One area that continues to be explored is automatic contribution enrollment and automatic contribution increases as ways to boost participation.
What are some areas of growing interest and focus for plan sponsors?
By providing better education and communication platforms, plan sponsors are enabling employee participants to be more prepared for their retirement. Finally, plan sponsors are continuing to keep a close watch on their administrative duties and regulatory requirements.
What are plan sponsors doing to help protect themselves and manage fiduciary risk?
They have leaned on third-party administrators, recordkeepers, investment advisors and legal counsel to identify their responsibilities to maintain plan compliance. Companies that have embraced outsourcing elsewhere in their organizations have also outsourced segments of their retirement plans to 401(k) fiduciaries. That can be 3(38) investment advisors, who assume responsibility for monitoring, maintaining, selecting and removing investment plan options; or 3(16) advisors, who accept responsibility for plan administrative functions. Some plan sponsors have adopted or explored the option of joining a 413(c) multiple employer plan. The closed multiple employer plan option provides an alternative for companies seeking relief from the burdens of independently operating and maintaining their own plan.
How do safe harbor features work?
One advantage for participants is that all employer matching and non-elective contributions vest at 100 percent immediately. Also, all participants, whether they're considered highly compensated or non-highly compensated, are allowed to maximize their elective deferral limits. Elective deferral limits, set by the IRS in 2014, are $17,500 for those age 49 or under and $23,000 for those age 50 or older. Without the safe harbor feature, highly compensated participants would only be able to defer approximately 1.5 to 2 percent more than the average contribution of the non-highly compensated group.
From a plan sponsor perspective, safe harbor plan designs are tools for recruitment and retention of top talent. In addition, the IRS permits a safe harbor plan to be top-heavy, meaning that 60 percent or more of plan assets are attributable to key employees: an officer of the organization, whose annual compensation exceeds $170,000; any employee, who owns more than 5 percent of the company, or owns more than 1 percent and has an annual compensation exceeding $150,000.
What are the implications if a plan is deemed top-heavy?
The plan must meet minimum contribution and vesting requirements for non-key employees for each year the plan is top-heavy. The minimum contribution to bring the plan back into compliance is the lesser of 3 percent of annual compensation for all non-key employees or a percentage equal to the highest percentage contribution of any key employee. Top-heavy penalties are painful infractions, which plan sponsors are able to manage when utilizing safe harbor as a strategy within their compensation and benefits package.
About the Investment Advisor Representative:
Phil Scott, Sequent
Phil Scott has over two decades of experience in the financial services industry. He is a Registered Representative with LPL Financial and Investment Advisor Representative with Advantage Investment Management.