Rethinking 401(k) Plan Success: The power of deferral rates

From the beginning of 401(k) plans, the retirement industry has focused on the performance of individual funds as the key driver of retirement readiness. But a study by the Putnam Institute in 2006 and repeated in 2012 concluded that increasing deferral rates have the greatest potential impact on a 401(k) participant’s account balance at retirement

The Putnam Study, Defined Contribution Plans: Missing The Forest For The Trees?, showed that fund selection was actually the least important factor compared to asset allocation, account rebalancing, and increased deferrals. The most important? Increasing deferral rates.

Putnam arrived at this conclusion by simulating different portfolios of mutual funds in a hypothetical, but typical, 401(k) plan. Here is how the study can be viewed from a plan sponsor’s perspective:

Plan Activity	Time Spent	Relative Importance
Selecting Funds	Most	Least
Allocating Assets	More	Lesser
Rebalancing Accounts	Lesser	More
Increasing Deferral Rates	Least	Most

One way – maybe the best way – to increase deferral rates is through auto-enrollment and auto-escalation. Congress thinks so. As part of the recently passed SECURE 2.0 employees are automatically enrolled in a 401(k) plan at 3% of compensation. The amount is increased each year by 1% up to at least 10% but not more than 15% of the employee’s compensation. There’s a plus for the employer: tax credits may be available.

Photo by Dino Reichmuth on Unsplash

Why a one-size-fits-all approach to 401(k) plans doesn’t work

By Jerry Kalish on March 10, 2023 Posted in 401(k) Plans, 403(b) Plans, Infographics, SECURE 2.0

Because there are now five generations in the workforce for the first time:

Traditionalists—born 1925 to 1945
Baby Boomers—born 1946 to 1964
Generation X—born 1965 to 1980
Millennials—born 1981 to 2000
Generation Z—born 2001 to 2020

The challenge to create and provide a 401(k) plan is arguably more difficult now than it ever was.

401(k) plans are part of the big picture which includes dealing with such questions as

What kinds of challenges are present for today’s employers?
How do generational workforce differences affect our ability to manage people effectively?
What are the traits, beliefs, and life experiences that mark each generation, influencing how they work, communicate, and respond to change?

Dr. Bea Bourne, DM, is an expert on generational differences and generational responses to organizational change. She is a faculty member in the School of Business and Information Technology at Purdue University Global. In the infographic that follows, she shares her research regarding:

How today’s talent stacks up by generation, including their defining values, beliefs, and worldviews
The significant historical events that shaped each generation
How to best motivate and manage workers from each generation

In the 401(k) and 403(b) world, we’ve got a tool. It’s called Plan Design and it’s been significantly enhanced by the recently passed SECURE 2.0 legislation. There will be more about that to follow as IRS guidance and recordkeeper platform capabilities develop.

In the meantime, here’s that infographic:

The box that has to be checked by July 31: Retirement Plan Restatement

By Jerry Kalish on June 20, 2022 Posted in Cycle 3 Restatements

That’s the box that has to be checked by July 31, 2022. It’s the date the IRS requires that your 401(k) plan, profit sharing plan, or other defined contribution plan be restated to be in compliance with recent tax law changes. Here is a plain language explanation in Q and A format to help you understand why July 31 is one of those “don’t miss” dates: Continue Reading

ERISA Record Retention: How long is long enough?

By Jerry Kalish on July 21, 2021 Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Defined Benefit Pension Plans, Welfare Benefit Plans

ERISA record retention may not be of those sizzling retirement plan topics for some folks. But please don’t stop reading.

It’s an important issue in today’s ERISA’s environment in which Plan Administrators and other fiduciaries must meet complicated compliance reporting requirements, oversight from regulatory agencies, and sometimes litigation.

So here is some basic information about document retention for ERISA plans in a Q and A format.

IRS now requires an employer discretionary match to be “definitely determinable”

By Jerry Kalish on June 30, 2021 Posted in 401(k) Plans, Cycle 3 Restatements

“Definitely Determinable” is one of those pre-ERISA concepts that are still applicable. It means that in order for a retirement plan to be considered “qualified” (eligible for favorable tax treatment), a participant’s retirement benefit had to be determined in accordance with a stipulated formula that is not subject to the discretion of the employer.

The purpose of which is, of course, to eliminate the possibility of benefits favoring the higher paid employees. It’s long been required for defined benefit pension plans in which it’s a straightforward matter.

But what about those 401(k) plans that provided a discretionary employer discretionary match? Until recently, an employer matching contribution that was discretionary did not have to be stated in the plan document. But now the IRS has taken the position that a discretionary employer match must also be definitely determinable.

Here is what an employer needs to do if its match is discretionary. Continue Reading

Form 5500: The Body Language of ERISA Compliance

By Jerry Kalish on January 12, 2021 Posted in 401(k) Plans, 403(b) Plans, Cash Balance Plans, Compliance, Defined Benefit Pension Plans, Welfare Benefit Plans

Last month, the Department of Labor (DOL), the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) released advance copies of the 2020 Form 5500 Series. When filed, they will join those of prior years’ morphing into the body language of ERISA compliance. Here’s how:

Sometimes SIMPLEs aren’t always simple and mistakes can happen.

By Jerry Kalish on October 5, 2020 Posted in SIMPLE-IRAs

SIMPLEs were designed by Congress in 1996 to make it, well simple, for employers with fewer than 100 employees to establish tax-advantaged retirement plans for their employees. Hence, the legislative branding naming the new law the Savings Investment Match Plan for Employees to make the acronym, SIMPLE.

It’s a special type of IRA and adopted because they’re easy to use. But they still have to be in compliance with many of the tax and ERISA provisions required of 401(k) and other qualified plans in order to continue to enjoy tax advantages.

It’s an especially current concern for those employers who have decided that a SIMPLE no longer fits, and will be replacing it in 2021 with a 401(k) plan. SIMPLEs must continue to be kept in compliance prior to termination, and plan document or operating mistakes should be corrected to preserve the tax advantages.

SIMPLEs haven’t always fared well in IRS audits with over 50% reported to have operational errors. Here are the 9 most frequent mistakes that the IRS has found need fixing.