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News|Jul 15, 2019

If legislation passes to allow for open multiple employer plans (MEPs) for plan sponsors without a common nexus, experts believe they will offer benefits to plan sponsors, but there would be some considerations to explore before joining one.

Generally speaking, retirement plan experts believe that open multiple employer plans (MEPs) offer several benefits to plan sponsors, particularly small business employers.

However, these experts caution that there are some downsides that sponsors should consider as well before deciding to enter into an open MEP, should the SECURE Act get passed to permit these types of retirement plans to exist for plan sponsors without a common nexus.

Closed MEPs permit plan sponsors to join into this type of pooled retirement plan as long as they have a common nexus—such as industry. Unlike with pension plans, “closed” does not mean it is not open to new entrants, it means not all plan sponsors can join the MEP. The new legislation would allow plan sponsors without a common nexus to join MEPs, called open MEPs. Probably the biggest upside for sponsors would be “limited fiduciary liability,” says Christine Stokes, head of DCIO strategy at Nuveen in New York. “As a plan sponsor, you are never fully absolved from this liability, but it introduces limited liability.”

Deb Rubin, vice president and managing director of TPA and specialty markets at Transamerica in Washington, D.C., adds: “The benefit to plan sponsors of pooled arrangements and open MEPs is that they are structured with a tremendous amount of support, with a third-party administrator handing the 3(16) administrative component—the day-to-day arrangements, on top of signing off on Form 5500. Plus, there is a 3(38) fiduciary handing the investment decisions. Together, that is a structure for a small plan to get maximum fiduciary support.”

That said, the SECURE Act does not make it clear as to how much fiduciary responsibility will shift to a third party, notes Tom Reese, an investment adviser with Conrad Siegel in Harrisburg, Pennsylvania.

That’s why it would be important for a sponsor in an open MEP to closely read the contracts and service agreements of providers to see what it is taking on, Rubin says.

Chad Parks, founder and CEO of Ubiquity Retirement + Savings in San Francisco, fears that “MEPs add more layers of legal complexity, which leads to higher plan costs. With more attention on fees and reasonable costs these days, we think open MEPs could go in the opposite direction and add more costs.”

In fact, Stokes says, BrightScope—a sister company of PLANSPONSOR—did a study of open MEP costs and found that they could be four basis points higher because of these administrative costs. “So, open MEPs are not a guarantee of lower fees because there are still operational complexities of combining plans of various companies,” she says. “So, before joining an open MEP, a sponsor needs to explore whether or not there is a financial benefit to doing so.”

Employers would also still be on the hook for “nondiscrimination testing and service crediting for eligibility and vesting as individual employers,” says Barb Van Zomeran, senior vice president of ERISA at Ascensus in St. Cloud, Minnesota. “As a result, each employer will still be required to gather and submit data to a MEP provider responsible for administration.”

Open MEPs might be a better choice for smaller plans, Parks says, because larger plan sponsors may not like how they seek to reduce costs with limited investment menus that are offered to all the companies in the plan, along with minimal plan design.

Stokes agrees: “Especially as you move up market, sponsors already benefit from scale, and they like to control the participant experience. For some plan sponsors, relinquishing control and investment selection might not be viewed as a good thing. Some are paternalistic about their participant demographics and want more of a hands-on approach. With an open MEP, you lose any customized communications and oversight of the call center experience. Thus, it is important for sponsors to assess whether or not an open MEP is in the best interest of their company.”

That said, a plan sponsor in an open MEP always has the option of moving into a single employer plan, Rubin says. However, Parks says, if a sponsor has been in an open MEP for a long period of time, “after offloading the majority of their fiduciary responsibility, it would be difficult for them to keep up with developments in defined contribution plans, which could make leaving the MEP somewhat problematic.”

In addition, sponsors still need to ensure that the open MEP plan administrator, as a prudent fiduciary, is thorough about its process for selecting the plan’s providers and documents that process in great detail, adds Nasrin Mazooji, vice president of compliance and regulatory affairs at Ubiquity Retirement + Savings. “Keeping ahead of those and making sure the processes are consistently being carried out is important,” she adds.

However, open MEPs might convince more small employers that heretofore have not offered a retirement plan to join these pooled arrangements, Parks says. “I think it will help with the perception that these retirement plans are not so intimidating, costly and burdensome, and that by joining a MEP and signing off, it should make it easier for businesses to put retirement plans in place,” he says.

Another factor for sponsors to consider is that the SECURE Act would raise the $500 tax credit that businesses receive for three years for offering a retirement plan to $5,000 a year, Parks adds. “In essence, the government will be paying companies to put these plans in place, and I would expect more adoption if we educate the audience.”

In addition, the SECURE Act would eliminate the “one-bad-apple” rule that would nullify the entire plan if just one company in an open MEP is noncompliant, Rubin says. “The elimination of that rule should create more comfort among employers to join open MEPs,” she says.Ultimately, employers need to weigh these pros and cons because it is likely the Senate will pass the SECURE Act, predicts Jeanne de Cervens, vice president and director of federal government relations at Transamerica in Baltimore. “I am very confident that it is not a question of if, but when this bill will be passed, having already passed by an overwhelming vote in the House.”

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Blog|May 15, 2019

On the same day as the introduction of the new Retirement Security and Savings Act, the Senate Finance Committee heard from retirement industry witnesses about the need to pass numerous federal retirement reforms.

U.S. Senators Rob Portman, R-Ohio, and Ben Cardin, D-Maryland, have introduced the Retirement Security & Savings Act, which they describe as a broad set of reforms designed to strengthen Americans’ retirement security.

The bill includes more than 50 provisions designed to improve the existing U.S. retirement system. According to the Senators, these include allowing people who have saved too little to set more aside for their retirement; helping small businesses offer 401(k)s and other retirement plans; expanding access to retirement savings plans for low-income Americans without coverage; and providing more certainty and flexibility during Americans’ retirement years.

As discussed during a Senate Finance Committee hearing, the Retirement Security and Savings Act is just the latest piece of sweeping legislation aimed at improving the private-sector retirement system. Notably, the Retirement Enhancement and Savings Act, known as “RESA,” has been repeatedly introduced and debated over the last two Congresses. Senate Finance Committee Chairman Chuck Grassley said during the hearing that passage of RESA remains a top priority for himself and Finance Committee Ranking Member Ron Wyden, D-Oregon.

Grassley and Wyden called the Finance Committee hearing to generate additional feedback from retirement industry experts about the need for the passage of RESA and other proposals. Senator Wyden also discussed the challenges faced by union-sponsored multiemployer pensions, and the challenges faced by the Pension Benefit Guaranty Corporation (PBGC) and Social Security. In addition, Senator Wyden said action is needed to allow employers to offer tax-advantaged retirement plan matching contributions against younger employees’ student debt payments. He also urged lawmakers to change rules applying to individual retirement accounts (IRAs), which prevent people from saving more in their IRA because they passed a certain age limit.

