Benefits July 3, 2023

Equity in Plan Design Starts With Understanding Demographics, Expanding Eligibility

To provide broader and more equitable access to retirement savings for all participants, plan sponsors should consider auto features, new SECURE 2.0 provisions, and tracking demographics to make adjustments, according to researchers.
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Art by James Yang


When thinking of ways to improve equity within a retirement plan and address the needs of all participants—whether they are low-income earners, early-career or part-time employees—plan sponsors need to first and foremost understand the demographics of their organization, according to retirement plan researchers.

It is commonly the case that demographics such as racial self-identity, socioeconomic class, gender identity and other factors are not tracked within a retirement plan, according to Benjamin Taylor, senior vice president and head of tax-exempt defined contribution research at Callan LLC.

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“If you’re not tracking [demographics] in your plan, it’s difficult to identify gaps in coverage or gaps in efficacy,” Taylor explains.

Taylor says people who earn the most and “benefit most economically from society” tend to benefit the most from workplace retirement plans. If a plan sponsor is seeking to address this issue, Taylor says it is important they are not “squeezing the balloon” and affecting employees’ ability to pay for childcare or other aspects of their home life, for example.

Assistant Secretary of Labor Lisa Gomez, the head of the Employee Benefit Security Administration, said at the PLANSPONSOR National Conference in Orlando, Florida that retirement equity is one of the Department of Labor’s primary objectives right now.

“The majority of people do not have access to retirement savings and an opportunity to save for retirement through their employment,” Gomez said. “This is really scary, particularly for underserved communities, for women, for caregivers.”

Angela Antonelli, research professor and executive director for the Center for Retirement Initiatives at Georgetown University, says that when it comes to retirement savings, white households have a median retirement account balance of $80,000, compared to $35,000 for Black households and $31,000 for Latino households.

Additionally, according to a recent Voya Financial study, Black and Latino workers have lower retirement plan participation rates and savings rates compared to white and Asian American workers. However, this study found that this gap closes significantly in plans that offer automatic enrollment.

Black and Latino employees had a two- to-three times higher participation rate at an employer who offered auto-enrollment compared to their peers at an employer who did not offer aut-enrollment, according to Voya.

Antonelli says auto features are the “foundation for having more people save.”

“Inevitably, if you have more people save, you’re going to be reaching those groups of people who typically have been left out, so you’re going to reach more women, more people of color,” Antonelli says.

According to the PLANSPONSOR 2022 Defined Contribution Survey results, which incorporates responses from 2,562 plan sponsors from a broad variety of U.S. industries, 47.1% of respondents said their plan offers auto enrollment and the majority said the default deferral rate is between 2.1% to 3%.

Eligibility Comes First

Before plan sponsors even begin to consider auto features, Anqi Chen, senior research economist and assistant director of savings research at the Center for Retirement Research at Boston College, says plan sponsors need to ensure that all participants actually have access to retirement savings programs and do not have to jump through eligibility hoops.

Chen says that many firms do not provide access to a retirement plan for part-time workers, and there are often tenure requirements for eligibility. For example, a company can require that a person have worked there for at least three years before they are eligible to contribute to a plan or receive an employer match.

The SECURE 2.0 Act of 2022 aims to break these barriers by requiring all new 401(k) and 403(b) plans established after the enactment of the legislation to automatically enroll new employees at an initial contribution amount between 3% and 10%. This is a mandatory provision that begins in 2025. The new law also reduces to two years from three the required years of service before long-term, part-time workers are eligible to contribute to an employer sponsored plan, including and ERISA-covered 403(b) plan, effective for plan years beginning after Dec. 31, 2024.

“I think the eligibility issue is definitely one of the most important factors for increasing equity because if you don’t have access to it, you’re not saving, and the first step to saving for retirement is going to be having access to one of these plans,” Chen says.

Once the barriers to eligibility are addressed, Chen says plan sponsors can evaluate why there may be a lack of retirement plan participation among certain groups.

Given eligibility, Chen explains that participation is typically high among higher income groups but can drop to about 60% among lower income groups. Lower wage workers may be more hesitant to contribute 6% of their salary, for example, in order to receive their full employer match, Chen says.

These workers who are more budget-constrained are unsure if they can sacrifice this percentage of their earnings to a retirement plan, so ultimately, the employer in this situation is likely giving more money to higher wage workers who are able to set aside that money for retirement, she notes.

Another reason why an employee might not be contributing to their retirement plan could be because they are trying to pay off student loans or other kinds of debt.

A study conducted by the Urban Institute found that debt disproportionately burdens racial minorities. For example, the study concluded that compared to an older adult in a majority-white community, an older adult in a community of color is more likely to have some type of delinquent debt, carry a higher balance of total delinquent debt and have a higher balance of medical debt in collection.

Chen says employers need to be thinking about whether a matching contribution or just a contribution for anyone who is eligible would better address the equity needs of their company. This idea of a plan that does not require an employee contribution is not unprecedented, Chen explains, as small-business plans, such as SEPs and SIMPLE IRAs, do not require employees to contribute in order to receive a match.

