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FINANCIALWELL-BEINGFORMEN:HELPINGTHEMPREPAREFORASUCCESSFULRETIREMENT
WHATPLANSPONSORSNEEDTOKNOWABOUTDOLENFORCEMENTANDREDFLAGS
FIRST-TIMEPLANAUDITS:WHATTOEXPECT
EMPLOYEE BENEFIT PLANSWinter 2020
HHMCPAS.COMCHATTANOOGA | MEMPHIS, TN
FINANCIAL WELL-BEING FOR MEN: HELPING THEM PREPARE FOR A SUCCESSFUL RETIREMENTMany sitcoms and comedians have played with the stereotype that male drivers are notoriously reluctant to stop and ask for directions. According to research, this reluctance to ask for help also affects men as they head toward retirement—and what that means for employees’ financial well-being isn’t anything to joke about.
MassMutual examined gender financial issues and found that men are less interested than women in receiving financial planning services, budgeting assistance, debt counseling and other financial education programs from their employers. Fidelity conducted research specifically for BDO and found that at the end of the first quarter of 2018, 41 percent of men didn’t have their investments allocated appropriately for their age group.
This statistic should grab the attention of men and their employers, because it directly impacts the financial wellbeing of employees. Those employees who are worried about their finances, may negatively affect workplace productivity. In fact, a recent survey by consulting firm Mercer found that financial stress is costing employers about $250 billion in lost wages each year. As a result, companies should identify ways to improve their employees’ financial well-being, and part of this effort should involve understanding
their male employees’ retirement savings habits.
MEN ARE SAVING FOR RETIREMENT, BUT...
It’s true that men, on average, have larger retirement account balances and prioritize saving for retirement more highly than women. But that doesn’t mean that men are doing just fine when it comes to retirement saving.
In its How America Saves 2018 report, The Vanguard Group found that men and women participate in their defined contribution plans at similar levels overall, however, disparities appear when this data point is analyzed by income levels. For example, only 74 percent of men earning between $50,000 and $74,000 annually participate in their defined contribution plan, compared to 86 percent of women. Meanwhile, men are contributing a lower percentage of their pay to defined contribution accounts, Vanguard found. For example, in that same earnings bracket, women saved 7 percent of pay compared to men saving 6.8 percent.
Fidelity Investments looked at the disparity between how men and women save for retirement and had findings similar to Vanguard. The research found that women tend to save a higher
Employee Benefit Plan
EMPLOYEE BENEFITPLAN TEAM
HHM has an experienced and knowledgeable team of Employee Benefit Plan Auditors. The key to auditing Employee Benefit Plans is not merely producing financial statements. Rather, it’s in successfully managing your plan – and HHM offers a proven methodology.
The daily operations of your plan isn’t always an open book, since plans are often serviced by third-party providers and implemented within your company by multiple individuals (or even departments). That’s where we come in. We’re familiar with the complex inner workings of employee benefit plans and can help you make sure your company is carrying out its responsibilities to your employees in an efficient manner that complies with governmental regulations.
In addition to executing the audit itself, our CPAs are able to consult with you to keep you informed of changing laws and regulations that affect your plan. Our personal, non-intrusive approach will make sure that your staff is satisfied and easily able to work with our auditors as we help your business move forward with an excellent plan. Our team thoroughly understands the process and can help you ensure that your plan satisfies the DOL.
RANDY DUMMER, CPA423. 702. [email protected]
RICHARD SWOPE, [email protected]
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Employee Benefit Plan
percentage of their salary than men (9.0 % vs. 8.6%) and generated a higher annual rate of return (6.4% vs. 6.0%).
HOW EMPLOYERS CAN HELPAs employers look for ways to improve financial well-being across their entire workforce, a good place to start is by gaining a better understanding of the saving and investing habits of various demographic groups of employees. Many record keepers and other service providers can offer information to help plan sponsors better understand their employees’ needs. Providers can analyze segments of a company’s workforce to pinpoint gaps, learn what motivates employees and offer possible solutions.
