May 2015

Inside this issue:

Are You Using Electronic Disclosures?

Delivering all of the required information and notices related to your retirement plan to your participants can be a challenging task. If you haven’t yet looked into the possibility of electronic delivery, you could be missing out on time and cost savings. To learn more about this time saving option, see the PlanSponsor article entitled “Current Guidelines for Electronic Communications”. (

Understanding Plan Eligibility

Is your company’s eligibility attracting and retaining quality employees? Is it competitive with other companies?

Eligibility is a waiting period and an age requirement for participants to meet in order to become eligible for a retirement plan. Some plans may also require an employee to work a certain number of hours to become eligible and there may be on-going requirements in order to receive company contributions.

The maximum waiting period that a company can choose is two years and the age requirement cannot exceed 21. If a plan has a two year waiting period, the employee must be 100% vested immediately in employer contributions. The maximum number of hours that an employee can be required to work to become eligible is 1000 hours. Immediate eligibility is permissible and plans are not required to have a waiting period, age requirement or hours worked requirement. Most companies have a waiting period of one year or less and choose age 21 or age 18 as the age requirement. To align with other employee benefit plans, companies will commonly choose the same waiting period as they have for their other employee benefits. As an on-going requirement, companies can require employees to be employed on the last day of the plan year and/or work at least 1000 hours during the 12-month plan year to be eligible for a company contribution.

Plans can have different waiting periods for employee contributions and employer contributions. For example, companies can choose “dual-eligibility” and allow employees to begin contributing their own contributions after three months of employment, but complete a year of service to be eligible for company matching contributions. Companies will consider this option if employer matching cost and employee turnover are a concern. Once an employee has met the eligibility requirements for the plan, they will enter the plan on pre-established intervals. These entry dates can be anywhere from immediate entry (1st pay period after meeting eligibility requirements) to an annual entry date which is only available if the plan has immediate eligibility and no waiting period. Common entry dates are immediate, monthly and quarterly.

For plans that choose a waiting period of less than one year of service and less than age 21, annual ADP/ACP nondiscrimination testing rules allow plans to test the group of employees with less than a year of service and less than age 21 separately from those that have met the one year of service and age 21. The annual ADP/ACP nondiscrimination testing compares the average contributions from highly compensated employees to non-highly compensated employees and if the difference between the averages is above the permissible amount, a correction needs to be made to pass the test. This usually results in taxable refunds back to highly compensated employees. Generally speaking, plans have lower participation from shorter term employees and companies can choose to use the test with the more favorable results – those with a year of service and age 21 and those without.

A company’s eligibility requirements should be monitored to ensure that eligible employees have access to join the plan. Also, companies should have automated processes in place to administer their eligibility requirements effectively.

Frequently Asked Question: Roth Utilization

Q: We aren’t seeing large numbers of participants utilizing the Roth accounts in our retirement plan, even though it was introduced three years ago. What are other plan sponsors experiencing?
A: Like you, many employers that offer a 401(k), 457(b) or 403(b) plan have added Roth accounts for their participants. In fact, Roth accounts have become increasingly popular in retirement plans, with over 50% of them now offering the option. But, says a working paper from the National Bureau of Economic Research, just under 9% of workers who have a Roth option in their employer-sponsored plan had taken advantage of it as of 2013.

There is no one right answer to the question of whether a pretax or Roth account is better, and that may have something to do with the lack of uptake among participants. However, uptake is significantly higher—in fact, double—among participants hired after a Roth account was initially offered as compared to participants who were employed before. The authors of the working paper chalk this up to the human tendency to leave well enough alone; when people have already made a decision (where to direct their contributions) or are intimidated by a decision (“Which kind of account is better for me?”) they tend toward inertia. The Roth account may be better explained to new hires as compared to longer-tenured employees, too.

While both Roth and pretax options have merit, educating participants about their differences could benefit the retirement savings of your employees, so it’s a good idea to regularly communicate about it if you have one available. Read the working paper here:

Don’t Eat the Marshmallow!

Having more self-control than a preschooler can lead to more rewards.

Fifty years ago, psychologists at Stanford University conducted an experiment on preschoolers. During this test, researchers placed youngsters in individual rooms and asked each child to sit down in front of a tray containing one marshmallow. The child was given a choice: He or she could eat this marshmallow immediately or wait a little while for the researchers to place a second marshmallow on the tray—an opportunity to enjoy two treats instead of just one.

What did the kids do, what would you do, and what does the ability to delay gratification mean for future retirement success?

This multi-year study led to a powerful conclusion: Children who “passed” the marshmallow test had greater competence and success later on as adults. 1 Kids who successfully waited for the second marshmallow showed self-restraint and understood that not all needs require immediate gratification. This example is directly applicable to behavioral finance: Controlling spending now may lead to significant benefits in the future.

Patience is not just a virtue—it may create its own success

There are a few steps you can take today that potentially could lead to greater retirement success tomorrow. They include:

  • Enrolling in your retirement plan. By setting aside money from each paycheck before you ever see it, you avoid unnecessary spending.
  • Making a habit of saving and increasing your plan contributions. Some experts say you should save 15% of your pretax income each year for your retirement, including your 401(k) and IRA. If your plan offers any employer matching contributions, take advantage of these as well.
    Self-control in retirement planning is key: By avoiding impulse spending and investing consistently over time to pursue rewards, you may move that much closer to securing your financial future.

1 Walter Mischel, The Marshmallow Test: Mastering Self-Control (New York: Little, Brown & Co., 2014)

News From MRPA

As Memorial Day 2015 approaches, Montgomery Retirement Plan Advisors pauses to honor those members of our Armed Forces who have died in wartime service to our country. Most of your stories of courage and sacrifice remain lost in the fog of history but honored by those for whom you died. We salute you.

No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

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