New Records in Retirement Plan Contributions and Participation
The annual survey from the Profit Sharing Council of America (PSCA) showed some record-breaking statistics, based on the most recent data from 2019 (released in December 2020). This industry-leading annual survey is eagerly anticipated each year because of the wealth of information presented and the large number of plans involved.
According to the report, 2019 was the third year in a row when new records were set in contributions and participation. More than 90% of employees eligible to participate had a balance in the plan, and nearly the same percentage (87.3%) of eligible employees contributed during the year. That was an increase from the previous year’s record high of 84.2%. On average, participants are contributing 7.6% of their pay, while their employers put in an average of 5.3% of pay, also hitting a new high. Between the two, participants were contributing 12.9% of pay in 2019.
Roth accounts, target date funds among design trends
There were some notable changes in plan design trends for 2019. The availability of Roth accounts within 401(k) plans climbed during the year, reaching 75.1%. There has been a steady increase in the availability of Roth accounts over the last decade, rising from 45.5% in 2010. More than a quarter of employees took advantage of the availability of Roth accounts in 2019, reaching 26.4%, an increase of 3.4% from the prior year.
In 2019, 80% of plans offered a target date fund, a significant increase from 2018 when 68.6% made them available. One investment trend that seemed to lose a little traction was in the socially responsible investments (SRI) arena. ESG, or environmental, social, governance and SRI investments accounted for less than 0.1% of plan assets in 2019, and fewer than 3% of plan sponsors responding to the survey reported including such options in their investment menu. That represents a slight decrease from 2018. The smallest plans, those with 50 or fewer participants, and the largest—with more than 5,000 participants—were most likely to offer ESG/SRI options: 4.2% of the largest plans and 4.4% of the smallest had them in the menu.
There is much more information available from the PSCA report. You can purchase a copy for yourself on the PSCA website, https://www.psca.org.
Coming Soon: Refinement of Retirement Plan Priorities
As employers focused on workforce reductions and ways to get the work done remotely, setting priorities for the 401(k) plan may have been low on the to-do list. But as things begin to normalize, it might be time to push that goal setting back toward the top of the list.
As plan sponsors figure out their plan priorities for 2021, says Mercer in a new report, they should give some thought to their participants’ values. In their Reinventing Retirement 2021 priorities report, the international consulting firm says 2020 revealed the critical importance of focusing on employees and what they need, want and expect.
Mercer suggests starting by reviewing participant demographics and key behaviors across the benefit programs, with an eye toward the financial pressures experienced during the pandemic. Using the information gathered, it may be easier to understand subsets of employees, and what they value and need from their employer.
Mercer’s 2021 report discusses four more items they believe will take on great importance in the next year: https://www.mercer.us/content/dam/mercer/attachments/private/us-2020-defined-contribution-top-priorities-in-2021.pdf
Frequently Asked Questions
Q: Our business was hanging on despite COVID-19, but then our area was hit by wildfires. Can employees who participate in our 401(k) plan take money out of their accounts under the COVID relief provisions?
A: No, but there may be another solution for them. Recognizing that many businesses and employees are suffering the financial effects of fires and other natural disasters, Congress changed the rules about plan loans and distributions for them. Similar to 2020’s COVID relief rules, the Consolidated Appropriations Act, 2021 (the Act), provides for Qualified Disaster Distributions or QDD. Those who are eligible for a QDD may withdraw up to $100,000 from their eligible retirement account without penalty or withholding. Like a COVID relief withdrawal, the withdrawals may be recontributed over a 3-year period. Also allowed under the Act are plan loans up to $100,000 or 100% of the present value of the participant’s vested account balance for qualified individuals. The Act makes an additional provision for participants who took a hardship distribution for the purchase or construction of a principal residence in a qualified disaster area. Such distributions, taken between 180 days before and 30 days after the qualified disaster incident, may be recharacterized if the money was ultimately used for a different purpose due to the disaster. With so many complexities involved in these new rules, we recommend speaking to the plan’s legal counsel for guidance.
