Key takeaways:
- Employer-sponsored retirement plans need to be designed and regularly reviewed to avoid mistakes that cost employers and their employees savings as well as expose employers to non-compliance penalties.
- Common mistakes involve plan objectives, design, costs, and communication.
- The Secure Act and Secure Act 2.0 contain provisions that make it easier and more productive for employees to save through workplace plans, but are complicated and require the support of an expert advisor & partners.
- Plan sponsors have fiduciary obligations, but can partner with financial advisors who are experts in plans and plan designs to outsource and mitigate certain fiduciary duties.
As its name implies, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 was designed to help people save for retirement through changes to how employer-sponsored plans could work. It contained a number of provisions to incentivize retirement planning, diversify the options available to savers, and increase access to tax-advantaged savings programs. Secure Act 2.0, which became law in December 2022, was aimed at encouraging even more workers to save for retirement. For example, one of the provisions requires automatic enrollment starting in 2025 for retirement plans established on or after January 1, 2023. Still, according to a U.S. Census Survey of Income and Program Participation, more than a third of all workers do not have access to either a defined benefit or defined contribution plan sponsored by their employers.
While the benefits of the plans extend to employers as well as their employees, the plans themselves and the rules that regulate them can be complicated. Many employers don’t understand the nuances of the plans and their requirements, including the following high-level fiduciary duties as plan sponsors:
- To act solely in the best interests of their employees
- To select and monitor the investments
- To operate the plan in accordance with the plan documents
- To ensure plan fees are reasonable
Mistakes and misunderstandings are ubiquitous. Errors such as remitting employee contributions late, applying eligible compensation incorrectly, enforcing eligibility requirements inconsistently are common. Such mistakes can lead to penalties, corrective contributions, and increased administrative costs.
Whether you are establishing a new plan or reviewing an existing plan, here are some common mistakes to look out for:
Failure to Understand Plan Objectives
Employers often implement plans without aligning them with their business goals, workforce demographics, or employee needs. The lack of understanding is, if you will, understandable. From the variety of plans to the investments to the documentation and fees, there are multiple forces at play. Even with all the moving parts, employer-sponsored retirement plans are clearly one of the best ways to fill the retirement savings gap, for employers as well as employees. Still, going about it correctly, appropriately, and in compliance with governing regulations is challenging.
Whether you’re starting a new plan or already have one in place, the first thing to understand is your objective. Over the past 15 years, I have worked with advisors and plan sponsors on more than a thousand plans, and I start at the same spot every time: What are your goals for your retirement plan?
Inadequate Plan Customization
Once the employer’s objective is known, designing a plan to meet their goals is the next step. Using a one-size-fits-all approach instead of tailoring the plan to match the company’s workforce and compensation structure can make the plan less effective, less likely to achieve your objectives.
Often employers put a plan in place and simply let it run. But years into the plan, if the business is successful, the goals for the plan may very well change. The owners and their employees, including highly compensated employees, might now be able to save significantly more with an updated plan design.
Maybe you’re limited as to how much in pre-tax dollars you can defer. Maybe you’re deferring, but a more complex profit sharing plan will help maximize contributions and be more efficient for you and your key employees. If you need additional savings as you get closer to retirement age, you might consider adding a cash balance plan.
It is important to continually monitor your plan design. Make sure you understand what is available, as well as what is required, in light of new provisions and plans introduced with Secure Act 2.0.
Ignoring Plan Costs
Another common mistake plan sponsors make is not properly evaluating plan fees, including investment, administrative, and recordkeeping fees, which can erode retirement savings, not to mention violate their obligations as fiduciaries. One study using Department of Labor statistics indicated that 80 percent of companies with 100 or more employees pay too much in plan administration fees.
Prior to disclosure regulations released in 2012, actual administrative expenses for the plans were hard to recognize. Recordkeeping was often reflected as “free” or “included,” but there would be a “program maintenance fee” or “account management charge.” Or no administrative expenses would be listed.
When the fee disclosure regulations were rolled out, transparency improved considerably. Still, the complexity of the disclosures makes it challenging for employers and plan participants to know what they are paying for. Additionally, there are different ways to apply fees, and while that flexibility allows providers to customize solutions, it does not necessarily make it easier for employers to ensure fees are reasonable. Employers are obligated to know if the fees they are paying are fair, but how can they know if they don’t understand how the fees are calculated, who is getting paid what, and how their fees compare to similar businesses?
As retirement plan consultants, we guide employers to solutions that make sense for their business, demographics, and involvement. It isn’t about getting the lowest cost solution, but ensuring you’re getting value for what you’re paying and understanding who is paying those fees. For example, will you as plan sponsor pay fees out of a corporate bank account or will plan fees be passed along to your plan participants? As a plan fiduciary, you should seek out expert consultants to continually monitor and benchmark your costs—at least every three to five years—to ensure they remain competitive
Poor Plan Communication
Not effectively educating employees on the plan’s benefits can lead to low participation, engagement, and potentially impact the plan administration.
Do your employees value the plan, that is, are they participating? Maybe they need to be educated about the plan to become more engaged. If you don’t currently provide a match or other employer contributions, adding a match might increase participation. Your retirement plan should be an effective retention and recruitment tool as it is one of the most tax-efficient ways for employees to save for retirement providing both automatic paycheck withdrawals and the advantages of dollar-cost averaging with their invested savings.
Note that low participation early in an employee’s career can potentially result in years of missed opportunity for compounded growth in their retirement savings. For that and many other reasons, be sure to partner with advisors who specialize in retirement plans and put the time in to educate employees and explain the nuances of their plan.
Neglecting Automatic Features
Owners may be out of compliance when they fail to include automatic enrollment, automatic escalation, or other behavioral finance tools that improve participation rates. The initial SECURE Act introduced the auto-enrollment tax credit, a $500 tax credit for each of the first three years of a retirement plan that includes an Eligible Automatic Contribution Arrangement (EACA). But SECURE Act 2.0 requires you to provide an EACA as of 2025 if your plan was started on or after January 1, 2023. The mandated auto-enrollment and the credit are designed to encourage employers to set up retirement plans that automatically enroll employees at a minimum of 3 percent (not more than 10 percent) of their earnings and auto-escalate their contributions at 1 percent per year until reaching at least 10 percent (not more than 15 percent).
There are some exceptions to mandatory automatic enrollment, including:
- Plans established before 12/29/2022
- Governmental plans, church plans, and SIMPLE 401(k) plans
- Small businesses that normally employ 10 or fewer employees
- Newly established businesses that have existed for fewer than three years
Required or not, automatic enrollment and auto-escalation make a plan more effective from a participation and contribution perspective.
Choose Your Partner Wisely
Who you work with on your plan matters.
The retirement plan landscape is complex and continues to evolve on a yearly basis. Hiring an advisor to act as a discretionary investment fiduciary or co-fiduciary to fulfill your duty to select and monitor the investments is critical, but partnering with true retirement plan specialists will help you successfully navigate all the moving parts.
Plan experts who offer financial education and wellness services help employees understand the benefits of the plan and keep their retirement savings on track. Service providers who offer operational efficiencies (integration and automation) and compliance expertise (regulatory updates and administrative outsourcing) allow you to manage your business while making it easier for you and your employees to save for retirement. Keep in mind the goals for your plan and pick partners who will help you achieve them.
At the end of the day, an employer must act with their employees’ best interests in mind. Whether starting or maintaining your retirement plan, be sure you are partnering with advisors who will help you do that.
We can help. If you have questions about your existing plan or starting a retirement plan for your organization, contact us at 267-669-5374, or email me at pgano@hbkswealth.com.
Important Disclosure
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
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