Compliance November 22, 2016

ERIC Makes Suggestions for PBGC Missing Participants Program

Among other things, ERIC suggests the PBGC extend the program from just terminated DC plans to all DC plans.
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The ERISA Industry Committee (ERIC) submitted comments in response to the Pension Benefit Guaranty Corporation’s (PBGC) proposed rule regarding missing participants under the Employee Retirement Income Security Act (ERISA) Section 4050.

ERIC notes that the legislative authority to create the PBGC’s missing participants program was limited to terminated defined contribution (DC) plans, but, it says, it would be beneficial to work toward extending the program to all DC plans. “A system of multiple missing participant programs at multiple agencies would be inefficient and lead to confusion for plan sponsors and participants. If the PBGC missing participant program for terminated defined contribution plans is successful, it would be more efficient to extend it to all defined contribution plans, rather than wait for another federal agency to create a separate missing participant program for all other retirement plans,” Will Hansen, vice president of Retirement Policy at ERIC, wrote in the comment letter.

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ERIC also suggests that the PBGC lower the fee waiver threshold from a $250 or less account balance to a $1,000 or less account balance. Hansen notes that if an account balance is $251, the $35 fee represents 14% of the account balance. The letter argues this is cost-prohibitive for plan sponsors.

If the PBGC doesn’t lower the fee waiver threshold, ERIC suggests a tiered fee structure—for example, $15 for account balances between $251 and $500; $25 for account balances between $501 and $1,000, and $35 for account balances greater than $1,000.

In addition, ERIC encourages the PBGC to always maintain the voluntary nature of the program. “Mandates on plan sponsors does not yield additional retirement savings or overall support for the employer-based system,” Hansen wrote.

Finally, ERIC encouraged the PBGC to incorporate a system that will allow the agency to electronically roll over a claimed account balance from the participant to a qualified retirement plan of the participant. “An electronic rollover instead of a paper check may provide a greater likelihood that the funds distributed will be maintained for the purpose of retirement,” Hansen wrote.

ERIC’s comment letter may be viewed here.

Data and Research November 22, 2016

Certain 401(k) Plan Design Features Hinder Retirement Outcomes

The GAO suggests regulators re-evaluate eligibility age requirements, vesting policies and whether to allow plan sponsors to require employment on the last day of the year to receive company match.
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Plan sponsors impose eligibility, vesting and matching policies on their participants in order to lower costs and reduce turnover, but these policies limit people’s ability to save, according to the Government Accountability Office (GAO).

GAO examined the policies of 80 401(k) plans and found that 41% do not permit those younger than age 21 to participate in their retirement plan. Twenty-four percent required participants to be employed on the last day of the year to receive company matches for that year, and 71% had vesting policies that require people to be employed for specific periods of time before their company matches are vested.

While the Employee Retirement Income Security Act (ERISA) permits employers to set these rules, GAO notes, 401(k) plans have become the primary retirement savings vehicle for Americans, who change jobs frequently. GAO says these policies could potentially reduce people’s retirement savings by significant amounts.

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“For example, assuming a minimum age policy of 21, GAO projections estimate that a medium-level earner who does not save in a plan or receive a 3% employer matching contribution from age 18 to 20 would have $134,456 less savings by their retirement age of 67 ($36,422 in 2016 dollars),” GAO says. In addition, “GAO’s projections suggest that if a medium-level earner did not meet a last day policy when leaving a job at age 30, the employer’s 3% matching contribution not received for that year could have been worth $29,297 by the worker’s retirement at age 67 ($8,150 in 2016 dollars).”

As far as vesting is concerned, GAO continues, “if a worker leaves two jobs after two years, at age 20 and 40, where the plan requires three years for full vesting, the employer contributions forfeited could be worth $81,743 at retirement ($22,143 in 2016 dollars).”

GAO is suggesting that Congress look into the minimum age required to participate in 401(k) plans and plans’ use of a last-day policy. In addition, GAO is asking the Treasury Department to “reevaluate existing vesting policies to assess if current policies are appropriate for today’s mobile workforce.”

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