retirement plans | Pension360

Chart: One-Fifth of Public Workers Don’t Know What Retirement Plan Their Employers Offer

According to research from the Pew Charitable Trusts, 20 percent of public sector workers don’t know what type of retirement plan their employer offers. From Pew:

One-fifth of state and local workers polled said they did not know what type of retirement plan their employers offered. Women were more likely to say this—23 percent—compared with 15 percent of men. In addition, workers younger than 50 were more likely to report that they did not know what type of retirement plan they had than were workers 50 or older.

In the graph [above], you can see how retirement plan knowledge breaks down by age. Predictably, people pay more attention to plan offerings as they get older.

Chart from Pew Charitable Trusts.

The Ethics of Plan Design

Retirement plan designers often encounter ethical dilemmas over the course of their careers.

A recent paper in the Journal of Pension Benefits, authored by Kelly Marie Hurd, dives into some ethical scenarios that might be presented to plan consultants.

First: Clients need to know the regulations surrounding the plan – even if they don’t necessarily want to hear them:

To a client, the laws and regulations can feel like a foreign language at best or at worst can seem like a hindrance. However, they also can be an excellent safety net to help clients understand the importance of avoiding discrimination issues. The various tests that must be performed each year help keep the plan on the right path, and taking the time to explain those requirements, at least in a general way, during the implementation stage can go a long way to ensuring that your client has a basic understanding of what is and what is not permissible.

It’s also important the plan consultant untangle the web of competing interests being brought to the table:

Different types of retirement plan professionals bring different perspectives to the plan design process, perspectives that may be complementary or competing…

An investment advisor may be primarily concerned with enrollment and access for employees to boost participation in the plan, as well as maintaining relationships with the participants to help them meet their financial goals. While all of these are reasonable perspectives, they also may lead to differences of opinion when it comes to plan design. For example, the investment advisor may want to push auto-enrollment, while the TPA has concerns about the possibility for missed enrollments that would then lead to potentially costly corrections. Rather than competing over such questions, the investment advisor and TPA should work collaboratively to communicate the pros and cons of the different design options to arrive at the design that is best for the client to target benefits, expand participation, etc., while ensuring that the client has a compliant and qualified plan.

Finally, the author presents this scenario:

There are many times you wish you could explain something to your client about how the plan works in simple language, but the solution leads you into an area where you are explaining discrimination to your client in a way that might influence his or her hiring practices. I have a client, a professional office, where the owner employs three staff members. The owner is nearing retirement and hoping to put away the maximum amount each year, although he does not draw a large salary. The plan is a cross-tested plan, which means that to get to a 70 percent coverage level, all three of the staff members need to benefit at the same percentage as the owner. And in this company, the office manager is only a few years younger than the owner.

It seems like such an easy suggestion to tell the client to hire a part-time college-age worker and make him or her eligible for the plan, but at the end of the day that is a potentially abusive manipulation of both the retirement plan regulations and age discrimination laws. Rather than suggest demographic changes, I revisit the plan design each year to see if there is a better option based on the existing demographics. There may not always be a cookie-cutter solution, but it is our illustrious burden to continue to strive for that perfection.

To read the entire paper, titled “The Ethics of Plan Design”, click here [subscription required].

Photo by Stephen Wu via Flickr CC License

Illinois Workers Opt Into 401(k)-Style Plans In Record Numbers

SURS members chart — CREDIT: Illinois Policy

All around the country, employers are funneling new hires into 401(k)-type retirement plans instead of traditional pension schemes.

But the members of one Illinois fund are given the choice of participating in a defined-benefit or defined-contribution plan–and more than ever, they’re choosing 401(k)s. From Illinois Policy:

Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan run by the state. These state-university workers control their own retirement accounts and aren’t part of Illinois’ increasingly insolvent pension system.

And recent data from SURS obtained through a Freedom of Information Act request shows the popularity of 401(k)-style plans is growing.

Nearly 20 percent of all SURS employees eligible for a retirement plan in 2014 have chosen a self-managed plan over the traditional pension scheme. Just a few years after the Great Recession, the number of SURS members choosing self-managed plans has reached an all-time high.

