Q: We are looking for ways to increase savings rates among new employees, at both lower and higher income levels. Should we focus on increasing our employer match, or setting a higher default rate?
A: Selecting a higher default rate has the largest impact on employee savings rates for new employees, according to a new research paper, “The Impact of Employer Defaults and Match Rates on Retirement Savings,” published by the Social Science Research Network. The research found that when employees are defaulted in at a higher rate, fewer move away from the default savings rate, which results in higher and more equal savings rates among employees at all income levels. In addition, the researchers note that lower-income workers can benefit from remaining in the default plan investment by taking advantage of institutionally priced diversified funds. You can download the paper at: https://tinyurl.com/mr46bvrv.
Q: We are thinking about submitting a request for proposal to several recordkeepers for due diligence purposes. Besides the traditional questions, do you have any guidance on issues we should focus on?
A: Fifty-eight percent of sponsors surveyed for the 2021 PLANSPONSOR Defined Contribution (DC) Plan Benchmarking Report said their organization has been using its DC plan recordkeeper for more than seven years, so the timing may be right for sponsors to take a fresh look at the recordkeeping marketplace. Here are some key issues you may want to focus on, depending on what is most important to you and your employees:
- Mergers, acquisitions and outsourcing of services by recordkeepers continues at a fairly high pace, so you need to understand who is committed to the business and who is outsourcing or leaving that business — and how does that impact their service model?
- Many recordkeepers now offer 360-degree payroll integration, transmitting data directly from the recordkeeper’s system to the payroll provider’s without the employer having to touch it. This may be something to ask about, as it creates efficiencies and is also an opportunity to reduce errors (which helps protect you from a fiduciary standpoint).
- You may also want to identify which recordkeepers can incorporate add-ons such as financial wellness platforms to participant websites, as well as integration of programs for emergency savings, student loan repayments and health savings accounts.
- It’s important to go beyond asking about the basics of what a recordkeeper does to prevent cyberattacks. Consider identifying recordkeepers who offer a guarantee to reimburse a participant if there is a loss, and ask what those guarantees entail.
Q: During the first quarter of this year we have had a number of employees leave our organization, some of which had nonvested employer contributions. Do you have any guidance on how best to handle these?
A: The money must be moved into the plan’s forfeiture or suspense account, where it can be used to:
- Cover other employer contributions already payable by the plan
- Restore the accounts of rehired employees, subject to certain criteria
- Pay ERISA-approved plan expenses
- Make additional employer contributions for existing plan participants
Regardless of which option a plan sponsor uses, ERISA specifies that any forfeited contributions be used for an appropriate purpose by the end of the plan year.