Plan Sponsors Ask...Q3 2019

Q: In reviewing employment data at our company, we were surprised to find the average time our employees stay with us to be about 6 years. Considering that many employees who leave us take a lump sum distribution from their 401(k) accounts, it made us wonder what we can do help more transient employees prepare for the future.

A: First, congratulations. Your average tenure is slightly higher than that of the overall workforce, based on the January Current Population Survey (CPS) from the US Census Bureau, as cited in an Employee Benefits Research Institute (EBRI) issue brief, Trends in Employee Tenure, 1983-2018, February 28, 2019. The issue brief reports that, according to CPS, over the past 35 years, a five-year employment tenure is about average. It seems the idea of holding one job for an entire career is a bit of a myth. The EBRI brief also points out the concern you have, that changing jobs (or even careers) every five years could have a negative impact on retirements. Shorter tenures may result in a lack of defined benefit plan vesting (when a defined benefit plan is even offered), reduced defined contribution savings, and as you mention, lump sum payments at times of job changes. While you may not be able to keep employees longer, you may be able to impact their savings and withdrawal decisions, thereby improving their future retirement prospects. First, implement regular and high-quality financial education, including specifics about the retirement plan. And second, enlist longer-term employees who do understand the plan to help give “on the ground” information to newer employees. Read the EBRI issue brief here, https://tinyurl.com/EBRI-IB-83-18.

Q: We know that emotion plays a role in money, and therefore retirement. What are some ways we can help employees offset less-than-rational emotion and thus make better decisions about their retirements?

A: Behavioral economics have been the subject of much discussion in recent years, as you know. Money is a deeply personal subject for most people, and we often view it as a big factor in our security. That’s why it is difficult to get people to take a rational, rather than emotional, look at their own financial behaviors. There are a few areas where employers and plan providers can help employees make decisions that are more rational, though. PIMCO recently published an article¹ with four suggestions you may be able to use. First, make sure employees receive education about the consequences of taking Social Security benefits at the earliest possible age, and the benefits of beginning payments at (or after) full retirement age. Second, consider including education about annuities in your pre-retirement sessions. These can help overcome fears about running out of money. Such fear may lead people to underspend in the early years of their retirement; PIMCO claims that 18 years into retirement many people have spent only 20% of their nest egg. For retirees who remain uncomfortable with annuities, PIMCO recommends education about how a conservative asset allocation may be used to provide some relative stability and hedge against longevity risk. Read the article for more useful information.

Q: Our 401(k) plan is relatively small. Do we need to be concerned about fiduciary issues and lawsuits? It seems like there are bigger fish to fry!

A: If your plan does not hold much money in assets, you are correct that ERISA enforcement agencies have bigger fish to fry. However, that does not mean you won’t find yourself in the frying pan. All it may take is one participant complaint — or even none in the event of random chance — and you could find yourself subject to a plan review by the Department of Labor’s Employee Benefits Security Administration (EBSA). That’s when the fun begins. According to the EBSA fact sheet for 2018², the DOL recovered $1.1 billion from enforcement actions against plans last year. Another $443.2 million was recovered through information complaint resolutions. EBSA closed over 1,300 civil investigations, about two-thirds of which resulted in some kind of corrective action, such as monetary recovery. The agency closed 268 criminal cases in 2018 as well, including indictments against 142 individuals. Eighty-seven of those corporate officers, plan officials, and service providers were convicted or pled guilty. The takeaway here is that NOW is the time to make sure you are dotting the I’s and crossing the T’s when it comes to your plan. Talk to your plan attorney or advisor to measure how you’re handling your compliance matters and what you could do to improve.

1    PIMCO Behavioral Insights, Rationality and Retirement: Mutually Exclusive?, Richard Fulford, Steve Sapra, April 2019, https://tinyurl.com/PIMCO-rationality-retirement

2    https://tinyurl.com/EBSA-2018-fact-sheet