In a SEP IRA, only employers can contribute to the plan, and employee contributions are not permitted. With a SIMPLE IRA, employers are required to make annual contributions, but employee contributions are discretionary.

SECURE 2.0’s Impact

New provisions in the SECURE 2.0 Act of 2022 may also provide avenues for employers to address equity in their retirement plans.

For plan sponsors who are looking to target groups who are overburdened with debt, Taylor says the student loan matching provision in SECURE 2.0 is a benefit that could greatly increase equity for the workforce. The new provision allows employers to offer matching 401(k), 403(b), 457(b) and SIMPLE IRA contributions if the participant elects to pay down student loans instead of contributing to a retirement plan.This option will be available starting on December 31, 2023.

“I think [the student loan provision] is a major area of potential focus for plan sponsors who want to increase equity,” Taylor says. “It’s important because [it] affects not just younger people who have student loans, but it can cover those who are cosigners.”

Taylor says data indicates that many people who are in their fifties and sixties, and still working, will often have student loan debt because they have cosigned on their children’s loans.

In addition, Taylor says the emergency savings provision in SECURE 2.0 could have an impact on retirement equity.

Beginning in 2024, employers will be permitted to create a “sidecar” account tied to a non-highly compensated participant’s retirement account. Employees may voluntarily contribute or may be automatically enrolled at up to 3% of their annual pay, and take distributions at any time. This account is capped at $2,500 annually or a lower limit created by the plan sponsor.

SECURE 2.0 also allows a participant who has been a victim of domestic abuse to receive a distribution from their 401(k), 403(b) or 457(b) plan. The provision would allow the individual to take out a maximum of $10,000 or 50% of their vested account balance without getting hit with the standard 10% tax penalty for early withdrawal.

According to CPA firm Schneider Downs, the distribution must be taken within 12 months of the domestic abuse incident, and if a plan were to adopt this provision it could allow for the participant to self-certify that the incident of domestic abuse actually occurred.

Taylor recommends that plan sponsors evaluate these provisions as a starting point to addressing equity in their plan design. But before implementing these benefits, he says plan sponsors should first focus on tracking demographics in their plan, tracking asset allocation by demographics, savings rates as a percentage of income, as well as “getting people in the door early” by implementing auto-features.

How State-Sponsored Plans Address Equity

Currently, a total of 18 states have enacted state-facilitated retirement savings programs for private sector workers who would not otherwise have access to a retirement account.

Antonelli says the addition of new auto-IRA programs in 2023, such as in Nevada and Vermont, provide the ability for more workers to begin to save for retirement with the tax advantages of a workplace plan..

Auto-IRAs, in particular, require employers who do not already offer a qualified retirement plan to register their workers to be automatically enrolled. Antonelli says that many small businesses, in particular, do not offer employer-sponsored retirement plans because it can be administratively burdensome, as well as costly to provide an employer match.

In addition, Antonelli says with SECURE 2.0, the Saver’s Tax Credit creates a new type of contribution for low to mid-income workers. The Saver’s Credit allows for qualified individuals participating in a retirement plan or contributing to an IRA to receive up to 50% nonrefundable tax credit of a maximum contribution of $2,000 (or $4,000 for if married filing jointly).

Antonelli argues that this provision will help boost people’s savings over the long term.

“If we’re closing that access gap [to retirement savings], we’re going to be reaching groups that have been historically underserved,” Antonelli says. “Going forward, if we really want to be able to more effectively assess the extent of the inequality of wealth and retirement savings… employer-sponsored plans, as well as government entities, [need] better [demographic] data about their retirement plans and programs.”

June 1, 2023

Interest Grows Among Employers in Retaining Retiree Assets In-Plan

Cost, administrative work and fiduciary duties are all considerations when contemplating changing from traditional retirement plan structures.
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Art by Melinda Beck

Should employers allow retiree assets to stay in-plan or should the assets go when a worker’s employment has ended?

Employers are grappling with the clash of long-standing retirement trends, considering whether to allow or encourage workers and their defined contribution assets to stay in-plan when workers retire.

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There is growing interest from employers in retaining the assets belonging to retired workers because permitting participants to keep the monies in place can accrue benefits to both the employee and retirement plan sponsors, according to sources.  

“In the past, it’s been more about encouraging participants to move the assets out, thinking that was less administrative costs, less exposure to [fiduciary] liability, those kinds of things,” says Judy Bobilya-Feher, chief financial officer at Aunt Millie’s. “A recent conversation has been on—as we start looking more at that time period of readying [pre-retirees] for retirement—coming up with the annuity or income solutions and such.”

A change at Aunt Millie’s to retain assets has been discussed, but the employer has not implemented one. At least not yet, adds Bobilya-Feher.  

One driver of accelerated interest was the onset of the COVID-19 pandemic and the resulting economic effects and impacts. That accelerated actions by some employers to focus greater resources on retention of employees and to care for workers, Bobilya-Feher adds.

Exploring a change to retain retiree assets in-plan is also about taking greater care of the workforce generally, she says.

”COVID-19 has pushed a lot of employers—with the Great Resignation, all the labor issues—to have to show more empathy with their employees,” Bobilya-Feher says. “That starts begging the question: We need to have better retirement solutions, better retirement education, maybe some Social Security education, and why should we push the assets out?”

