Administration March 30, 2020

Introducing Generation Z to Retirement

While retirement isn’t achievable for this new clutch of employees for years to come, saving for it is.
Reported by
Art by Melinda Beck

Millennials are no longer the youngest generation in the workforce; now it’s time to get Generation Z focused on retirement.

Those in Gen Z face many of the same financial struggles as other working generations, especially when it comes to student loan debt and personal finance. A Betterment for Business survey on Millennials and Gen Zers found almost half (47%) of the two age cohorts are struggling with student loans, while 75% owe at least some credit card debt. Yet, even while retirement isn’t expected in the coming decades, saving at least a fraction of money is still encouraged, says Edward Gottfried, group product manager of Betterment for Business.

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“A lot of financial habits for Gen Z are driven from the perception that retirement is far for them,” he explains. While Baby Boomers, Generation X, and even some Millennials experienced pensions and defined benefit (DB) plans, those in Gen Z are much likelier to save in a defined contribution (DC) plan, therefore contributing is even more vital, Gottfried adds. “Now that we’re seeing DC plans as the only savings vehicle for them, Gen Z are understanding what it means to save early,” he says.

In fact, those in Gen Z may soon surpass Millennials in savings—35% said they plan to start saving for retirement in their 20s, versus 12% of Millennials who said the same, according to a study by the Center for Generational Kinetics (CGK). Additionally, Gen Zers may be more realistic about what benefits they’ll obtain from the federal government during retirement. The CGK report mentions that one-quarter of Gen Zers surveyed expect to receive retirement money from the government, while one-third of Millennials anticipate the same. “Gen Zers are thinking about retirement and how their financial plan is performed,” Gottfried notes. “They feel the same financial uncertainty that those in other age cohorts are feeling.”

Managing enough savings for an emergency fund, allocating money for future purchases—whether a home or additional schooling—and paying everyday finances and bills, including health insurance, are all top of mind for Gen Zers. According to the Betterment for Business report, 88% are actively saving at least some of their money on a monthly basis, including into their retirement funds. Seventy-three percent are contributing at least 3% for their retirement savings, and 23% are saving more than 8%. “They’re thinking about the financial milestones in their life similar to other generations—having a family, purchasing a home and being prepared for situations that may impact them,” Gottfried says.

Since Gen Zers have similar concerns as other age cohorts, plan sponsors should continue the same practices that are successful for workers today, such as setting up automatic enrollment and automatic deferral increases. As a starting point, Gottfried recommends defaulting employees at 5% and communicating the significance of a 401(k) and other retirement or savings vehicles.

The Betterment for Business study found employees in younger workforces tend to dip into their retirement savings account—one in three said they had done so to pay off debt. “It’s important for plan sponsors to communicate that your retirement account is intended to be there for your savings,” he says, and to encourage Gen Z to build an emergency savings account so they have funds that are not coming out of retirement accounts.

One successful way to communicate with Gen Zers is through face-to-face contact, according to the CGK study. Fifty-three percent of the Gen Z workforce prefers in-person contact rather than online tools, including instant messaging or video conferencing. While personal contact is currently limited in the workforce and throughout the globe, employers can use social media to break down their content in the form of helpful tips and short videos.

Employers are also advised to monitor savings habits for their Gen Z female workforces. Akin to previous generations, female employees are more likely to be paid less, more likely to pause their work to raise or care for families, and often do not invest with the same confidence as men, according to the Betterment for Business study. Currently, 13% of Gen Z and Millennial women are not contributing to a retirement plan, compared with 7% of men.

Aside from paying workers equally, employers can target additional education and support efforts for women in the workplace. “To correct it, they will have to take intentional and proactive measures, like understanding their employee’s needs and helping them more conservatively manage longevity risk—to ensure women are taking full advantage of benefits and preparing properly for retirement,” the study says.

Compliance March 26, 2020

SECURE Act Eases Paths for DB Plans

A new minimum age for in-service withdrawals and permanent nondiscrimination testing relief ease plan sponsors’ ability to keep older employees and protect their benefits.
Reported by
Art by Philip Lindeman

In addition to the required minimum distribution (RMD) rule change that applies to all plan types, there are other changes included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act that specifically apply to defined benefit (DB) plans.

A blog written by Seth Safra, a partner in the Employee Benefits & Executive Compensation Group at Proskauer in Washington, D.C., and Jennifer Rigterink, an associate in the Labor Department and a member of the Employee Benefits & Executive Compensation Group at Proskauer, explains that, effective for plan years starting after December 31, 2019, the SECURE Act allows for in-service distributions starting at age 59 1/2, without regard to the plan’s normal retirement age.

