If your company’s plan is on auto-pilot, it’s time for finance to take control. There are several timely things you should look into, or make sure your benefits department does, in order to improve the plan for the company and your employees in 2015. Here are four of the most important.
More than half of companies allow employees to make Roth contributions through their 401(k) plans. For many plan participants, the Roth 401(k) is more appealing than the Roth IRA because it has a higher contribution limit (for 2015, $18,000 vs. $5,500 for those under age 50) and no income limitations.
Employers that don’t offer Roth contributions should consider doing so. It can be a great planning tool for employees, as it provides an opportunity diversify future tax liability. Someone who has traditional pre-tax savings in 401(k) or IRA accounts, as well as Roth savings, can juggle distributions as they go through retirement. For example, if at age 65 tax rates are on the high side, taking distributions from the Roth account will optimize their tax liability. Then, if at age 75 tax rates are lower, taking distributions from the traditional accounts will do the same.
It’s the diversity that offers this value. Someone whose 401(k) savings is all in traditional accounts or all in a Roth account will have less flexibility.
Also, at present distributions from a Roth account are not factored into a retiree’s income for purposes of determining whether his or her Social Security income is taxable, as is the case with distributions from traditional 401(k) accounts.
A few services (such as fiduciarybenchmarks.com, brightscope.com and 401ksource.com), including some that have recently come to the market, will compare your retirement plan to others in your industry. For example, if you are a manufacturing firm, what are other manufacturers doing for their employees? How does your employer match compare? Are your recordkeeping fees more or less than are paid by manufacturers with a similar number of workers as you? If you have a six-month waiting period for new-employee eligibility for the plan, how does that compare to your peers?
Fiduciary Benchmarks has been at it the longest and probably has the biggest database. The services gather information from plan sponsors, which in return get access to aggregate data. Once you have this data in hand, it becomes much easier to make positive changes to your plan.
We spend a lot of time figuring out how to get people into the plan and maximize savings. The best paths to those goals are automatic enrollment and automatic escalation. But we tend to overlook how to get people out of the plan
Employees with small account balances often delay taking their money out of the plan or forget to do so altogether. That costs you, because most recordkeepers and some plan auditors price their services by the number of account balances in the plan.
Automatic features help here too. IRS rules allow a plan to automatically distribute any balance under $5,000 that an outgoing employee leaves behind. There is a procedure that has to be followed, but distributing those smaller balances can make the plan cheaper and better organized.
Big recordkeepers such as Fidelity and Principal have been enhancing their technology lately. The reporting of data has become faster and it’s easier to obtain, allowing plan sponsors to make more timely, better-informed decisions around plan management.
Some providers now allow you to see how many of your plan participants are on track to retire, and how far off track the rest are. Previously, plan sponsors knew that much of their work force was not adequately prepared for retirement, but they didn’t have the granularity these new services provide.
Why is that so important? According to a study by SocialSecurityWorks.org, workers in their 60s are twice as likely to miss work with a disability claim as those under 40. Combine that fact with the knowledge that health-insurance premiums for senior workers can be up to five times higher than they are for younger workers, and it’s easy to see why you must make sure your employees are using your plan to the fullest.
Michael Clark is a retirement plan adviser with Raymond James Financial Services.