Administration January 23, 2020

Phasing Out Retirement Jargon

Complex retirement planning terminology isn’t just tough for participants to understand. Plan sponsors are having difficulty, too.

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Retirement planning is a stressful journey, unsurprising to many. From projecting desired income sums to understanding the retirement savings process, preparation can be an overwhelming course. And the jargon isn’t helping—neither for the participant nor the plan sponsor.

This jargon, including a motley of abstruse terms like Social Security optimization and glidepath, can discourage participants from engaging with their retirement plan, reports say. A 2019 Invesco study found when participants were presented with a “personalized, plain-English and positive short description” of a retirement plan, 54% were either very or extremely likely to stay in the plan with a monthly payout feature.

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“Very few people want to talk about investments in the abstract or theory,” explains Greg Jenkins, the head of Institutional Defined Contribution at Invesco in Texas. “People would rather talk about investments in terms of their goals, that’s much more meaningful to them.”

For employers—especially smaller plan sponsors—these terms can prove just as trying. At smaller institutions, where managing the retirement plan does not encompass a full 40-hour work week, comprehension levels are comparable to participants, says Steve Jenks, chief marketing officer at Empower in Colorado. “It’s different when you get into the very large end of the market, where overseeing a retirement plan is somebody’s full-time job,” he says.

Smaller plan committees, whose members as fiduciaries structure the workplace plan, are not commonly fluent in technical terms like Social Security optimization, Jenks adds. When it comes to this specific terminology, plan sponsors cannot assume the committee will understand all terms. It’s far more effective to break down the language.   

Even those who understand the lingo aren’t welcoming to the terminology. Words such as “glidepath,” “best in class” and “institutional quality” that may resonate with plan sponsors aren’t necessarily adopted, mentions Jenkins. Adding plan-English definitions, such as a rebalancing strategy for investments or a risk-reduction path, are preferred over the jargon. “There are some words that work with plan sponsors, where they may understand what providers are talking about, but the participants don’t,” he adds.

Financial advisers and providers can take advantage of their own knowledge to simplify jargon for plan sponsors and participants. For example, providers tend to use unfamiliar terms such as noncorrelated asset management, hedging, and different types of derivatives, notes Jenkins. He says that while some will assume the plan sponsor will understand, the reality is many employers misinterpret the meaning. Terms like this are misunderstood or are misconstrued because, for many plan sponsors, that’s just not their world.

This means that most of the responsibility sits with the providers. Just how providers need to communicate with participants and incorporate their language, the same should be done with plan sponsors, Jenks argues. Instead of exhausting retirement terminology, providers can consult with employers on adjusting the language.

If a plan sponsor has trouble interpreting vocabulary and its provider has not conferred with it, Jenkins suggests employers push back. Ask providers to explain what terms mean and if there are any plain-English meanings that can help with understanding. The end goal for providers is to build communication for all three parties—themselves, the employer and the participant. “Plan sponsors are communicating to an employee,” he says. “It’s the same responsibility that providers have when communicating with employers.”

Opinions January 22, 2020

Should Your Company Finally Offer a Retirement Plan?

David Levine and Kevin Walsh, with Groom Law Group, Chartered, discuss opportunities—some created by recent legislation—for small business employers to offer retirement plans.

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It’s OK—you’re far from alone—47% of small to midsize businesses don’t offer a retirement plan, and you have reasons for being one of those. You have more to do than run a retirement plan and don’t want to spend your time administering a plan or picking investment options. And, given your company’s size, you think the costs of offering a plan outweigh any tax, recruiting, employee retention or other benefits you might get in return.

New legal changes may make you rethink your decision. First, there are new tax incentives for offering a retirement plan. Second, there are new ways for employers to take advantage of professional plan administration and the economies of scale that had been available only to larger employers. Third, states may soon require employers to offer a plan or participate in a state-run scheme.

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Background

The first question to ask: Why should we offer a retirement plan? There are many reasons, including the following:

  • So your employees can save for their retirement and then retire, allowing the next generation of employees to help lead your company into the future.
  • So employees can receive a tax deferral for their contributions.
  • So you can deduct your contributions made on employees’ behalf.

Additionally, employers may even be eligible for a tax credit for the startup costs for their plan.

New Tax Credits

This past December, Congress added to the tax incentives employers get for offering a retirement plan—viz., for starting one. With passage of the SECURE Act, now, an employer can receive a credit of $500 to as much as $5,000 for three years for starting a plan. The employer also will get a credit for including an automatic enrollment feature that defaults employees into participating in the plan. This credit is $500 and can be claimed for three years. All in, these changes mean that employers are eligible for tax credits of up to $16,500 if they create a retirement plan.

New Ways to Band Together

While these tax incentives may make you want to create a retirement plan after all, there are more new ways to provide retirement benefits to your employees as a result of regulatory and legislative changes last year.

First, there are two options for employers that would rather participate in a plan run by a third party. Right now, chambers of commerce and other associations are designing and sponsoring “association retirement plans.”

Next year, there will be another possibility, “pooled employer plans.” These plans will be run by a professional entity. In a pooled employer plan, an employer’s responsibilities are limited to monitoring the entity administering the plan, providing information, making timely contributions and taking steps to maintain tax qualification. In some cases, an employer may have some investment responsibility. For all other aspects of plan administration, the professional entity will be responsible.

In both association retirement plans and pooled employer plans, employers can offer retirement benefits while leaving most aspects of plan administration to others and taking advantage of the opportunity to benefit from aggregating with other employers for better pricing.

State Programs

Those pooled plans are not the only avenue being considered by and for small and midsize employers. Some states have and others are considering mandates whereby an employer that doesn’t offer a retirement plan would be required to make a filing and contribute to a state program on behalf of employees. However, if a small or midsize business is operating in multiple states, a nationwide retirement plan could offer a single solution to providing that company’s retirement benefits. Such a plan could help the employer avoid the need for determining the filings that various states may require and weaving through possible mandates in each jurisdiction. Importantly, many of these state laws exempt employers that offer a nationwide retirement plan.

Kevin Walsh is a principal at the Groom Law Group. He advises clients on a wide range of “standard of care” matters. His practice encompasses helping retirement plan service providers, including registered investment advisers and broker-dealers, comply with the Department of Labor’s fiduciary rules, the Securities Exchange Commission’s best interest rules, FINRA’s suitability rules, and evolving state care standards.

David N. Levine is a principal at the Groom Law Group, where he advises plan sponsors, advisers, and other service providers on a wide range of employee benefit matters, including retirement. He was previously the chair of the IRS Advisory Committee on Tax Exempt and Government Entities and is currently a member of the executive committee of the Defined Contribution Institutional Investment Association.

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 Institutional Shareholder Services (ISS) or its affiliates.

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