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Market Update
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Retirement Services - U.S.
Printable Version
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The Rise of "Do it for me" Retirement Planning
Even before the recent decline in the stock market, worker confidence in
being able to afford a comfortable retirement had been decreasing. This
has made it even more important to contribute to a retirement plan over
a long period of time because it is one of the main ingredients of having
enough money at retirement. In response, employers that sponsor defined
contribution retirement plans such as 401(k) are considering plan design
changes to help their employees save for retirement.
Defined contribution plans have evolved as the primary retirement savings
vehicle for workers today. However, despite plan sponsor’s attempts to boost
participation through increased participant education, online retirement tools,
and investment options, workers are still not saving enough for retirement.
Due to the passage of the Pension Protection Act of 2006, employers are
considering automatic features in their retirement plans. Employees are
looking for "do-it-for-me" tools to move their retirement savings in the right
direction. Employees often become so frustrated with all the decisions they
must make for retirement planning that they do nothing. Employers can help
create more successful retirement outcomes by incorporating some keep-it-simple
plan design or procedural changes:
- Automatic enrollment—Employees are automatically enrolled at a certain savings percentage unless they opt otherwise.
For example, employees are enrolled at a 4 percent deferral rate unless they opt out. Our experience is that very few
employees opt out, so this increases plan participation and gets employees enrolled in the plan.
- Automatic increases—Even with automatic enrollment, inertia sets in again and workers do not change their savings
percentage. With automatic increases, participant deferrals are increased by a small percentage over time.
- Reenroll employees each year—Health benefits have an open enrollment period each year, so why not retirement
benefits? This could be just reenrolling nonparticipants or encouraging all employees to revisit the plan each year. This is
incorporated into an education plan prepared by your advisor.
- New Safe Harbor Plan Design—The Pension Protection Act created a new safe harbor plan design called a qualified
automatic contribution arrangement. This may be a plan design to consider for plans with nondiscrimination testing
issues. Unlike the traditional 401(k) safe harbor, it does not require 100 percent vesting but allows full vesting after
two years. It incorporates many of the automatic enrollment/increase concepts and does require employer matching
contributions of 100 percent of deferrals up to 1 percent of pay, plus 50 percent, in excess up to 6 percent of pay, or a
flat 3 percent contribution to all eligible employees. This plan design does relieve plans from certain nondiscrimination
testing that limits highly compensated employees.
- Implement target-date or life cycle investment options—As the default investment option for automatically enrolled
employees. These funds are managed based on a targeted retirement age or life expectancy. They are also well received
by plan participants that want the "do-it-for-me" approach. These funds also meet the Qualified Default Investment
Alternative (QDIA) legislation that can provide fiduciary relief for default investments. Steps need to be taken to take
advantage of the fiduciary relief.
The Internal Revenue Service issued final 403(b) regulations on July 24, 2007, and deadlines for compliance are fast
approaching. The legal requirements for 403(b) plans will now be more similar to the requirements for 401(k) plans. In
general, the effective date of the regulations will be January 1, 2009. Employers who have a 403(b) plan should be addressing
these new regulations right now. A written plan document is now required for all 403(b) plans, including non-ERISA
plans. Other requirements include timing requirements for employee contributions, more stringent nondiscrimination rules,
universal availability requirements, coordination of catch-up contributions, contract exchange rules, plan-to-plan transfer
rules, and stricter distribution rules.
Finally, look for additional fee disclosure requirements later this year and into 2009. In anticipation of more disclosure,
all retirement plan fiduciaries should be reviewing the costs of their plans with their advisors so they have a thorough
understanding of all fees being charged to the plan.
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Please contact your Lockton Representative for further information regarding any information contained in this
market update.
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Dan Nemmers
Executive Vice President,
Lockton Financial Advisors
Denver, CO
Tel: 303.414.6042
E-mail: dnemmers@lockton.com |
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