Compliance October 11, 2023

Sponsors Need Clarity on Emergency Savings Accounts, Say Industry Advocates

In comment letters submitted to the Department of Labor, concerns expressed ranged from QDIAs to permitted withdrawals.

Reported by

Retirement industry groups filed comment letters Wednesday with the Department of Labor asking for clarity on certain provisions of the SECURE 2.0 Act of 2022 and for streamlined disclosure requirements. The comments came in response to a DOL request for information in August.

SECURE 2.0 contains several provisions reforming the disclosure process for retirement plans. Among them are changes to lump sum distribution disclosures and to the electronic delivery of statements.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Emergency Savings

The Insured Retirement Institute and the ERISA Industry Committee both asked the DOL to issue regulations to clarify how the emergency savings “sidecar” accounts created by SECURE 2.0 fit into the overall retirement plan. The ESAs are limited to $2,500 (indexed), and participants can withdraw funds without the typical 10% penalty.

The IRI asked the DOL for guidance on how to interpret the word “emergency” for purposes of withdrawals and how ESAs overlap with plans using a qualified default investment alternative. Specifically, can sponsors designate the ESA as a QDIA? Can a plan have separate QDIAs for the ESA and for the retirement plan?

The ERIC asked the DOL to clarify that the $2,500 cap does not apply to growth within the account. Since highly compensated employees do not qualify for an ESA, the ERIC requested that the DOL be flexible with employees who change HCE status over the course of the year. It also asked for regulatory flexibility on matches and vesting schedules as applied to ESAs.

Electronic Delivery

Section 338 of the law requires defined contribution plans to send at least one paper copy of a benefit statement to each participant annually, every three years for defined benefit plans. Participants may, however, elect to receive these documents electronically, and sponsors can also use the 2002 safe harbor exemption. The provision is effective for plan years after December 31, 2025.

Jason Berkowitz, the chief legal and regulatory affairs officer at the IRI, explains that the 2002 safe harbor permits sponsors to send benefit statements and other disclosures electronically only if they ensure that the participants receiving the disclosures have reliable internet access and are, in fact, receiving the disclosures.

The comment letter sent by the IRI described Section 338 as “unfortunate” because of the additional burdens this will place on sponsors. The DOL had previously issued an updated safe harbor ruling in 2020, Berkowitz says, which was more of a “notice and access” approach by which sponsors could default participants into electronic delivery if they were given the ability to opt out and were notified when disclosures were available.

Sponsors using the 2020 safe harbor, but not the 2002 safe harbor, will be subject to the annual paper requirements, Berkowitz says. Since Section 338 is a statutory requirement that the DOL cannot regulate away, the IRI letter advocated that the DOL “go no further than is clearly and absolutely necessary” to comply with SECURE 2.0. The IRI letter noted that electronic delivery is generally more secure than paper delivery and is more easily translated into other languages or to an audio file for vision-impaired participants.

Lump Sums

The ERIC letter also addressed disclosures of lump-sum buyout offers. Section 342 of SECURE 2.0 requires defined benefit plans to disclose several items to participants eligible for a lump sum payment. At 90 days before a lump-sum offer decision period, plan sponsors must disclose the assumptions used to calculate the lump sum, the value of annuities offered by the plan, tax rules involved with accepting a lump sum and a warning that annuities purchased in the market might be more expensive than those in the plan and that taking a lump sum exposes the recipient to longevity risk.

According to the ERIC letter, the DOL should not mandate any new factors to be disclosed, but should allow plans to list potential “positives” of taking a lump sum instead of “negatives.” For example, sponsors should be allowed to inform participants that lump sums can help estate planning and can pay off in the long run if the payment is invested well.

Section 342 does not contain any “negatives” for lump sums, per se, but would require disclosure on alternatives to the payment. Andrew Banducci, the senior vice president for retirement and compensation policy at the ERIC, clarifies that the warnings in the disclosure “have a skeptical trend” and said that a Model Notice circulated by the DOL “does not provide a balanced perspective” on lump sum payments.

SECURE 2.0 requires the DOL and Department of the Treasury to issue joint regulations on the lump-sum provision no earlier than one year after the December 29, 2022, enactment of the law.

The comment period for the RFI closed on Wednesday, and it is not clear when the DOL will propose the regulations required. Sidecar ESAs are eligible to be created starting in 2024, but they are unlikely to be offered until regulatory guidance is issued.