The first witness called by the committee was Joni Tibbetts, vice president of product management, retirement and income solutions, Principal Financial Group. Tibbetts testified to the effect that online and digital enrollment solutions created by the defined contribution (DC) retirement plan industry have driven improved outcomes for participants. In part due to automatic enrollment and in part due to better educational resources, newly eligible employees are deferring more than ever before, Tibbetts said.

“The average contribution of those using our website is 50% higher than those who do not engage with us digitally,” Tibbetts noted. “Digital and automatic solutions work, but we also know that it has been 15 years since the Pension Protection Act was passed. We need a system that keeps up with the changes in consumer needs and in the broader workforce, and RESA would help create that system.”

Beyond RESA, Tibbetts said Principal supports the broader removal of barriers to the greater use of automatic plan design and administrative features. The company also supports the expanding of the open multiple employer plan (MEP) opportunity to the 403(b) plan marketplace.

“Principal has lot of experience in the small and mid-sized plan space,” Tibbetts said. “What these clients talk about most is the burden of setting up multiple employer plans today, and the fact that many small employers wear multiple hats. For open MEPs to be successful, the administrative burden must be low for employers and employees. It should be easy to join a plan and to maintain compliance.”

Testimony next came from Tobias Read, Treasurer of the State of Oregon and a former member of the Oregon state legislature. Notably, Read was among the sponsors of the legislation that created the OregonSaves auto-IRA program, and in his role as Treasurer, he is now helping to operate the growing program. He noted that more than $2 million is being invested in OregonSaves each month, and much of this money is coming from new savers. Given the rapid growth and the fact that 82% of voters in the state support OregonSaves, Read said, other states should seriously consider creating their own automatic savings programs for workers whose employers do not offer tax-advantaged savings opportunities. He said the creation of more state-based systems would be a great complement to the progress that RESA would bring about, helping to alleviate Americans’ reliance on Social Security.

In testimony from Joan Ruff, board chair of the AARP, particular attention was given to the declining role of private pensions, and how this fact makes passage of RESA and other pro-DC plan legislation that much more pressing. Ruff said a clear priority for lawmakers in the Senate should be providing coverage for the tens of millions of Americans who totally lack coverage today. She provided stats suggesting workers are 15-times more likely to save for retirement when a savings program is offered by their employer.

“Payroll deduction is a very powerful tool, and we believe that state and federal programs working together will most effectively solve our challenges,” Ruff said. “States should be allowed to continue to enact and expand savings opportunities for private-sector workers. We also want to emphasize that federal policy should also address part-time workers who lack coverage, two-thirds of whom are women.”

Other topics addressed by Ruff include improving the savers tax credit and pushing the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) to make progress on conflict of interest reforms in the advisory and brokerage industries.

“When it comes to the union multiemployer pension crisis, there is so much concern from our members voiced over the funding situation,” Ruff added. “We beg Congress to come up with a working solution, and soon. Benefit cuts have already happened and those who are already retired do not have any easy way to make up for a loss in anticipated income.”

During her questioning of the experts, Michigan’s Democratic Senator Debbie Stabenow echoed these points and urged the committee to find some real urgency on the multiemployer union pension crisis. Senator Mike Enzi, R-Wyoming, agreed, noting that 150 such plans could become insolvent within a matter of years.

“We need a hair on fire moment about the union pension issue,” Stabenow said. Anyone who has listened in on the various public meetings held on this topic throughout 2018 will have noticed the dire testimony given time and again by various stakeholders in the multiemployer pension space. In previous testimony on this matter, witnesses have suggested that fewer than 1% of multiemployer plans are 100% funded when using reasonable actuarial assumptions.

The next testimony came from Lynn Dudley, senior vice president, global retirement and compensation policy, American Benefits Council.

“The passage of RESA would send a very positive message about the employer-sponsored retirement system,” Dudley said. In her assessment of RESA, two provisions stand out. First is the proposal to provide nondiscrimination testing reform to help older, longer-service participants in pension plans, when the plan has been modified for future participants.

“This is a big issue,” Dudley said. “The second top priority is to expand open MEPs, which RESA does by eliminating the nexus rule and the one-bad-apple rule. This is a tremendous change to improve access for many, including gig workers. Also, we need to address student debt and how this can be linked to retirement matching dollars against student loan payments.”

By way of context for the hearing, the Senate Finance Committee, among other committees, has been pretty active so far in 2019 with respect to the national retirement system. However, the wealth of hearings and proposals has not yet delivered significant legislation, and conventional political wisdom says passing such sweeping legislation as RESA or the SECURE Act gets harder as a Presidential election approaches.

In February, the Senate Special Committee on Aging held a hearing about “Financial Security in Retirement: Innovations and Best Practices to Promote Savings.” Hearing witnesses discussed conducting a comprehensive review of the American retirement system, allowing for open MEPs, and changing certain defined contribution plan rules to facilitate greater savings, among other things.

In early April, the bipartisan leadership of the Senate Finance Committee introduced a 2019 version of the Retirement Enhancement and Savings Act, known as “RESA.” As seen during the hearing, retirement reform advocates have called the legislation the most comprehensive retirement security measure proposed at the federal level since the Pension Protection Act of 2006.

Finally, just this month, the full Senate confirmed Gordon Hartogensis as the 16th director of the Pension Benefit Guaranty Corporation (PBGC) by a vote of 72 to 27, with one abstention. He replaced Thomas Reeder, who was director from 2015 to 2018.

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Blog|Apr 25, 2019

An analysis from Morningstar suggests monitoring defined contribution (DC) plan fund menus can have a positive impact on performance, and investment management providers weigh in on how to determine when a fund change is needed.

A Morningstar report, “Change Is a Great Thing,” finds that monitoring defined contribution (DC) plan fund menus can improve performance, although more research on why this effect occurs is warranted.

The report cites previous research which found that institutional investment managers hired to replace terminated underperforming managers perform much better before they are hired, but this outperformance disappears after they are selected.

Morningstar researchers used a large data set of plan holdings from three different recordkeepers between January 2010 and November 2018, to investigate the monitoring value provided by plan sponsors. For each plan, a list of available funds is available at some interval, typically quarterly. They employ a matching criterion to determine when a fund is replaced within the same investment factor style based on its Morningstar Category over time. The analysis results in a sample of 3,478 replacements across 678 DC plans. They find that on average replacement funds had better historical performance and lower expense ratios, along with more-favorable comprehensive metrics such as the Morningstar

Rating for funds (the “star rating”) and the Morningstar Quantitative Rating for funds, than the funds they replaced. The largest performance difference in the replacement and replaced funds is the five-year historical returns, suggesting this historical reference period is the one that carries the most weight among plan sponsors.

