Plan Sponsors Ask…Q4 2022

Q: We are considering a plan design change regarding loans. Are there any data that supports offering just one loan per participant versus offering multiple loan options?

A: According to T. Rowe Price’s 2022 “Reference Point”, plans that allow multiple loans tend to have lower savings rates — dropping from an average deferral of 7.9% to 6.8%. Allowing a greater number of loans is also correlated with higher average loan balances: $10,162 for one loan, $12,424 for two loans, and $13,698 for three or more loans. The study suggests that given the negative potential impact that allowing multiple loans has on savings, plan sponsors could consider limiting them to one per participant. This solution could satisfy the participant need while also limiting the possibility of loans being used for less essential reasons, preserving important retirement savings. You can access the report at: https://tinyurl.com/5bf74dym.

Q: We have a group of plan participants who have asked us for some additional education that covers topics more relevant to employees within 10 years of retirement. Our advisor has set up presentations that cover Social Security, Medicare and income planning. What else might we consider?

A: A new research brief from the Center for Retirement Research at Boston College provides data and perspectives that could serve well as content for an educational seminar. “How Well Do Retirees Assess the Risks They Face in Retirement?” finds that retirees do not have an accurate understanding of their true retirement risks, and there’s a large disconnect between how actual and perceived risks are ranked. The analysis finds actual risks should be ranked in this order: 1) longevity, 2) health and 3) market. However, perceived risks are ranked: 1) market, 2) longevity and 3) health. Specifically, Americans ages 50 and older are about three times as worried about market risk as the research modeling suggests that they should be, 50% less worried about their own longevity risk than they should be and 30% less worried about healthcare costs in retirement than they should be. The research also explores family risk, which has received increasing attention. Family risk includes divorce, death of a spouse and adult children becoming ill or unemployed. You can access the brief at: https://tinyurl.com/ycyr4jty.

Q: One of my plan committee colleagues mentioned a new compliance program that was being launched by the Internal Revenue Service. Can you provide any details?   

A: The pilot compliance program has recently launched, and it starts with a letter from the Internal Revenue Service (IRS). The letter gives you 90 days to perform both a document and an operational compliance review. If you fail to respond to the letter within 90 days, the IRS will contact you to schedule an exam. Assuming you choose to conduct the appropriate review and you discover errors, the errors may, if eligible, be corrected using the correction principles in Employee Plans Compliance Resolution System. If the errors are not eligible for such correction, you may request a closing agreement and pay a sanction determined pursuant to the fee structure set forth in the Voluntary Correction Program. The IRS states that its goal with this program is to reduce taxpayer burden as well as the amount of time spent on retirement plan examinations. At the end of this pilot, they will evaluate its effectiveness and determine if it should continue to be part of their overall compliance strategy. For more information on how the pilot program works, go to: https://tinyurl.com/ymkvmkd9.

Rowe Price (2022, April). Reference Point. https://www.troweprice.com/content/dam/retirement-plan-services/pdfs/insights/savings-insights/REFERENCE_POINT_2022.pdf

Center for Retirement Research. (2022, July). How Well Do Retirees Assess the Risks They Face in Retirement? https://crr.bc.edu/wp-content/uploads/2022/06/IB_22-10.pdf

IRS. (2022, June 6). Employee Plans News. https://www.erisapracticecenter.com/wp-content/uploads/sites/25/2022/06/Employee-Plans-News-_-Internal-Revenue-Service-June-3-2022.pdf

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.