For example, plan sponsors may want to look to see if there are differences in the risk profiles of their employees’ retirement portfolios across genders, age groups or income levels. With this information, plan sponsors can tailor communications strategies to address any suboptimal investment practices by each group.
Employers also may want to harness some of the recent findings from the burgeoning field of behavioral finance. Rather than simply assuming that humans will act rationally, behavioral finance looks at some of the cognitive biases that affect people’s decision-making when it comes to finances. By understanding these biases and tendencies, plan sponsors can better identify some of the traps that employees may fall into and communicate with employees in a way that aligns with how they actually make decisions.
Behavioral finance has found that inertia is a powerful force when it comes to preparing for retirement. Plan designs like automatic enrollment and auto escalation take advantage of the power of inertia and can help put employees on a successful path to retirement. Also, online tools that prepopulate with data from healthcare and retirement plan providers, which remove some of the friction and barriers to good decision-making, can make it easier for employees to take action to improve their financial well-being.
INSIGHT: EDUCATE EMPLOYEES ABOUT INVESTMENT OPTIONS AND ENCOURAGE FAMILY CONVERSATIONS
The lack of preparedness for retirement is certainly not a gender-specific issue. According to MassMutual’s study, nearly three-fourths of both genders (74 percent of women and 71 percent of men) aren’t saving enough for retirement.
When it comes to men specifically, Fidelity’s finding that 41 percent of men didn’t have their investments allocated appropriately for their age group actually represents a positive trend. The figure has decreased 13 percentage points over the last five years. This improvement can most likely be largely attributed to the increased use of target-date funds, which are professionally managed accounts that are tailored to the retirement age of users.
To continue building on this positive trend, employers should educate employees on the importance of
developing an appropriate asset allocation strategy, as well as on the tools and investment options that are available for implementing this strategy. This education, along with finding ways to reduce the friction and make it easier for employees to save for retirement, should be an important part of companies’ financial well-being programs. Also, plan sponsors should encourage employees to realize that a family’s long-term financial planning shouldn’t be the responsibility of just one family member. Rather, all of the adults in the family should be involved in the big picture discussions about saving for retirement, budgeting and insurance.
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WHAT PLAN SPONSORS NEED TO KNOW ABOUT DOL ENFORCEMENT AND RED FLAGS
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Employee Benefit Plan
Attracting and retaining millennials, the largest segment of today’s workforce, is a priority for companies in one of the tightest labor markets in history. One way to do this is to re-evaluate the company’s benefits—particularly the retirement plan—so that they better align with millennials’ needs and priorities.
Like all generations, millennials—defined as those born between 1981 and 1996, according to the Pew Research Center—may have different career and financial goals than previous generations. While some of these generational differences may be exaggerated, it’s still important for employers to understand the priorities of their younger workers and offer benefits that these employees will value and appreciate.
FACTS AND MYTHS ABOUT MILLENNIAL WORKERS
Millennials have a reputation for being frequent job-hoppers, but it’s important to understand the data that give rise to this assumption. Gallup data show that 21% of millennials reported changing jobs in the last year—more than three times higher than older generations. Gallup also found that only 29% of millennials report being emotionally and behaviorally connected to their jobs, compared to 32% for Generation X and 33% for baby boomers.
These differences, however, may have more to do with the stage
workers are at in their careers than generation gaps in attitudes about work. The Pew Research Center found that millennials aren’t changing jobs at a faster rate than Generation X did at similar ages. The U.S. Bureau of Labor Statistics found similar results when comparing millennials with baby boomers, according to a 2018 report by the National Institute on Retirement Security (NIRS).
Regardless of the reasons for millennials’ job-changing patterns, there is no denying that it has an impact on millennials’ relatively low participation rates in retirement plans. The NIRS study showed that in 2014, the most recent year for which data is available, 66 percent of millennials worked at a company that provided a retirement plan, roughly equal to the percentages for Gen X and baby boomers. But only 34 percent of millennials participated in the retirement plan, compared with about 50 percent for older generations.