They also found that the future performance of the replacement fund is better than the fund being replaced at both the future one-year and three-year time periods, and that these differences are statistically significant. The outperformance persists even after controlling for expense ratios, momentum, style exposures, and other metrics commonly used by plan sponsors to evaluate funds such as the star rating and quantitative rating.

“Our findings suggest that monitoring plan menus can have a positive impact on performance,” the researchers conclude.

Jim Licato, vice president of product management at Morningstar in Chicago, and co-author of the report, tells PLANSPONSOR, “We have found, and believe it is very important, for someone to be keeping an eye on retirement plan investments—whether an investment committee or investment adviser—and make necessary changes. We found not doing so is a disservice to participants.”

He says that the prior studies did not include as robust a data set as the Morningstar analysis and that may be the reason it found different results than prior research. However, he adds, “We still have not dug through the detail about why exactly replacement funds are overperforming. It will require further research as it remains elusive as to why.

“What we can say,” Licato continues, “is that prior to replacement, plan sponsors were looking at a number of areas—past performance, expense ratios, Morningstar ratings, etc.—and all improved with the replacement fund.”

Considerations for fund replacement

Other than declining returns, Mike Goss, EVP and co-founder, Fiduciary Investment Advisors in Windsor, Connecticut, says one big factor in considering a fund for replacement for his firm is a fund manager change—whether a lead portfolio manager or a key member of that team. When this happens a fund may be put on watch because generally the manager is ultimately responsible for the funds track record and which securities to own. A fund manager change could change the fund’s track record or style, he explains.

Other factors in considering a fund for placement on a watch list or for considering a fund change is the change in ownership of the investment firm. “It’s a potential change that could lead to poor results,” Goss says. Those tasked with monitoring a DC plan’s investment menu also want to watch out for a fund style change or drift—for example, from value to growth—and for a strange in strategy or fund turnover—for example, some funds own stocks for a long time and some trade frequently. “Both can be good strategies, but if a fund changes strategy it should cause a plan fiduciary to ask why,” he says. “Plan sponsors select funds based on a certain process, style or philosophy. Any change would be a red flag.”

According to Licato, fund expenses should also be monitored to make sure they are in line with what similar funds are charging.

He says when a fund is put on a watch list, it can remain on the watch list for one quarter or a few quarters. Those monitoring the DC plan fund menu will look to see whether what triggered putting the fund on the watch list has been improved or gotten worse. If it’s gotten worse, the fund should be replaced. “There is no set number of funds that need to be replaced or put on watch. It’s more about fund monitoring and staying on top of things,” he adds.

According to Goss, his firm’s rule is that a fund cannot be on watch more than year. “There’s no law or necessary best practice, but we think a year is enough time to make a quality assessment to either maintain the fund in the DC plan investment menu or change it,” he says.

Goss warns that DC plan fiduciaries should never try to time the market. “That’s no reason to add or delete a fund. Hopefully, if they’re doing very good due diligence when they select a fund to include on the investment menu, they should not have a significant turnover of funds. We very rarely turn funds over,” he says. Goss adds that one of the things fiduciaries can outsource through a 3(38) investment manager is the ability to have the manager select, monitor and replace funds.

Licato points out that fund turnover can be disruptive for recordkeepers and participants—the paperwork and moving of assets is never a good thing from an administrative standpoint. However, he says, if a plan fiduciary is contemplating not removing a fund because it will be disruptive, it is not looking at the best interest of participants. “If it will benefit participants, do it.”He adds that the main lesson from Morningstar’s analysis is, “Don’t’ set the investment menu on cruise control and not look at it for years. During that time there could be many red flags.”

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Blog|Apr 15, 2019

The United States tax code allows for many unusual but legitimate tax deductions and tax credits. Below are some of the noteworthy tax breaks that have been successfully claimed. Some of these might apply to you.

  • Pet Moving Expenses: If you lost your job and you are relocating to start a new job, these moving expenses are tax deductible if you are an active duty military member or if you are an employee who has reimbursed expenses dated before January 1, 2018 and did not claim them on a prior tax return. You might not know that the expense of moving your cat, dog, bird, or other pet you have from your current or old home to your new home is treated the same as moving your other personal properties.
  • Clarinet Lessons: A parent was able to deduct the expenses for clarinet lessons for her child because she claimed it corrected her child’s overbite. This was based on a 1962 case where an orthodontist argued that playing the clarinet helps correct a child’s overbite.
  • Babysitter Expenses: Another claimed her babysitter expenses as a deduction because she was performing charitable deeds while she was away from her child. This would mean that you pay somebody to look after your child while you work for no pay for a charity. In this case the tax court rejected and overruled an IRS revenue ruling when, despite not having the money go directly to a charity, a parent used the baby sitter expense as a charitable contribution while volunteering for a charity.
  • Private Airplane Expenses: A couple owned and rented out a condo that was a 7 hour drive away from their primary residence. To save time and money, they bought a private airplane and were able to deduct airplane expenses, like fuel and depreciation for business use, for the property management trips to their condo. However, it turned out that the expenses increased the overall loss on the rental condo.
  • Cat Food Expenses: Under certain conditions, the cost cat food might be considered a legitimate deductible expense. A junkyard owner bought cat food to attract local stray cats in order to drive away mice and rats. He claimed it as a business expense and it was approved by the IRS. The average house cat will likely not qualify because the cat would need to perform some task associated with the upkeep of a business.
  • Swimming Pool Costs: If you have a medical condition that would improve with a swimming pool exercise regimen, your swimming pool expenses might qualify as a deductible medical expense. That’s what happened in the case of an arthritis patient who was prescribed to swim frequently in order to treat his condition. He installed a swimming pool on his property and deducted the expenses from his taxes. After some investigation, the IRS approved the deduction, but if the pool were used for recreational purposes, it wouldn’t have been approved.
  • Sex-Change Operation Expenses: A man who was diagnosed with gender-identity disorder (he felt he was a woman trapped in a male body) wanted to deduct almost $22,000 in out-of-pocket medical expenses for various surgeries, including hormone therapy, sexual-reassignment surgeries, and breast augmentation, in order to become a woman. Here is what the tax court decided: the hormone therapy and the sex-change operation in the amount of $14,500 was a qualified medical tax deduction. However, the expenses for the breast augmentation was not; it was deemed nondeductible cosmetic surgery by the court.
  • Medical Expenses to Quit Smoking: You might qualify to deduct expenses for smoking cessation programs, nicotine patches, stop-smoking aides, etc.
  • Costs for Getting in Shape: Weight-loss expenses may be deductible if doctor signs off on it and tells you that your life might be in danger if you don’t start exercising and lose weight. The cost for remedies that help you drop a few pounds, improve your heart rate, or reduce your cholesterol might all be deductible.
  • Business Trips: Any business trip viewed as “ordinary and necessary” to the course of doing business by the IRS is eligible for a travel expense deduction. In one case, the owner of a dairy took a trip to Africa to conduct research on wild animals, and successfully claimed it as a business expense because it was relevant to his business.
  • Lawn Care Expenses: These expenses might be deductible, but your house will have to be your workplace and the state of your lawn would have to have some relevance to the performance of your business. A sole proprietor successfully deducted lawn care expenses as business expenses because he met his clients in his home office.
  • Cost of Body Oil: For one bodybuilder, it worked. He claimed a deduction for the cost of body oil that he used in competitions. The IRS didn’t seem to have any problem with this, as it was a business expense.
  • Whaling Boat Repairs: Whaling boats need repairs and, since 2004, captains of whaling boats can deduct up to $10,000 for repairs, equipment purchases, and other expenses associated with the business. However, starting a whaling business to claim a deduction will not work for most people, since whaling is banned by the United States government and only Native American tribes are allowed to engage in it.
  • Cost of Breast Implants: In 1994, one stripper’s attempt to get more tips led her to undergo breast augmentation surgery. She then proceeded to deduct the expense from her taxes. A tax court judge ruled in favor of the stripper, stating that the implants were a stage prop, and thus a legitimate work expense that can be deducted.

