Tips For Plan Sponsors
The year 2016 was a banner year for equity market returns with the S&P 500 index growing a healthy 9.8% YTD as (as of December 28, 2016), and the Dow Jones Industrial Average up a robust 13.5% for the same period. Stock market success usually translates into a smooth(er) path for plan sponsors. Employees seeing their balances rise are also less likely to engage in lawsuits, making the job of the plan sponsor somewhat simpler. Unfortunately, stock market returns are just a small piece of the puzzle.
2016 was indeed the year of the 401k class action lawsuit. And while it is not likely to end any time soon, the rising markets do provide some cover for the volume of lawsuits. But while the diminishing threat of lawsuits may be welcome news, plan sponsors still have their work cut out for them. That’s because another major theme in the defined contribution (DC) market was that outcomes are falling far short of where they need to be, and the overwhelming majority of workers are not on track in their retirement plans.
The problems beneath the surface of the headlines is that the economy is not just about the stock market, other factors such as wages and access to full-time employment are still near historical lows…and getting worse. It is a conundrum indeed, because just when the markets can reward plan participants, the available capital to invest is just not there. So how does the average plan sponsor help change outcomes?
Each year should be treated as a new opportunity to “reset” the company retirement plan. Auto-enrollment, re-enrollment, auto-escalations, education and general best practices need to be revisited, refreshed and renewed! If indeed your plan investment options have benefitted by the rise in equities, this is an ideal opportunity to point out to participants the power of compounding and saving over the long-term. Getting the focus on the accumulation effect and less on the short-term gain will help participants visualize achievement of savings goals.
And like other aspects of personal “fitness”, people tend to focus on new goals for the first few weeks of the New Year, and like the new gym membership, tend to never visit again during the rest of the year. So here is a tip we have shared before that can help participants save more every month. One way to increase deferrals is to optimize tax withholding levels (based on the number of dependents on their tax forms. Most workers withhold too much (according to the IRS the average refund is approximately $3,200). That’s money that is essentially lent to the government tax-free.
If employees optimize their withholding and put the extra amount (that would otherwise be withheld) into their 401k or 403b savings plan, over the course of a career, that translates into about a half million dollars for retirement.The IRS publishes a video and offers a withholding calculator to help workers optimize their withholding.
