Administration December 18, 2014

Targeted Education Quells Fears About Employee Retirement Savings

Targeted messaging could alleviate some of retirement plan sponsors’ fears about employees’ retirement savings adequacy.
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A recent survey by the Plan Sponsor Council of America (PSCA), sponsored by The Principal, found 27% of nonprofits believe they have a responsibility to encourage employees to save for retirement, and one-quarter believe they have that responsibility but would like to do more.

Aaron Friedman, national tax-exempt practice leader at The Principal, in Shelton, Connecticut, says plan sponsors that want to do more can use plan design provisions such as automatic enrollment—at a higher default percentage than 3%—and automatic deferral escalation to encourage employees to save. In addition, targeted education is very effective at getting people to save or save more, he tells PLANSPONSOR.

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Half of nonprofit organizations (50.4%) that sponsor 403(b) retirement plans are equally concerned about all employees saving enough for retirement, no matter their age, the survey found. However, only 15.8% of survey respondents target their plan education materials to specific age segments.

According to Friedman, for those concerned with all groups equally, targeted messaging will reach each group, and can alleviate some of these concerns.

Friedman says targeted education should focus on different life stages at each age—from just getting started, to balancing life events and saving then getting ready to retire. For example, The Principal offers Retire Secure, providing participants with one-on-one retirement planning and financial strategy meetings at the work place or over the phone. With it, employees can look at their overall financial picture, taking into account student loans, mortgages, or care for aging parents or children, according to Friedman.

In addition, a focus on outcomes is extremely important in education. “It’s not just saying put away as much as you can, its more fine-tuned. What is your objective for income replacement, and what is the path to generate that?” he says. “The average person cannot connect accumulation with income, so we need to help [retirement plan] participants so they can better understand and prepare.”

The PSCA survey found 25% of nonprofits offer no retirement plan education at all. According to Friedman, this is not unusual in nonprofits because of the bifurcation in the marketplace between Employee Retirement Income Security Act (ERISA) plans and non-ERISA plans. With non-ERISA plans, the employer is more hands-off, and there is no education program or consistency in messaging.

However, for ERISA plans, the biggest problem with not providing any education is employees can think they are doing something that will help them be prepared for retirement, but end up at retirement being underprepared, Friedman says. “Without an education program targeted to various stages in life, the average person cannot project his needs. As a person’s career progresses, it gets too late to fix discrepancies [in savings].”

Nonprofits tend to be more paternalistic toward employees than corporate entities, and for that reason, historically they tend to offer a higher levels of benefits, Friedman notes. “That said, it’s interesting to see we don’t yet have a wide offering of auto features and targeted education among nonprofits. The larger PSCA 403(b) survey shows uptake is slower among 403(b) plan sponsors than 401(k) plan sponsors,” he adds.

However, Friedman says it’s encouraging to see the industry is moving toward outcomes-based plan design features and education to help employees be retirement ready.

Compliance December 18, 2014

Treasury Issues Final Regs Underlying ‘myRA’ Program

The U.S. Treasury issued final regulations establishing a new type of electronic retirement savings bond designed to serve as the backbone of the president’s myRA program.
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The Bureau of the Fiscal Service, part of the Treasury Department, says a new nonmarketable electronic retirement savings bond is now available through designated custodians serving Roth individual retirement accounts (IRAs) established under the myRA program.

This savings bond is available only to participants in the myRA retirement savings program, the Treasury says. The bonds are designed to protect the principal contributed while earning interest at a rate previously available only to federal employees invested in the Government Securities Investment Fund (G Fund) of the Thrift Savings Plan.

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The agency previously announced its intentions to establish the new class of bond. In February, Mark Iwry, senior adviser to the Secretary and Deputy Assistant Secretary (Tax Policy) Retirement and Health Policy at the Treasury Department in Washington, D.C., said workers looking to start saving for retirement would soon be able to purchase a specially designed Treasury retirement savings bond held in a Roth IRA. He said the bond will have an add-on feature, meaning that additional contributions will increase the value of a single security held by a given investor, instead of requiring the purchase of multiple securities. (See “myRA Program Details and Intent.”)

Iwry pointed out that initial investment could be as low as $25, and contributions as low as $5 could be made through payroll deductions. As starter accounts, myRAs will be limited to a cumulative $15,000 each—not an end target for saving, but rather a transition point at which the individual’s savings would shift to a private-sector Roth IRA. If a saver’s myRA never accumulates to $15,000, the balance will be shifted to a private-sector Roth IRA after 30 years, the Treasury says.

The myRA program was created in January, when President Obama issued a memorandum directing the Secretary of the Treasury to develop a retirement savings program focused on serving new and small-dollar savers. The president’s proposal raised both hopes and eyebrows in the private retirement planning industry and brought significant national attention to America’s retirement issues when introduced during his fifth State of the Union address.

According to the Treasury, myRA accounts will allow savers to begin investing for retirement without start-up costs or fees. These facts have caused some to speculate that the Treasury will have to rely on niche service providers that already specialize in low-balance IRAs, such as those providing automatic rollover and cash-out services for terminating pension plans, among others, to administer the accounts. 

Once their account is established, participants in the program can continue to make periodic electronic contributions in any amount. Amounts contributed by participants in the program will be invested exclusively in the Treasury’s new retirement savings bonds. The designated custodian for the program will purchase and hold these new bonds exclusively for the benefit of the participants.

At any time, participants can transfer their balance to a commercial financial services provider to take advantage of the broad array of retirement products available in the marketplace. Because the accounts offered through the program are Roth IRAs, participants also have the flexibility to withdraw their contributions at any time without a penalty. Participants can keep their account and can continue investing in the retirement savings bond even if they change jobs.

The full text of the new rule is here.

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