Strange Tax Breaks from the U.S. and Around the World

  • In Wisconsin, cloth diapers are not subject to sales tax, but disposable diapers are.
  • In Texas, cowboy boots are exempt from the sales tax, but hiking boots are not.
  • In Ohio, a corpse in a mortuary gets makeup applied on it without getting taxed, but a living person is taxed for the makeup that gets applied in a beauty salon.
  • In South Carolina, one can get a $50 deduction if they donate a dead deer to the poor.
  • In Maryland, oyster farmers get a tax break, but those who farm other types of shellfish don’t.
  • Hawaii gives a $3,000 tax deduction to those who grow state-approved trees.
  • People who were persecuted by the Ottoman Empire between 1915 and 1923 were exempt from taxes in California (learn more about the history of taxes in United States).
  • A business owner bought a racehorse and claimed it as a business expense. No, he was not in the horse-racing business; he claimed that he needed to entertain his clients and that a racehorse would do just that. The economic stimulus package allowed for a tax deduction as large as $25,000 to be claimed for buying a racehorse, but the deal expired without creating many new purchases.
  • In one case, the use of a yacht was deducted as a business expense because the business owner tried to impress his customers and encourage them to do business. Maintenance and cleaning of the yacht, however, was not allowed to be deducted because the IRS code prohibits it.
  • An ostrich farmer in Louisiana’s St. Tammany Parish depreciated his ostrich, which is allowed as long as the birds are used for breeding purposes.
  • One man who owned several properties hired his girlfriend to manage them. She looked for furniture for the houses, made sure the proper repairs were made, and managed his home. He was able to deduct $2,500 of the $9,000 he paid her as a business expense.
  • A dentist submitted fraudulent insurance claims. When the fraud was discovered, she was ordered to pay the money back as well as serve some time in jail. However, she was able to deduct her repayment to the insurance company as a business expense. That is because the repayment was done to compensate for a loss sustained by the insurance company and was not considered a fine.
  • A man was arrested for drunk driving after he waited to sober up–but not for long enough–and wrecked his car. His insurance company refused to compensate him for the wrecked car because he broke the law. The driver, however, was able to deduct the cost of his car as a casualty loss because he acted reasonably. If he hadn’t waited to sober up, then it would have been gross negligence and thus nondeductible.
  • In 1981, a drug dealer from the Minneapolis area was caught with possession of large amounts of cocaine, amphetamines, and marijuana. He was arrested and later audited. The audit found that he owed $17,000 in taxes. The drug dealer argued that he should be able to deduct a significant amount of the back taxes as business costs incurred by running his business from his home. He managed to get a deduction, but still went to jail for drug possession.
  • A man working for a graphic design agency bought a pair of skis from Yamaha Snowmobiles, a company for which he was making a catalog. He used the company discount and then successfully deducted the skis as a business research expense.
  • A hair stylist successfully deducted the entire cost of her wardrobe that she wore while working with her clients as a business expense.
  • In Germany, one can deduct bribes. While the deduction is seldom used, it does exist as part of the tax code. All one has to do to report it is disclose their name and the name of the official that they bribed.
  • The United Kingdom gives tax breaks to video game companies that create “culturally British” games. The criteria for being culturally British is not very clear; the game must score 16 or more of 31 points on a test that was designed to measure the cultural content and contribution of the game.
  • In the Netherlands, those who study and practice witchcraft can claim a tax break given out by the government. It has existed for quite some time, but in 2005 it gained the attention of the public after a judge upheld the tax break in court.
  • During the 2010 FIFA World Cup in South Africa, stadiums and the areas surrounding them were exempt from the value added tax as well as the income tax from profits. This allowed FIFA to keep more of the money to itself. Critics didn’t like this measure because it deprived the government of South Africa from tax revenue associated with the World Cup matches.
  • In Italy, almost a third of all men over 30 still live at home. To encourage them to move out, the government issued a 1,000 euro tax break to those who rent their homes. However, the problem is considered to be tied to the difficult job market in Italy that prevents young men from obtaining jobs that will support their independent lifestyles, so critics say it’s unlikely that the tax break will encourage many young Italian men to move out.

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Blog|Mar 25, 2019

Half of U.S. workers are panicked or depressed over money.

By Marlene Satter | March 25, 2019 at 02:32 PM

Businesses suffer when employees are stressed. And if it costs them, it costs their employees first.

That’s among the findings of a survey from Salary Finance, which reports that American businesses lose half a billion dollars a year because their employees are stressed about their personal finances.

Indeed, says the report, Americans of all ages worry more about finances than their health, careers or relationships.

Thus it should probably come as no surprise that the U.S. has slipped in the standings in this year’s World Happiness Report using data drawn from the Gallup World Poll.

While it doesn’t get into people’s finances, the World Happiness Report does cite socioeconomic inequality as a cause of stress, and also points out that the U.S. has sunk from 18th in the world to 19th. The happiest country? Finland, which espouses numerous policies that the U.S. does not—a strong social safety net, personal freedom and a good work-life balance, points out the World Economic Forum, coupled with “a feeling of personal safety in a troubled world.”

All that may not have as much to do with money or income as one might think, but in the U.S., financial stress certainly doesn’t promote happiness.

After all, it’s tough to be happy when you’re prone to depression, panic attacks, sleepless nights and distractions at work—all of which nearly half of Americans suffer because of concerns over their finances.

And that’s costing their employers big time—in fact, all that lost productivity amounts to 2.5 percent of the U.S. GDP.