NIRS concludes that this discrepancy is mostly attributable to the fact that millennials are less likely to be eligible to participate in their company’s retirement plan. There are two main causes of this: 1) millennials are nearly twice as likely to be employed as part-time workers than older generations and 2) more than half of millennials have tenures of less than one year at their current company.
TAILORING YOUR 401(K) PLAN
Given these factors, employers who want to increase retirement plan participation rates among their millennial employees may want to examine the eligibility guidelines for their retirement plans. Other ways that employers can tailor a retirement plan to better align with the needs and priorities of millennial workers include:
• Mobile access to plan information: Millennials expect to receive information via interactive digital formats, so plan sponsors should incorporate this into how they provide information about—and access to—the retirement plan. Formats that plan sponsors may want to incorporate into their communications strategies include videos or infographics (as opposed to static, text-heavy PDFs), apps that make selecting investment options simple and online calculators that facilitate financial planning.
• Socially responsible investment options: One of the biggest areas of growth in the asset management industry is investments that focus on more than just financial returns, often referred to as socially responsible investing or Environmental, Social and Governance (ESG) investing. Millennials are driving much of this growth, so they may want to see these types of strategies as options
Employee Benefit Plan
Written by: Beth Garner and Joanne Szupka
Employee Benefit Plan Employee Benefit Plan
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in their retirement plans. Plan sponsors may consider adding these strategies to their 401(k) lineups or at least provide ESG ratings for the plan’s current investment options.
• Portability of benefits: When they change jobs, workers often cash out of their 401(k) plans. Making it easier for new employees to roll 401(k) assets from their previous employer into the new plan can help employees keep their assets growing and may encourage further savings.
• Student loan assistance: A survey by Bankrate.com shows that 29 percent of millennials are delaying saving for retirement
because of student debt. Plans sponsors can now help employees address their debt problems through the company’s retirement plan. The Internal Revenue Service recently issued a private letter ruling allowing one company to make matching contributions to participants’ 401(k) accounts when they pay down a certain percentage of student loan debt.
INSIGHT: UNDERSTAND MILLENNIAL DRIVERS BEFORE MAKING CHANGES
Organizations that are trying to engage their millennial workforce may want to evaluate their employee benefit offering, including their retirement benefit plan programs.
Benefit plans that address millennial concerns, interests and communication styles may be an effective way for companies to boost participation and engagement—and, in turn, improve retention.
Before overhauling the plan design, employers should do their homework to understand millennials’ priorities for retirement and other benefits and the reasons why millennials do or don’t participate in retirement plans. Once these drivers are understood, organizations can design plans aimed at achieving company goals while addressing the specific needs and interests of its workforce.
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FIRST-TIME PLAN AUDITS: WHAT TO EXPECTGrowing beyond 100 employees is an important landmark in a company’s history. While companies may view crossing this threshold as cause for celebration, the Department of Labor (DOL) may view it as a trigger for increased scrutiny of your employee-benefit plan. Certain employee benefit plans with 100 or more eligible participants may be required to engage an independent auditor (referred to as an Independent Qualified Public Accountant or IQPA) to audit the plan’s financial records.
Going through an audit for the first time can be a daunting task. Your auditor will ask for information you might expect, such as employee census and payroll data, plan documents, plan financial statements, contribution deposit history, and more. What you might not expect is getting requests for that information from previous years, or for a sample of participants over a certain timeframe to check for past errors. It’s a lot of data to supply, so keeping good records and planning ahead is paramount. A solid auditor with benefit plan audit experience can be extremely helpful in guiding plan sponsors through the first-time process.
