|DC PLANS ALIVE, WELL AND THRIVING
Although the employer-sponsored retirement plan system went through a shaky period during the 2008 financial crisis (when plan balances declined and the number of loans rose), DC plans have evolved, adapted and come back stronger as America’s economy and workers have recovered. A new survey finds that participants continue to save, and have increased their savings in employer-sponsored retirement plans, mostly thanks to solid education programs from plan sponsors and providers on topics such as market volatility, asset allocation, and target-date funds.
Eligibility, Participation and Deferral Rates Show Strength
Eligibility rates are strong. Nearly 99% of all full-time employees are eligible to participate in their employer-sponsored plan. What’s more, half of plans allow part-time workers to contribute. Participation rates are steady, too. A full 88% of eligible participants in the plans surveyed have an account balance, and 80% are making contributions.
Deferral rates are higher than pre-crisis levels. According to ADP testing, deferrals for “non-highly compensated employees”—those earning below $115,000 a year—averaged 5.8% of pay in 2014, compared to 5.3% in 2013. Further, this group is catching up to its highly compensated counterparts, whose pretax contributions are typically around 6.9% of pay.
Sponsors Are Helping to Boost Savings, Too
Employer-matching contributions are also on the rise. Sponsors made contributions in 95.6% of plans. In 2014, the average 401(k) plan contribution was 3.2%, up from 2.9% in 2013. Moreover, 51% of plans have no service requirement to receive the match.
A majority of plans—more than 52% —now offer automatic enrollment. However, plan size makes a difference: While 70% of plans with 5,000-plus participants have an auto-enroll feature, just 19% of plans with less than 50 participants offer one. That’s significant, because participation is about 10% higher in plans with auto-enrollment, according to the survey. Sponsors typically auto-enroll workers at a 3% rate, but some are opting for higher default rates. The survey showed about equal deferral rates for auto- vs. self-enrolled participants.
Some Key Findings
- The average fund menu included 19 options.
- Seven out of 10 plans offered a target-date fund (TDF). On average, 15.8% of plan assets were allocated to TDFs, a notable uptick from 4.5% in 2007.
- Eighty percent of plans used a qualified default investment option (QDIA); 74% of sponsors chose a TDF as the QDIA.
- Nearly 70% of sponsors used investment advisors.
The 58th Annual Survey from the Plan Sponsor Council of America is available online
© 2016 Kmotion, Inc.
CORRECTION OPTIONS FOR MISSED RESTATEMENT DEADLINE
Defined contribution plans, like 401(k) plans, that are established on a pre-approved plan document drafted by third party administrators and other document providers are subject to a six-year cycle for updating the plan document for law changes. The current six-year cycle, often referred to as the PPA Restatement, just ended. Employers should have signed a new plan document by April 30, 2016.
The IRS expects some employers will miss the restatement deadline and provides correction options for these employers. The correction options generally require the employer to adopt an updated document and to pay a fee to the IRS in order to bring the plan back into compliance and restore its tax-favored status.
One correction option is to file under the IRS’s Voluntary Correction Program (VCP) to report the missed restatement and pay the penalty. If a plan is restated under the VCP program by April 29, 2017, the IRS has announced that the standard late amender fee will be reduced by 50 percent. Many employers engage the support of their third party administrator or a plan consultant or attorney to assist with the VCP submission.
A new correction option available this year allows the financial institution sponsoring the plan document to request a closing agreement on behalf of a group of employers who missed the restatement deadline. A financial institution that uses this corrections option must have 20 or more plans that missed the restatement deadline. The correction fee will also be reduced if this program is used.
PLAN SPONSOR QUIZ: PLAN LOANS TO PARTICIPANTS
Take the following quiz to test your knowledge of the basics of participant plan loans. Note whether you think each of the following statements is true or false, and then check your answers below.
- Loans cannot exceed a term of five years.
- The Internal Revenue Code’s general rule regarding the maximum loan is that it is the greater of 50% of the participant’s account balance and $50,000.
- Plans may, but are not required to, suspend loan repayments during an unpaid leave of absence.
- The “cure period” for a missed loan payment is nine months.
- Loans can be granted for any purpose.
- The Internal Revenue Code sets no limit on the number of plan loans that a participant may have outstanding at any one time, but the plan may set a maximum.
- Department of Labor rules impose a maximum of $100 for the loan fee that a plan administrator may charge a participant.
- When a participant with a loan is granted bankruptcy protection, repayments by payroll deduction must stop immediately and the outstanding loan balance is discharged.
- The Department of Labor requires that loan repayments be deposited in the plan’s trust in the same time frame as elective deferrals and other participant contributions.
© 2013 Kmotion, Inc.
PLAN SPONSOR CALENDAR
Most retirement plans are required to file Form 5500, Annual Return/Report of Employee Benefit Plan, with the Department of Labor by the last day of the seventh month following the end of the plan year. For example, a plan that operates on a calendar-year basis must file Form 5500 by July 31, unless an extension has been obtained. Plans required to file Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits, must file the form with the IRS by the same deadline.
A 2½ month extension to file Form 5500 and Form 8955-SSA is generally available. For a calendar-year plan, the extended due date is October 15. An extension can be obtained by filing Form 5558, Application of Extension of Time to File Certain Employee Benefit Returns, by the original due date for filing Form 5500.
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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.
For Plan Sponsor use only – Not for use with Participants or the General Public. 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.
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC. Other advisory services offered through Montgomery Retirement Plan Advisors, a separate entity.
- False. The one exception to the rule regarding the maximum loan term is the purchase of a principal residence, in which case the term can be greater than five years.
- False. The Internal Revenue Code specifies the general maximum as the lesser of 50% of the vested account balance and $50,000.
- True. Note that interest continues to accrue during the leave.
- False. The “cure period” cannot extend past the end of the calendar quarter following the quarter in which the payment was due.
- False. The Department of Labor requires only that, in practice, fees do not cause loans to be withheld from any participant and do not prevent large numbers of participants from
- False. Federal bankruptcy laws were changed in 2005 to provide that the prevention of collection of certain debtor obligations during bankruptcy does not apply to a payroll withholding authorization to repay a plan loan and that such loans are not discharged in bankruptcy.