It’s not necessarily due to income here, either, though—while 34 percent of U.S. employees are without savings and regularly live paycheck-to-paycheck, says the report, one out of four of them earns more than $160,000.

Approximately 40 percent of people making more than $100,000 per year are financially unstable, with less than three months’ savings.

Of course, high medical expenses do offer the threat of almost instant destitution, whether people are insured or not. And that adds its own stress factor.

Just 6 percent of U.S. employees feel that finances aren’t weighing down their lifestyles—and just because they have emergency savings, that doesn’t necessarily ease their minds. One out of three who actually have more than three months’ savings set aside for unexpected expenses is still worried about making ends meet.

Employers need to pay attention to financially stressed employee populations, since such workers lose nearly one month (23–31 days) of productive work days per year and are 2.2 times more likely to hunt for a new job.

Lost productivity, turnover and other factors directly related to poor financial wellness cost the average company between 11 and 14 percent of their total payroll expense, the report adds.

But if managers are worried about the state of their employees’ financial well-being, they’re right to, since employees with money worries are

  • 3.4 times more likely to suffer from anxiety and panic attacks
  • 4 times more likely to suffer from depression
  • 5.8 times more likely not to be able to finish daily tasks
  • 4.9 times more likely to have lower work quality
  • and 8 times more likely to have sleepless nights.

With all that to look forward to, it’s no wonder the U.S. isn’t happier.

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Blog|Mar 04, 2019

In order to receive the benefits of ERISA §404(c), plan fiduciaries must comply with certain requirements. The following recommendations will help advisors and plan sponsors evaluate their efforts.

1. FIDUCIARIES SHOULD NOT “SET IT AND FORGET IT” WHEN IT COMES TO TARGET DATE FUNDS (TDFS).

Fiduciaries should follow an objective process to evaluate TDFs, understand the TDFs’ investments and fees, and periodically review them. Key areas of focus and questions to consider include:

  • Review the fund lineup to ensure it includes a review of the funds included in the TDF and the individual managers that oversee the TDF. When considering a pre-packaged product offered by an investment firm that may also serve as the plan recordkeeper in bundled situations, examine whether the TDF comprises only proprietary funds of a single firm. Don’t fail to compare other available options without proprietary funds.
  • “To” versus “through” matters. Off-the-shelf TDFs are not customized to the specific circumstances and characteristics of particular plans. Decide whether the TDFs’ glidepath of “to retirement” or “through retirement” is appropriate. Consider, for example, participants’ contribution and withdrawal patterns, the average retirement age, and the existence of other benefit programs, all of which can affect the investment time horizon for the TDF.
  • Managing fees is important since they directly erode participants’ assets and they can vary significantly. Pre-packaged TDFs may include bundled fees including asset management fees for the various investment mandates. Bundled fees may be appropriate, but fiduciaries must understand the fee structure and components to accurately compare TDF products. If the expense ratios of the individual component funds are substantially less than the overall TDF, fiduciaries should ask what services and expenses make up the difference.
  • If the TDF is not pre-packaged, make sure the TDF provider understands the other benefit plans offered by the sponsor, including traditional defined benefit plans, salary levels, turnover rates, contribution rates and withdrawal patterns so that the sponsor and provider can together consider the impact of the TDF’s glidepath and asset allocations on the employee population.
2. ADVISORS CAN DEVELOP CUSTOM ETFS TO HELP PLANS MEET THEIR FIDUCIARY DUTIES AND CONTROL THE RISK EXPOSURES AND FEES FOR PARTICIPANTS, BUT MUST BE SURE THEY ARE APPROPRIATE FOR THE PLAN. SOME QUESTIONS TO CONSIDER:
  • What asset classes does it include and how does the glide path progress?
  • Should the fund include alternative investments, and, if so, what would be the appropriate investment allocation.
  • What is the mix of active and passive management?
  • What are reasonable fee levels?
  • Do any pre-packaged TDFs satisfy the analysis?
  • What is the best way to implement the custom TDF?
3. IF YOU’RE CONSIDERING ESG INVESTMENTS AS PART OF A PLAN LINEUP, CONSIDER COMPETING VIEWS.

Selecting an ESG-themed investment option without regard to possibly different or competing views of plan participants or the returns of comparable non-ESG options would raise questions about the fiduciary’s compliance with ERISA. For example, selecting as ESG target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with similar degrees of risk.

4. FOR PLANS THAT INCLUDE TDFS WITH A LIFETIME ANNUITY OPTION, MAKE SURE THE FUND SATISFIES IRS REQUIREMENTS IN ORDER TO AVOID SEPARATE NONDISCRIMINATION TESTS.

Most of those options are only offered to older employees and they cannot include certain employer securities that are not readily tradeable on an established securities market, as well as other regulatory requirements.

5. DON’T BLINDLY RECYCLE LAST YEAR’S QDIA NOTICE.

If the plan provides default investment options for participants who fail to make affirmative selections, make sure participants receive a QDIA notice that complies with legal requirements. Participants must be provided with the notice 30 days in advance of the effective date and each year. They should also be given the prospectus, any material relating to voting, tender or similar rights provided to the plan, a fee disclosure statement, and information about the plan’s other investment alternatives. The investments comprising the QDIA should also be reviewed to make sure they satisfy DOL Reg § 2550.404c-5(e).

6. CHECK ALL DOCUMENTS THOROUGHLY.

Plan fiduciaries should check the plan’s investment policy statement, investment management agreement, investment guidelines and related plan documentation to ensure that any investment option is permitted by the plan.

7. MAKE SURE TO DOCUMENT THE EVALUATION OF THESE AND OTHER APPROPRIATE CONSIDERATIONS AND KEEP IT IN A CENTRALIZED FILE.

While you’re at it, calendar future review dates so that they don’t get overlooked. Some questions to ask:

  • Has the fund’s strategy or management team changed significantly?
  • Is the manager effectively carrying out the fund’s stated objective?
  • Has the plan’s objectives changed and should any funds in the lineup be changed?
  • Review the fund’s prospectus and offering statement. Do the fiduciaries understand the strategies and risks? Do any TDFs continue to invest in volatile assets even after the target date and, if so, do the fiduciaries understand and have they clearly communicated that to participants?
8. REVISIT EMPLOYEE COMMUNICATIONS.

Employees should understand the investment options available to them and communications should be written with a style and content appropriate for the workforce. If they do not understand a TDF’s glidepath when they invest, for example, they may be surprised later if it turns out not to be a good fit for them. Consider surveying employees or a sample of them to make sure they understand.