In 1998, SURS began allowing its new workers to opt into self-managed retirement plans. In these plans, an employee contributes 8 percent of his or her salary toward retirement savings and the employer puts in a matching 7 percent. That means the employee has the equivalent of 15 percent of each paycheck put into an account that’s entirely theirs.

As for why employees are opting into 401(k)s over traditional pensions? The growing concern over the health of Illinois’ pension funds probably plays a big role. Strong stock market gains over the last few years likely play a part, as well.

17 States Considering State-Run Retirement Plans Aimed at Private Sector Workers

Many private-sector workers don’t have access to retirement plans through their employers, and states across the country are now trying to solve that issue. The trend has flown under the radar, but well over a dozen states are in the process of setting up (or brainstorming) a state-run retirement plan that caters to private-sector employees.

From Benefits Pro:

According to the Pension Rights Center’s website, 17 states are at some stage of legislating state-administered plans that hope to deliver retirement plan access to the country’s smallest employers.

Among them, Maryland, Connecticut and Illinois have either set up a commission to study creation of statewide retirement programs or taken early steps to create such programs.

Nebraska has held hearings examining the state of its private-sector employees’ retirement readiness. Indiana is moving forward, too, as are Arizona, Colorado, Minnesota, Ohio, Oregon and Vermont.

More specifics on a few of the initiatives from Benefits Pro:

In Connecticut, a panel is evaluating whether state-run automatic individual retirement accounts or other retirement programs could help increase savings. The panel is expected to issue an interim report by May.

In Illinois, legislation has been introduced that would require employers who have 25 or more employees but don’t offer a retirement plan to automatically enroll workers in a Roth IRA with a 3 percent payroll deduction.

In Maryland, a retirement program task force was established after a lawmaker wrote a bill requiring employers with at least five employees who don’t offer a retirement plan to establish an automatic 3 percent payroll deduction into a retirement plan.

California, as usual, was among the first states to have begin implementing the idea of a state-sponsored retirement plan for private sector workers. In 2012, Jerry Brown passed the Secure Choice Retirement Savings Trust Act, which eventually will require all business with over five employees to enroll their employees in the state plan.

States Move To Give Private-Sector Workers Access to State-Run Retirement Plans…But Not Everyone Thinks It’s A Good Idea

There are millions of private-sector workers in the United States without retirement plans, but the past year has been an active one for state and federal lawmakers trying to make sure these workers can gain access to a state-run plan if they want one—nearly a third of states in the US are drafting legislation for such systems.

But Dale E. Brown, president and chief executive of the Financial Services Institute Inc, published a piece this week in Investment News advocating against such state-run systems. One reason, he says, is the skewing of small business incentives:

State-run retirement plans for private sector workers would immediately undermine the incentives for small businesses that do not currently offer employer-sponsored plans to establish their own plans in the future…

As more employers came to “offload” their retirement plan offerings to the respective states (or simply neglect to develop them in the first place), many experienced financial advisers in each area — who have been ethically advising plan sponsors for years — would simply be forced to leave the market. The result would be a reduction in access to professional financial advice, rather than the expansion of access that American workers so badly need.

Brown also spends time decrying the cost associated with the systems:

These proposals would also create substantial new costs for states and taxpayers, and would open states to potential liability to the IRS and to the Department of Labor under ERISA. While many of the bills’ sponsors envision these plans as low-cost solutions, the true expenses of running a large and robust retirement plan — including ensuring that the plans are properly managed; that investment options are appropriate and are adjusted as necessary; and that plan activities are closely monitored to prevent prohibited transactions, among many others — could easily and quickly derail these expectations.

In addition to the ongoing expenses mentioned above, taxpayers would be on the hook for substantial costs just to get the plans off the ground. When start-up outlays for plan research and design, legal and tax expenses associated with obtaining IRS approval, and many other expenses are factored in, it becomes clear that these states would be incurring significant costs to provide a service that is already broadly available in the private market.

But federal lawmakers say there are too many workers without access to retirement plans. One lawmaker told Pensions & Investments:

“With 75 million Americans without a retirement plan, there is no question that our country has a retirement security crisis,” said Sen. Tom Harkin, D-Iowa, in an e-mail. “I am encouraged to see states taking steps to improve retirement outcomes for Americans.” Mr. Harkin has proposed privately run retirement funds on the national level.

Sixteen states are considering legislation that would set up state-run retirement plans for private-sector workers.