UNDERSTANDING THE 100-PARTICIPANT THRESHOLD
Generally, when a plan has 100 or more eligible participants, it’s considered a “large plan” for reporting purposes, which requires an annual examination from an IQPA. The audit must be included in the plan’s annual report – filed with the DOL on a Form 5500 – and is due within seven months of the end of the plan year. It may be extended to nine and one half months of the end of the plan year.While 100 participants is the general
threshold for large-plan status, the DOL does provide some wiggle room. Plans that have between 80 and 120 eligible participants at the beginning of the plan year are allowed to file their Form 5500 in the same way they did the year prior. For example, a plan that had 70 participants on January 1, 2017 and filed as a small plan for 2017, and then grew to 115 participants by January 1, 2018, may elect to file as a small plan again—and avoid an audit—for the 2018 plan year. An audit would not be triggered in this example until the eligible participants exceeded 120 as of the first day of the Plan year.
It’s important to understand how to count plan participants by beginning with the definition of eligible participant as outlined in your plan document. The qualification may include age or service requirements, so it’s important to keep good records for those criteria. For 401(k) plans, the number of eligible active employees are counted even if they have never elected to participate and don’t have an account. Former employees who have left their 401(k) funds in the plan are also included in the participant count. The participant count for welfare benefits are less inclusive than for 401(k) plans because an employee must elect and make any required payments for coverage in order to be considered a participant.
WHAT TO EXPECTTo ensure a smooth process, plan sponsors should anticipate the auditor’s requests and gather certain plan records in advance of the auditor’s visit. Often, the plan’s record keeper or third-party administrator can assist or provide the necessary information, including:
• Plan documents and amendments
(including the Internal Revenue Service’s opinion letter on the plan document)
• Summary plan description and any modifications
• Agreements with service providers, especially record keeper and plan custodian
• Plan committee minutes
• Documentation of the plan’s internal control processes
• Employee census (list of all paid employees for the year including key demographic data)
• Payroll records
• A listing of contributions remitted to the trust, by pay period
• Trust and recordkeeping reports
• Independent appraisal for company stock or other non-traditional investments held by the 401(k)
• Distributions, loans or other plan activity
• Proof of insurance coverage for employee crime (fidelity bond)
• Prior Form 5500 filings
Remember, your auditor works outside your company and needs to get a good understanding of how your plan works. It’s important to offer full disclosure of any issues related to the plan, such as operational errors or contributions remitted late to the plan. Just like the plan sponsor has a fiduciary duty, the
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auditor’s job is to protect the interests of the participants by ensuring the plan is operated in accordance with the plan document and the laws that govern qualified plans. During the process the auditor might identify issues that put the plan’s qualified and tax exempt status in jeopardy if not fixed. While beyond the scope of an independent audit, a knowledgeable auditor can help the plan sponsor understand how to avoid the same mistake in the future and formulate a plan of action including an introduction to a tax specialist that can help you utilize a variety of IRS and DOL programs to fix any issues the plan might have.
Your auditor may prepare a draft of the report or review a draft prepared by plan management. It should include financial statements and related footnote disclosures, as well as
supplemental information as required by the DOL. After you approve the report, the auditor will give you a formal copy, which will be attached to the Form 5500 by the person responsible for E-filing the annual report.
PLAN AHEAD AND FIND THERIGHT AUDITOR
The DOL can reject your 5500 if it finds errors in the audit report, which may result in fines or other severe penalties. Three years ago, the DOL evaluated the quality of audit work being performed on employee benefit plans by independent qualified public accountants and found that nearly 40 percent of audits had major errors that would cause the department to reject a company’s Form 5500.As a plan fiduciary, it’s critical to work with a competent, experienced
independent auditor—especially if you’re going through an audit for the first time. Although the audit process may seem daunting, it can go smoothly with a little bit of planning and organization. Even if your plan hasn’t crossed the 100-participant threshold yet, it’s never too early to start strengthening your record-keeping systems and thinking about what information you may need to provide down the road. In the end, the audit helps strengthen benefit plan policies and processes.
ALICIA JUHL, CPA423. 713.5755
ADAM OSBORNE, CPA , CGMA423. 702. 8395
ZACH HUTCHERSON, CPA, MBA423. 702. 8150
BRITTANY CARMAN, CPA 423.541.2024
CALL THE HHM EMPLOYEE BENEFIT PLAN TEAM
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