9. CONSIDER HIRING A PROFESSIONAL.

QDIA and 404(c) compliance are just several items plan fiduciaries are held accountable for. For most of you who are managing a plan, the duty of plan fiduciary is in addition to your daily responsibilities at your company. There are no pre-requisites for those appointed to help manage a retirement plan; however, there are duties imposed on you by the Employee Retirement Income Security Act (ERISA). Using a retirement plan consultant that can act as a fiduciary will transfer this burden from the plan sponsor directly to the consultant. Effective consultants deeply understand the complex landscape of fiduciary law and regulatory compliance as it relates to their clients. They will also communicate this understanding to clients while applying best practices and conducting fiduciary training. But the best consultants? They will diligently do the above while simultaneously looking to the future. Increased regulation has resulted in intensified enforcement actions and litigation over the past few years. The best consultants balance compliance with today’s fiduciary standard with proactive research on trends and shifts in regulatory focus and litigation, setting their clients up for success.

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Blog|Jan 29, 2019

Breaking down benefit costs: 6 charts that show where the money goes

By Scott Wooldridge | January 28, 2019 at 10:58 AM

Growth chart with coins

A new analysis on the cost of employee benefits to employers provides some interesting insights on the differences that size, geographic location, and industry can bring to the value of benefits that workers receive.

The report, by Bay Alarm Medical, looks at a range of employee benefits alongside compensation costs. Using data from National Compensation Survey’s Employer Costs for Employee Compensation (ECEC) report, which gathers information from roughly 27,200 occupations and 6,600 private industries, the analysis provides insight into how companies are investing in benefits for their employees.

Related: 30 percent salary bump? No, I’ll take the benefits

Take a look at six charts below to see Bay Alarm Medical’s benefits breakdown, and then keep reading for more insights.Previous

Cost of compensation—the big picture

The ECEC data showed that almost 70 percent of a private industry employer’s compensation costs are from wages and salaries. Benefits account for approximately 29 percent of an employer’s compensation costs, the study finds. Health insurance made up 7.5 percent of compensation costs on average. Social Security and Medicare contributions, mandated by federal laws, came to 5.8 percent of employer contributions. The study notes that many industries are now adding benefits such as student loan repayments or parental leave, but compared to other areas, these benefits still represent a very small segment of the a whole. What do employee benefits cost?

Breaking down the numbers further, the study finds that benefits cost the average employer $21,726 annually per employee. With wages, the total cost is $71,334 annually per worker. Wages by themselves account for about 70 percent of compensation costs.

The total average cost for insurance benefits, including health, life, and disability insurance, comes to $2.73 per hour, or $5,698 annually per employee. Legally-required benefit contributions such as Social Security and Medicare add up to $2.65 per employee per hour. The survey estimates that employers are paying, on average, $5,000 annually for paid leave per employee. The report notes that paid leave benefits can vary between employers.

Benefits costs increase over time—but in different ways

The analysis finds that total costs of benefits to employers have increased 368 percent over 14 years. During that time, health benefits cost has increased by 28 percent, which the study attributes to chronic illness and rising costs from health care providers.

“Perhaps the most unexpected cost for employers is the 161.8 percent increase in employee vacation time,” the report said. “This could be due to employees using more of their allocated vacation time, rising to a higher level last seen in 2010.”

Despite the recent improvements in the U.S. economy, unemployment costs to employers have risen 106.8 percent since 2004—which the study attributes in part to the 2008 recession.

As far as the difference in benefits costs among industries, the study said the finance and insurance industries have seen the most substantial increase in employee benefits at 17 percent. The utilities industry is next, with a 15.2 percent increase. The utility sector pays an average of $39,028 in annual benefits per employee, the highest of any industry in the study.

Health care and institutions of higher education have seen similar increases, at 14.6 percent and 14.4 percent respectively. The study finds a significant difference though: average annual costs of benefits for higher education employers is $34,250, while the average cost of benefits for each worker in health care is $21,364.

The hospitality industry, which includes food services, saw one of the smallest increase in benefit costs, a 5.9 percent increase since 2004. This industry employs five million Americans, the study notes. Changes were also relatively small in the retail industry, with a 3.9 percent increase. The numbers are interesting data points at a time when public pressure has grown regarding “living wage” and parental leave laws in several states. The report notes that some employers in food services, such as Starbucks, have increased benefits substantially in recent years, in order to attract workers.

Geography—and size—matters

Not surprisingly, bigger companies tend to have better benefit offerings. The study found that the largest corporations spent almost $10 more in total benefits per employee than businesses employing 49 or fewer workers, but only about $12 more in wages and salaries. The report notes that, “Ultimately, small companies have fewer workers to provide benefits for, while the largest companies may benefit from an economy of scale that many small or midsized companies lack.”

A more interesting finding may be the difference that location makes when it comes to benefits. Higher benefit costs are found in companies that are centered in big, coastal cities such as San Francisco and New York. This finding isn’t too surprising, given the higher living costs in those cities.

But there are some exceptions: parts of Florida such as Miami have relatively lower benefit costs for employers. And the Phoenix Phoenix-Mason-Scottsdale has seen a big increase in what employers are spending on benefits. The study speculates that one reason for the higher costs may be the six Fortune 500 companies that are based in Arizona. Another reason may be a new law in the state that increased the minimum wage and required employers to offer sick time benefits to workers.

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Blog|Jan 17, 2019

4 simple ways to maximize the effectiveness of your benefits program. Contact the Arcwood Consulting team to review if you are getting the most out of your plan!


4 ways to get the most bang out of your benefits buck

By Tuan Nguyen

Published January 14 2019, 1:08pm EST

It’s a tough time to retain your best employees.

Wages across all disciplines are increasing, which is resulting in competitive new job offers and making it difficult for employers to staff and retain top talent (unless they can regularly dish out significant raises company-wide). Most employers compensate for their potential wage discrepancy by offering employees attractive, affordable and comprehensive benefits programs.

Despite these efforts, employee-retention rates are not where most companies would like them to be, a sentiment that supports findings in Payscale’s 2018 Compensation Best Practices Report. Payscale highlights employee retention as one of employers’ top concerns across all sectors: More than half of employers (59%) say they’re worried about losing their best employees to competitors, and 67% are concerned about the difficulty of holding onto skilled labor.

These fears are not ill-founded: In the event a quality employee leaves, the cost to replace them (i.e. disseminating and advertising the open position, interviewing and conducting background checks on candidates, drug testing, referral bonuses, signing bonuses, etc.) can creep up to 20% or more of that individual’s annual salary. There’s also a potential uptick in salary expectations from the new employee due to industry trends and recognition of a competitive marketplace. This is on top of the minimum wage increases we all are seeing now.

To further complicate matters, three distinct generations — baby boomers, Gen-Xers and millennials — with varying needs and expectations compose most of today’s workforce. Fewer in numbers, but also represented, are the Silent Generation (the demographic cohort following the G.I. Generation and the oldest group of employees in today’s workforce) and the Generation Z workers (the generation after millennials), who represent opposite ends of the age spectrum. This multi-generational labor mix adds value to the work environment, but the combination also creates new demands when it comes to recruitment and retention.