Q: We recently had a participant ask if they can repay their 401(k) loan early. Honestly, this has not come up before. What should we consider in making a decision? Because of the way loan repayments are applied in our system, we expect there would be difficulties just in terms of the technology.
A: This is a question on which you will need a legal opinion. However, there are a few key considerations to consider—and systems difficulties aren’t really at the top of the list. Similar to other questions about qualified plans, meeting the prudent person test should come first. Maybe the participant realizes the interest he or she is paying back to his or her account is less than the account could earn if invested. Failing to allow the loan to be repaid could give that participant a reason to look to the courts for redress. Another potential problem could arise if the participant is not allowed to repay the loan in its entirety and later defaults. That, too, could create a fiduciary breach. Remember, mere functional procedures (as opposed to those that are specified in the Plan Document, the Summary Plan Description or other governing documents) are just not as important as is prudence in operating the plan. So if the prudent thing is to allow prepayment, then that’s what should happen in spite of any technology challenges.
Q: We weren’t able to keep everyone employed during the pandemic, even though the business has continued with a skeleton crew. Unfortunately, we don’t expect to be in a position to rehire everyone for some time. Some of our employees are telling us that they are less confident now that they will be able to retire on time. Is that what you’re hearing from other companies?
A: Yes, retirement confidence has taken a hit for many because of repercussions of the pandemic. A Jan. 7, 2021 article on Kiplinger’s summarized a poll they conducted with Personal Capital, a wealth management firm. In that poll, 43% reported less confidence in their ability to retire comfortably as a result of COVID-19. Forty percent said their confidence level has not changed, though. What are people planning to do about it? About one-third of them (34%) said their plans have not changed. Thirty-five percent said they expect to work longer, 34% plan to save more, and 20% said they will revise their activities and/or travel in retirement so it will be less costly. The poll shows that just over 34% said they took a distribution from a retirement account and 27.4% took a loan. Nearly one-third (32%) said their withdrawal was between $75,000 and $100,000, and 31% borrowed in that same range.
Web Resources for Plan Sponsors
Copy the links below into your browser for answers to plan questions.
Internal Revenue Service, Employee Plans
Department of Labor, Employee Benefits Security Administration
401(k) Help Center
Plan Sponsor Council of America
Employee Benefit Research Institute
Society for Human Resources Management
International Foundation of Employee Benefit Plans
Consult your plan’s counsel or tax advisor regarding this checklist and other items that may apply to your plan.
- Conduct a review of second quarter payroll and plan deposit dates to ensure compliance with the Department of Labor’s rules regarding timely deposit of participant contributions and loan repayments.
- Verify that employees who became eligible for the plan between April 1 and June 30 received and returned an enrollment form. Follow up for forms that were not returned.
- Ensure that the plan’s Form 5500 is submitted by July 31, unless an extension of time to file applies (calendar year plans only).
- Begin preparing for the distribution of the plan’s Summary Annual Report to participants and beneficiaries by Sept. 30, unless a Form 5500 extension of time to file applies (calendar year plans only).
- Provide quarterly benefit/disclosure statement and statement of fees and expenses that were charged to individual accounts to participants (due 45 days after end of quarter).
- Submit employee census and payroll data to the plan’s record keeper for mid-year compliance testing (calendar year plans only).
- Confirm that participants who terminated employment between Jan. 1 and June 30 elected a distribution option for their plan account balance and returned their election form. Contact those whose forms were not received.
- Begin preparing the applicable safe harbor notices to employees, and plan for distribution of the notices between Oct. 2 and Dec. 2 (calendar year plans only).
- Distribute the plan’s Summary Annual Report by September 30 to participants and beneficiaries, unless an extension of time to file Form 5500 applies (calendar year plans only).
- Send a reminder memo or e-mail to all employees to encourage them to review and update, if necessary, their beneficiary designations for all benefit plans.
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 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 professional for advice regarding plan-specific issues.