Data and Research October 11, 2023

Youngest Workers Feel They Face Most Retirement Obstacles

Workers from Generation Z say the cohort experiences higher financial stress than other generations, affecting their job performance, according to a Charles Schwab study.

Reported by

The youngest workers in the workforce say they are facing the most obstacles to saving for a comfortable retirement, new research shows.

For Generation Z workers between 21 and 26 years old, 99% say they are facing burdens to accumulating sufficient assets to reach a comfortable retirement, a nine-percentage-point increase from last year, according to the Charles Schwab Retirement Plan Services 401(k) Study — Gen Z Focus October 2023.

Get more!  Sign up for PLANSPONSOR newsletters.

Compared to Gen Z, 88% of Millennials say they are facing retirement obstacles, as do 91% of Gen X and 86% of Baby Boomers, the Schwab data showed.

“Younger workers new in their careers are likely earning less than older workers, and they are still learning how to manage their finances overall,” says Marci Stewart, Schwab Workplace director of communications consulting and participant education, by email. “In this high-inflation environment, people with lower incomes are disproportionately impacted, since basic needs like food, shelter, clothing and transportation typically take up a larger percentage of their income.”

Schwab found that Gen Z workers reported retirement obstacles such as:

  • Inflation: 54%;
  • Keeping up with expenses: 36%;
  • Unexpected expenses: 31%;
  • Helping aging parents financially: 30%;
  • Saving and/or paying for children’s education: 28%;
  • Stock market volatility: 27%; and
  • Paying off credit card debt: 25%.

“Saving for retirement and paying the bills doesn’t need to be an ‘either/or’ situation,” said Brian Bender, head of Schwab Workplace Financial Services, in a press release. “You can work toward multiple financial goals at once. This is especially important for younger workers to remember as student loan payments resume and become yet another monthly expense for many.”

Separate research from Corebridge found that 75% of 2,100 federal student loan borrowers said that resuming student debt payments will impact their ability to save for retirement. In order to make payments beginning this month, 22% said they plan to reduce how much they save for retirement, and 29% plan to reduce their emergency savings, according to data published last month.

On the issue of financial stress, most participants—83% of those Schwab surveyed between the ages of 21 and 70—said either stress has not affected their ability to do their job or they have not been under financial stress, while 17% said financial stress has impacted their job. Schwab reported younger workers are more impacted.

More than one-quarter of Gen Z employees (26%) said financial stress has impacted their job, compared to 22% of Millennials, 15% of Gen X and 10% of Baby Boomer workers, the survey found.

“Overall, the number of respondents saying they face obstacles to saving for retirement is steady: 89% this year and 90% last year,” Stewart adds. “The biggest individual obstacle overall is still inflation, cited by 62% of respondents this year, compared to 45% last year. We attribute this increase of inflation’s impact this year on the fact that we have been in a sustained high-inflation environment for well over a year. While the rate of inflation is slowing, prices are still high. This ongoing inflationary pressure is definitely challenging for workers.”

Employers are responding to workers’ stress, as more than half have acted in 2023 to help employees manage financial stress, Schwab found.

Employers must focus their financial wellness and retirement saving resources in areas that are the most challenging for workers, according to Stewart.

“That can go a long way toward helping to boost retention and slow job hopping among younger workers,” Stewart stated in a press release

The Schwab survey found 14% of Gen Z respondents preferred employer support offerings that address managing current expenses in order to have more money to save for retirement, while 10% expressed support for programs that help with managing debt.

The Schwab survey asked participants to select all responses that applied to the prompt: “If you could get help with retirement planning, what would you like help with?”

For all generations, the study found that 41% of employees—the largest share—would like employer support calculating how much money to save for retirement, followed by 40% that cited receiving specific advice on how to invest in a 401(k) and 38% who said they wanted employer support determining at what age they can afford to retire.

The 2023 401(k) Participant study was an online study conducted by Logica Research. The study was conducted from April 19 through May 2, with a sample of 1,000 401(k) plan participants between the ages of 21 and 70. The survey respondents work for companies with 25 or more employees, have 401(k) plans and are plan participants currently contributing to their companies’ 401(k) plans.

In order to analyze Gen Z results against other generations, an additional 100 plan participants aged 21 to 26 completed the survey. Survey respondents included participants served by approximately 15 different retirement plan providers, Schwab reported.

«