See also: Why you’re about to lose your best employees

All employees, regardless of their ages, are looking for increasing salaries, rich benefits and subsidies for dependent coverage. Factoring in medical, dental, life, disability, 403(b), vacation pay, time off and taxes, the total cost for employers is substantial. This is problematic for companies trying to reduce costs year over year and continue to offer benefits for five demographic cohorts that will help attract and retain talent.

Second only to wages, your employee benefits program is your next highest expense. Employee benefits is a significant financial and administrative investment that could be a key variable in your efforts to both attract and retain quality team members — and get competitive advantage (if you know how to leverage it). One of the best ways to maximize your investment is to work with your broker to implement a benefits-communication strategy to help employees fully understand — and more importantly, appreciate — what your organization offers.

Here are four ways you can maximize the ROI of your benefits program so you can best recruit and retain talent.

Prioritize employee retention over recruitment. You’ll get more mileage from your benefits program if you work on focusing on employee retention first — as this is ultimately where your greatest return on human-capital investment comes from — and recruitment second. Focusing on retention involves investing time, money and effort into designing rich, yet affordable, benefits options. And, communicating these efforts with your employees to demonstrate your dedication to keeping them. When you subsequently shift your focus to recruiting, also be sure to emphasize to candidates just how great your benefits program is. Prioritizing the “who gets communicated with about our benefits program and when” — and in this order — is more likely to help you reach your company objectives.

(Re)educate employees about their benefits at various touchpoints. Employees often don’t fully understand the scope of time and money an employer invests into offering a competitive benefits program. It’s also easy for employees to lose sight of the benefits package they’re receiving after they’ve been onboarded. Rather than appreciating the program’s value with each paycheck, they simply see a hit on their net incomes. Whether they’ve just joined the company or are seasoned team members, employees must be educated and continually reminded of the value of their enrollment.

Your broker can help you design a multi-touch educational campaign that includes communications tools such as benefit guides, wallet cards and announcements — all of which can keep benefits top of mind for employees at every stage of their journey with you. Wellness and health fairs and campaigns throughout the year also can present multiple opportunities to educate employees and go beyond the standard annual open-enrollment meetings. Work with your broker to design the best communications strategy that allows you to speak loudly and frequently to all the perks of working for your community. You stand to get the biggest payback on your benefits program investment: satisfied employees who stay.

Take a traditional and forward-looking approach to benefits communication. Since different age groups have different needs when it comes to benefits communications, there are multiple communications technologies your broker should be making available for you, including the following: 

  • Online enrollment
  • Benefit portals
  • Intranets
  • Mobile phone apps (becoming very prevalent with millennials)
  • Webinars (livecast and on-demand)
  • Video (generally preferred by millennials and Generation Z populations)

Your broker shouldn’t discontinue administering the more traditional open-enrollment group meetings in favor of newer technologies, though. In-person one-on-one meetings and answering employees’ questions via Q&A sessions are employee-communications approaches that are still generally preferred by the baby boomer and Silent Generation populations. As the workforce continues to evolve, multiple means of communication that are both “old school” and more leading-edge will be needed to communicate effectively across all demographic bands.

Communicate the total value of your benefits package. Another way to demonstrate to employees how greatly you value them is to employ a total-compensation strategy to share with them the full scope of their benefits and compensation programs. Total-compensation statements go beyond standard paychecks to provide a greater overview that gives a quantitative value of your benefits program. Research shows 80% of employees who ranked their benefits satisfaction as “extremely high” also ranked job satisfaction as “extremely high,” meaning a transparent communication approach can help increase employee appreciation and satisfaction.

Use your existing benefits administration system to set this up, or ask your broker to help you provide this to employees. Total compensation statements also are a valuable recruitment tool, as they can also be shown to potential candidates to demonstrate how well you treat your employees.

If you want to retain your workforce and build employee morale, getting your management team behind the idea of communicating often and consistently throughout the year, using different communication vehicles and providing total compensation statementscanfoster good will and improved productivity among your employees, which ultimately leads to a happier workforce and increased employee retention.

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Blog|Jan 15, 2019

With a tight labor market, companies look to their wellness programs to retain and attract top talent. Contact Arcwood Consulting to work with you to optimize your benefit program!

Wellness programs retain talent — even if workers don’t use them

Published

  • January 14 2019, 1:46am EST

Employees are loyal to companies with expansive wellness programs — even if they never actually take advantage of them.

In an economy with more jobs available than workers to fill them, it’s crucial for organizations to offer benefits that will secure and retain talent. Companies providing access to more than seven employee health and wellness programs are nearly twice as likely to retain current employees, according to a survey by health services company Optum. Employees are also three times as likely to recommend their company as a place to work.

“Engagement in health and wellness programs translates to greater employee loyalty, which can significantly contribute to productivity and a stronger bottom line for employers,” says John Holcomb, Optum president of Population Health Solutions.

Optum’s survey results of more than 1,200 full-time employees working in large companies in various industries showed wellness programs are essential to employee job satisfaction, even among workers who don’t use them. Of employees who don’t participate in company programs, 29% of them said they’d recommend their company as a place to work. Only 18% of employees who aren’t offered programs at all would suggest working for their employer.

“Even if they don’t take advantage, offering these programs sends the message to employees that their employer cares about them,” says Seth Serxner, Optum’s chief health officer. “They like knowing the option is there if they ever need it.”

The number of programs offered at work matters to employees; 53% of survey respondents, the highest amount, said they’d recommend their company if it provided seven to eight wellness programs. Ratings dropped sharply from there: employers with four to six programs were 30% likely to get employee recommendations. Those offering one to four programs and none received 24% and 18% ratings respectively.

“This illustrates companies need an array of programs if they want to retain and attract talent,” Serxner says.

A well-rounded benefits package ideally combines great medical coverage with fitness programs, support groups and healthy office conditions, Serxner says. Access to medical professionals for help managing chronic conditions was the most popular wellness program on the survey.

“Whether you have asthma, diabetes or a heart condition, knowing you can talk digitally or in-person with a nurse about the condition when concerns arise would be of tremendous benefit to you,” Serxner says. “It helps employees take charge of their health.”

On-site fitness centers and healthy office snacks were rated as important to employees.

For many employees, benefits enrollment can be tedious—sometimes even scary. They don’t want to make a mistake—and who can blame them?

“Employees appreciate anything that makes it easier for them to make healthier decisions on a daily basis,” Serxner says.

As a consultant, Serxner says some companies may consider cutting such programs to save money, which would be a mistake.