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Safra notes that defined contribution (DC) plans already may allow for in-service distributions at age 59 1/2, and he says the provision in the SECURE Act is just aligning with that. However, there are other situations for which the provision will help.

“The point of in-service distributions in DB plans is, first and foremost, to facilitate phased retirement,” Safra says. Senior employees can start receiving their retirement benefits while continuing to offer the company the benefit of their expertise.

He adds that some employers may fear that senior employees can leave their company with their DB plan benefits and work somewhere else. “Being able to allow in-service distributions is helpful; companies can keep senior employees and those employees will have access to their money,” Safra says.

Asked whether taking in-service distributions would reduce the benefits DB plan participants may get, Safra explains that the way traditional pensions are structured, it is common to have subsidized early retirement. “If participants start their benefit earlier, they will get more payments but with a reduction in the monthly amount. But what many plans do is offer subsidies so the benefit amount is more than what the actuarial reduction will be,” he says. “From that perspective, if the plan offers early retirement subsidies for senior people who continue to work, it adds the ability for them to get the value from their pension without having to leave the firm to get it.”

Another benefit of lowering the age at which DB plan participants can get in-service distributions relates to pension de-risking. Many sponsors of frozen DB plans have been offering lump-sum windows to reduce liabilities for their plans. Safra says that, previously, the minimum age at which participants could get in-service distributions was 62. Lowering the age broadens the number of employees who can be included in lump-sum window offerings.

Safra adds that when offering lump-sum windows, information and disclosures must be provided to affected participants, and agreements and consents must be returned. These are more easily attained from active employees, so reducing the age for allowing in-service withdrawals provides an opportunity to expand the breadth of lump-sum window offerings.

Tommy Vaught, principal and leader of the Asset/Liability Practice Group at Findley in Nashville, Tennessee, says in his experience, not many DB plans offer the ability to take in-service distributions. Plan sponsors will have to evaluate whether they want to make the change, and he says it will require a change in the plan document, summary plan description (SPD) and administrative procedures. “If a plan is already providing for in-service withdrawals, the procedures for reducing benefits to an earlier age are already in place, so I don’t think it will be particularly burdensome,” Vaught adds.

Nondiscrimination Testing Relief

Over the years, a number of DB plan sponsors have closed their plans to new entrants while allowing those already in the plan to continue to accrue benefits (what may be called a “soft freeze”). Often, these plan sponsors implement a defined contribution (DC) plan for all employees going forward.

In the early years after the DB plan has been closed to new entrants, the plan may be able to satisfy nondiscrimination testing without being aggregated with the DC plan. However, over time, as grandfathered employees in the old system typically build seniority and become more highly compensated than younger workers entering the DC plan, it becomes more difficult to satisfy testing. Over the years, the IRS has provided temporary nondiscrimination testing relief for closed DB plan, which it has had to extend several times.

The SECURE Act makes nondiscrimination testing relief permanent.

However, Safra explains, the relief provided in the SECURE Act differs from that provided over the years by the IRS. According to the blog, “The SECURE Act provides significant relief in three ways, and the relief is generally broader than what Treasury and the IRS had previously provided.”

There are requirements closed DB plans must meet in order to be eligible for the relief:

  • The plan must have either been closed before April 5, 2017, or existed for at least five years before the closure, without a “substantial increase” in coverage or the value of benefits, rights and features during that five-year period;
  • The plan must have passed the nondiscrimination tests without relief for the year in which the plan was closed and the next two years; and
  • If the plan is amended after it is closed (for example, to change the closed class, to change benefits, or to change rights or features), the amendments must not significantly favor highly compensated employees.

Safra explains that previous relief provided the ability to combine the DB plan with the DC plan to pass nondiscrimination tests by converting the annual contributions to the DC plan to an equivalent annuity benefit. A big change with the SECURE Act is that. previously, only nonelective contributions could be considered in this “cross-testing,” but Safra says now, matching contributions and employer contributions to an employee stock ownership plan (ESOP) or a 403(b) plan can be taken into account.

Notably, the SECURE Act provides that eligible closed plans automatically pass the benefits, rights and features test as well as the minimum participation test.

Safra says when DB plan sponsors freeze their plans, they should work with their actuaries who can provide projections for when passing nondiscrimination testing will become a problem. “When it does, they now have additional tools for testing,” he says.

Vaught says plan sponsors can confirm that their providers are well-versed in the new rules, but other than that, there are no immediate action items.

He says the nondiscrimination testing rules give plan sponsors the flexibility to continue to provide benefits for participants in closed plans. “In particular, under minimum participation rules, as participants left the closed plan, plan sponsors were faced with having to do a hard freeze and eliminate benefit accruals,” Vaught explains. “The new rules enable plan sponsors to continue to provide and protect the benefit of that older group of employees. It is a very welcomed change.”

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