Why Do it?
There are several reasons employers are interested in retaining retirees and their assets in-plan. Primarily, plan sponsors want to continue to benefit from greater plan size, rather than having their workers take away assets when they retire.

Many Baby Boomers have saved in their company’s defined contribution plan and accumulated significant assets, so if they leave the plan at retirement, “that’s a lot of assets coming out of the plan if we don’t give them solutions to let them stay in the plan,” Bobilya-Feher says.  

The recordkeeper for Aunt Millie’s, John Hancock Retirement, and Brea Dantin, the plan’s adviser at ProCourse Fiduciary Advisors LLC, suggested changes to retain retiree assets in-plan, both Dantin and Bobilya-Feher note. John Hancock data analytics allowed the adviser and recordkeeper to look at the participant demographics at Aunt Millie’s for topics the employer will want to address, Dantin adds.  

A demographics analysis is “sometimes … very eye-opening for employers to go, ‘Oh my goodness, 10% of our population could potentially retire in the next two years. Are we ready for that?’” Dantin says. “Working with the communication team at John Hancock … we really zeroed in on the fact that they’ve got a large pre-retiree population, so we started talking about that a couple of years ago, and then COVID hit,” gumming up their plans.

Employers also want to keep the assets to negotiate favorable pricing for investments, recordkeeping and administrative services. But plan sponsors must balance the focus on costs against greater fiduciary responsibility if more individuals are contributing to the Employee Retirement Income Security Act-governed plan, says Dantin.

Dantin and Bobilya-Feher have discussed and will continue to explore balancing a possible increase of fiduciary liability by expanding plan benefits to retirement participants versus “caring-for-the-employees-like-family conversation,” at Aunt Millie’s, she adds.

Prior to the onset of the pandemic, exploring lifetime income options that would enable retirees to create a regular monthly stream of income about retaining retirees’ assets in-plan, Bobilya-Feher says.

Although Aunt Millie’s has not implemented a change to retain retiree assets, it is being actively considered for the future, as are other changes including the name of the DC plan, Dantin advises. 

“[The] Aunt Millie’s retirement plan, it’s called the savings plan, and one of the things that we’re really pushing is to change [the name] to savings and income so that folks know, if this is the direction the committee decides to go, that they can stay in and create an income,” she adds.

How do plan sponsors benefit?
Plan sponsors benefit from employees staying through fees for recordkeeping, investments and administrative services, says Bill Ryan, a partner in NEPC and its head of defined contribution solutions.   

One plan Ryan worked with had more than $25 billion in participant assets and 400,000 participants, yet more than 40% of the plan was inactive and/or terminated participants. The size allowed “everyone else” to benefit, he says.

Employers with a greater focus on the decumulation phase and in-plan lifetime income options can benefit by limiting  “unintended effects” to their workforce, says Sean Brennan, executive vice president of pension group annuities and flow reinsurance at Athene.  

“We’ve seen in the past that people might extend [their working life]—if they come to retire in a very bad market—longer and delay retirement relative to what they planned, so that’s obviously an impact on the individual, but also it affects the workforce,” he says. “If people aren’t leaving and you have very little control over their leaving … by way of retirement benefits, you can have the outcome of higher frictional costs of employment and people hanging around longer than then you might otherwise want.”

Time, resources and dollars?
The costs of implementing a change are another important decisionmaking factor, from a fiduciary protection prospective, for employers, says Dantin.

Arranging an installment payout system or administration to send out checks to retirees would be easy for plan sponsors—should an employer want to permit installment payouts from participants’ assets—yet an arrangement with greater complexity would be more costly.

“To do things like installment and other distributions, that’s already built by the provider we work with,” says Dantin. “John Hancock can handle all that; they can make it administratively easy, so I don’t feel like that’s a … hurdle, [and] we’re well-prepared in that area.”

Setting up a more significant system would likely be more costly, says Teresa Hassara, senior vice president of workplace savings and retirement solutions at Principal Financial Group.

“To set up a whole separate set of capabilities would not be an insignificant spend,” she says, nothing that because these kinds of systems are still new, it is early for an estimate of what the change might cost.

This view is shared by Jessica Sclafani, a senior defined contribution strategist at T. Rowe Price.

“Every plan’s retirement income journey will look different, so it would be impossible to find a fixed cost,” she says.

Brennan, at Athene, says the increased costs associated would merely be “incremental.”

Employers may drive greater cost savings with the change to retain retiree assets, notes Ryan at NEPC.

“It’s actually more efficient and less time-intensive to keep participants in-plan,” Ryan explains. “It would be a lot of effort for an HR [staff] and benefit managers to track a person leaving the plan and then issue or create a mechanism to kick them out. Once the balance is over $5,000, they can’t just issue a check; they [have] got to send it somewhere for an IRA or do something of that nature, and it’s more difficult to actually track participants down on an annual basis to get them out of the plan.”

Employers that want to meet their fiduciary responsibilities and allow participants to keep assets in-plan should, like “for everything they do … make sure they follow a process and document it,” Dantin says.

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