“We need to shift the thinking from ‘these programs and services are all about cost containment’ to ‘these programs are how to make our company grow and thrive,’” he says. “Programs like these are conducive to creating a workplace where employees actually want to stay, regularly contribute and actively engage.”

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Blog|Dec 11, 2018

Great article about the pro’s and con’s of 401(k) plans highlighting the importance of plan design.  Contact Arcwood Consulting to review the pro’s and con’s of your current retirement plan today!

401(k) plans are 40 years old. To celebrate, here’s a look at how they could be better

Russ Wiles, Arizona RepublicPublished 6:00 a.m. MT Dec. 9, 2018

It’s clear that 401(k) plans have been huge successes in the 40 years since they were authorized, amassing more than $5 trillion in assets and becoming investment mainstays for millions of Americans through workplace-benefit programs.

But 401(k) plans and similar defined-contribution programs haven’t worked out well for everyone, and criticisms linger. As the 401(k) concept marks the 40th birthday from its creation in the Revenue Act of 1978, here’s a look at some of the shortcomings:

These programs aren’t pensions

Perhaps the biggest complaint about 401(k) plans is that they aren’t traditional pensions, where employers hire professional managers to run the show and ensure payouts for retired workers.

Still, 401(k) plans have supplanted traditional pensions, as companies find them cheaper to run, with less risk in terms of guaranteeing results. 

With 401(k)-style programs, workers themselves are responsible for making decisions that will affect their investment success. For astute investors, that’s not bad. Many of these people value 401(k) plans for the control and flexibility they provide, allowing each person to decide how much to put away and which investments to select.

Also, 401(k) accounts are portable, meaning you can take your funds with you when switching jobs.

The 401(k) recipe has worked well for many. Fidelity Investments recently reported that 187,000 people with 401(k)s managed by the firm had portfolios of at least $1 million as of the third quarter, a 41-percent rise from a year earlier (though representing just 1 percent of all accounts). The average balance overall hit a record $106,500.

But not everyone is up to the investment challenge, and not all plans are attractive. 

Millions of workers would be better off with pensions if their employers offered them. But that prospect isn’t likely, so 401(k) critics who pine for the return of traditional pensions, especially at the small firms that never offered them, aren’t being realistic.FacebookTwitterGoogle+LinkedIn6 ways to help retirement-focused investors Fullscreen

Here are six strategies  that retirement-focused investors

Most workers still lack 401(k) access

Even assuming 401(k) plans are good programs — which isn’t the case in all situations — a lot of workers don’t have the ability to participate or don’t take advantage of it.

In 40 years, the spread of 401(k) plans has been impressive, but it hasn’t filled all the gaps. Only 58 percent of workers had access to any retirement plans through work, and just 49 percent participated, according to a 2016 estimate by Pew Charitable Trusts. 

Stated differently, only about 30 percent of workers use 401(k)s. Coverage and participation are lower at small companies and among part-time and lower-paid workers.

A big reason the wealth gap has increased in America reflects the concentrated ownership of the stock market and housing assets by affluent people. Both real estate and, especially, stocks have rebounded from the last recession, but millions of Americans haven’t participated in the recovery because they aren’t in the game.

There’s not much 401(k) plans can do about housing (which isn’t offered as an investment choice, at least directly), but the programs represent an important portal to the stock market for workers of modest means.

Mainly this comes through investing in mutual funds, the mainstays of most 401(k) programs.FacebookTwitterGoogle+LinkedIn30 retired Phoenix employees with the largest pensions Fullscreen

The average pension for a retired Phoenix employee

Next Slide32 Photos30 retired Phoenix employees with the largest pensions

Not all plans are user-friendly

Plenty of 401(k) plans, especially those at small companies, often lack key features that boost the odds for success.

The best plans offer a reasonable but not overly extensive choice of perhaps nine to 12 investments featuring moderate annual expenses below roughly 0.5 to 0.75 percent or so annually ($5 to $7.50 for every $1,000 invested).

Good plans also feature generous employer matching funds to encourage workers to save. Many programs allow participants to borrow a portion of their assets, as loans give workers some assurance that they can tap some of the money in a pinch.

The advent of target-date funds also has been helpful, as these selections provide a mix of investments suitable for people at specific ages, growing more conservative over time.

Two relatively new features in 401(k) programs are automatically enrolling workers and gradually increasing their financial contributions — unless they opt out.

Both automatic enrollment and contribution increases take advantage of the propensity of many people for inertia, noted Lori Lucas, CEO of the Employee Benefit Research Institute.

“The same people who are reluctant to increase savings today may allow their contributions to be automatically increased over time,” she wrote in a blog. “Research shows they generally do.”

By now, most Americans are pretty hip to the importance of saving for retirement. Buzz60’s Natasha Abellard has the story. Buzz60

Benefits aren’t always explained well

Modest participation partly reflects low financial literacy and a lack of insight in how workers can make 401(k) plans work for them. Although education has improved, it remains spotty. Some employers provide consultations, webinars and other helpful information tools; others don’t.

It’s easy for workers to become discouraged by the retirement challenge.

“The (financial) industry likes to create fear by saying things like Social Security won’t be there or benefits will be reduced,” said George Fraser, a retirement-plan specialist who helps companies boost participation. Rather, “You want to inspire hope that people will have a better life in retirement” and that they can succeed with their plans, he said.

Fraser likes to tell reluctant workers that they can start by saving as little as one penny from each dollar of earnings, then increase it by a penny each year for a while after that.

Couched in those terms, the effort doesn’t seem as difficult, especially as many people don’t even bother to pick pennies off the ground, said Fraser, managing director at Retirement Benefits Group in Scottsdale.

Study says Americans closing in on retirement now aren’t as healthy as prior generations were in their late 50s. Buzz60

Some people are wary to withdraw

Some participants don’t seem to have a good plan for using the money they have accumulated. 

Once workers retire, many move their 401(k) balances to individual retirement accounts as rollovers, preserving the tax-shelter benefits. Many then leave the money alone, aside from taking minimum required distributions after age 70½.

“For the most part, retirees’ drawdown strategy is simply to take the required minimum distribution,” Lucas wrote. “Our research shows that, depending on the size of the nest egg, only between about 12 to 27 percent of assets are drawn down over the course of the typical retirement,” referring to those people with 401(k) accounts.

Granted, this doesn’t seem like much of a problem. “After all, it means you didn’t run out of money,” Lucas said in a follow-up note.

But it suggests that people who have invested diligently for decades “still cannot bring themselves to live off of their hard-saved nest egg because there is too much uncertainty,” she added, citing health issues, stock market unpredictability and more.

Low drawdown rates point to a need for more education on withdrawing 401(k)/IRA funds, especially as it meshes with managing Social Security benefits, dealing with health concerns and other issues. 

“The draw-down dilemma is one that the system does not appear to have adequately addressed,” Lucas said.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.