strategies: They often ignore those employees who would like to save in a 401(k) but feel as though they can’t.

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Schwab recently conducted a survey* that examined the attitudes and behaviors of two groups of employees: those who are currently saving in a workplace 401(k) (“savers”) and those who have access to a 401(k) at work but are not currently saving in it (“non-savers”). The findings—especially for the non-savers—were illuminating and, in some cases, pretty unexpected. For one, it became apparent that the reason many non-savers opt out of or choose not to enroll in their company’s 401(k) plan has nothing to do with the value of such investments. Forty percent, in fact, consider a 401(k) a “must-have” benefit, and 59% would think twice about taking a new job without one. So why aren’t they utilizing this benefit?

A closer look reveals a sobering picture. Many in this group have no money left over at the end of the month (30%) or are actually behind on bills (15%). Moreover, this group’s respondents said, by an overwhelming margin, that the one thing they would change about their past financial management would be to accumulate less debt. To someone who is mired in debt and struggling to make ends meet each month, it might seem impossible to find any part of their paycheck to earmark for retirement—especially when retirement may seem like a faraway issue, a bridge to cross when they get to it. The truth is, however, that preparing now and setting aside a little bit each month could make saving in a 401(k) more doable than they think.

Financial Wellness Starts at Work

 

So what can employers do to help their work force get a better handle on their finances and work toward long-term saving strategies? For one thing, they can introduce financial wellness programs, designed to outfit employees with tools, education and resources to help them develop skills such as navigating their personal finances, creating a budget and designing a saving strategy.

Some 77% of the non-savers in the Schwab study say they would use a financial wellness program if it were offered by their employer. This is a telling sign that these folks need and want help to take control of their finances. Getting employees engaged with financial wellness programs can be a critical first step in helping them understand that they can save for the future—even before you make formal efforts to get them saving in the company 401(k) plan. Once they understand how to prioritize bills, debt payments and other obligations, they may find a reasonable way to also put funds away for the future.

At the end of the day, employers have a vested interest in reducing their employees’ stress about money. The survey found that 30% of non-savers have experienced financial stress that affected their job performance. Providing tools and resources to help with these challenges is one way to be good to your employees while also helping them focus more on their work while they’re on the job.

The Mandate Is Clear

 

One of the biggest surprises about the Schwab survey was that more than half of the non-savers—again, those who have access to a 401(k) but do not currently contribute to it—actually had in the past contributed to one. And more than half of the people in that subgroup reported that their old 401(k) account is their largest or only source of retirement savings. One might guess that if they’re not currently saving in that or any 401(k) plan, they might not be saving for retirement at all. As we know, you get only one chance at saving for retirement, so the earlier you start, the easier it tends to be in the long run.

With all of this in mind, employers should understand that they can play a sizable role in helping their staff make sense of their current financial situation so they can keep an eye on their financial future. The mandate for financial wellness is clear, and it makes sense to think of it as a prerequisite for other 401(k) engagement strategies. Remember, it may just be the people who aren’t saving who need that help the most.

*2017 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.

The information contained herein is proprietary to Schwab Retirement Plan Services, Inc. (SRPS), and is for informational purposes only. None of the information constitutes a recommendation by SRPS. The information is not intended to provide tax, legal, or investment advice; please consult with your accountant or investment advisor for how this applies to your specific situation. SRPS does not guarantee the suitability or potential value of any particular investment or information source. Certain information provided herein may be subject to change. None of the information contained herein may be copied, assigned, transferred, disclosed, or utilized without the express written approval of SRPS and its affiliates.

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This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
Compliance December 6, 2017

Court Decision in PBGC Suit Shows Sponsors Have Ultimate Fiduciary Liability

“IHI cannot delegate fully its statutory responsibilities under ERISA,” a federal judge says in her opinion.

Reported by

U.S. Magistrate Judge Candy W. Dale of the U.S. District Court for the District of Idaho has denied Idaho Hyberbarics Inc. (IHI) a motion for leave to file a third-party complaint.

The case concerns a Pension Benefit Guaranty Corporation (PBGC) audit of the termination of IHI’s defined benefit (DB) plan. During the audit, the agency found that full distribution of assets to plan participants was not made in a timely manner and that IHI failed to pay them the full value of their annuity contracts.

The PBGC ordered IHI to: calculate the underpayments due to participants by determining the difference between the amount each participant actually received and the full cash surrender value of that person’s annuity contract, adding a reasonable rate of interest to the additional amount; submit such calculations for PBGC’s review; and pay participants the additional amounts due them. IHI neglected to do these things, so the PBGC filed a lawsuit.

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IHI now argues that a third party bears responsibility for any improper administration of the plan, and seeks to file a third-party complaint against CJA & Associates. IHI retained CJA to assist it with establishing and administering the DB plan for IHI’s employees. IHI asserts CJA played a significant role in establishing and administering the plan through a service agreement with IHI, and, therefore, to the extent PBGC’s claims of improper administration against IHI succeed, the resulting liability should transfer to CJA, the party that played the most significant role in administering—and terminating—the plan.

Citing prior case law, Dale noted that the crucial characteristic of a Federal Rule of Civil Procedure 14 claim “is that defendant is attempting to transfer to the third-party defendant the liability asserted against him by the original plaintiff. The mere fact that the alleged third-party claim arises from the same transaction or set of facts as the original claim is not enough.”

Dale found IHI’s arguments unpersuasive. PBGC’s claim against IHI arises under Title IV of the Employee Retirement Income Security Act (ERISA), and liability is based upon IHI’s acts or omissions, not the actions of CJA. Under Title IV, the plan administrator alone, not a third-party adviser, is responsible for proper termination of the plan. “In other words, as PBGC argues, IHI cannot delegate fully its statutory responsibilities under ERISA,” Dale wrote in her opinion.

For its argument, IHI relied upon several cases that cite the general principle that ERISA was enacted to promote and protect the interests of plan participants. IHI also contended that, if the court denied its motion, it likely would file for bankruptcy, which is not in the plan participants’ best interests.

Dale found this argument was misplaced, however, because ERISA concerns itself with proper plan administration and terminations that serve and protect the interest of participants and beneficiaries. “The principal statutory duties imposed on plan trustees relate to the proper management, administration and investment of fund assets, the maintenance of proper records, the disclosure of specified information, and the avoidance of conflicts of interest. IHI’s financial health, which exists independent of the Plan and its administration, is therefore not ERISA’s concern,” she wrote.

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