Client Service February 28, 2017

Advisers and Sponsors Together Can Boost Hispanic Workers’ Retirement Savings

Hispanic workers born outside of the United States have the lowest retirement plan participation rate of all other workers, but several strategies can help reverse the trend. 
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While among one of the fastest growing population demographics in the country, studies have shown Hispanic workers face major challenges in allocating enough towards retirement savings.

In a 2016 study conducted by The Urban Institute, it was reported that immigrant Hispanic retirees age 65 and older held a far worse chance of being satisfied with retirement than non-Hispanic whites. Instead, Hispanic retirees were about twice as likely to be “less gratified during their retirement.” Furthermore, a Principal study found Hispanic workers born outside of the United States have the lowest retirement plan participation rate of all other workers, often due to language barriers and cultural influences.

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Why? Well, there’s a list of factors. For starters, Carlos Rojas, director of Consumer and Cultural Engagement at Principal, believes the problem can be attributed to little knowledge in the concept of saving for retirement.  “It’s not a lack of discipline, but just an understanding of the system,” he says.

While Hispanic workers may have trouble in allotting enough for retirement, Rojas explains that the issue does not lie with saving in itself. Instead, it runs on several other factors impacting workers, including caring for family back in their native country; a distrust of institutions and employers; and even plans to retire in their homeland.

“There’s definitely an absence of financial literacy but not in financial discipline,” says Rojas. “Their ability to send money back home; that actually highlights the fact that they have the ability to purposely save for a reason.”

Regarding a sense of mistrust towards employers, Rojas found that the concern can be addressed by highlighting the generosity of matching contributions. Many employers, according to Rojas, “have noticed how workers would fail to realize the amount paid into the plan by the sponsor as well.”

“When we started paying attention, observing their behavior, they didn’t [realize],” he says. “They really missed it, and when we delve deep into it, they really had this distrust that comes from a very rooted concept where they would say, ‘why would my employer even care to do this for me?’”

NEXT: Focusing on cultural issues

 

To combat these underlying issues, Rojas suggests plan sponsors should focus on the cultural needs of Hispanic workers, instead of concentrating on fixing the language barriers involved. Whereas bilingual representatives can play a vital role in educating workers on participation, employers need to take time to focus on the “right levels of commitment towards a 401(k) education,” says Rojas. “We need to be bicultural, not just bilingual.”

In order to do so, Principal’s Hispanic Market Program utilizes several solutions targeting culturally engaged participants, focused on providing better context in written educational materials rather than the word-for-word translation.

Sean Jordan, vice president of Participant Development at MassMutual, believes engagement—not literacy—should be the driving force in bringing Hispanic workers into retirement savings programs.

“We want to understand, first, the sort of behavior they need to adopt. This is half the battle. They need to understand what they need to adopt to get to a better outcome,” he says.  

Jordan notes that while language barriers are an issue, the real conflict often lies in the cultural difference between a representative and worker. In order to break down these barriers, at MassMutual, representatives who assist Hispanic employees are most of the time, Hispanic themselves. To Jordan, this allows workers to feel a better sense of comfortability and easiness.

“It helps, culturally, not just to have the language skills, but also to have the member of the culture saying, ‘hey folks, let me explain this to you in a different way, or let me represent it in a different way, than you might otherwise get.’ It’s part language, part cultural,” he says.

Currently, between 20% to 25% of MassMutual’s representatives are bilingual in English and Spanish. 

Furthermore, MassMutual conducts both English and Spanish educational sessions during the same meetings, where one instructor will teach material and answer questions in both languages. The company also employs in-house translators during calls between workers and representatives, instead of utilizing third-party resources.

While both Rojas and Jordan believe the services provided are crucial, it’s the lasting effect in saving that holds the highest importance.

“You want to really take advantage of the fact that someone’s motivated in that moment, and help them do it and make it easy and intuitive,” says Jordan. 

 

Compliance February 27, 2017

IRS Agents Told What to Look for When Examining Hardships

Not only will IRS agents look for proof that the hardship was for an immediate and heavy financial need, they will be looking to see if plan sponsors followed notification requirements and third-parties followed reporting requirements.
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A memorandum issued to Internal Revenue Service (IRS) Employee Plans (EP) Examinations employees sets forth standards for examining whether a section 401(k) plan hardship distribution is “deemed to be on account of an immediate and heavy financial need” under safe-harbor standards set out in the Income Tax Regulations.

The memorandum notes that, “A distribution is deemed to be on account of an immediate and heavy financial need” under § 1.401(k)-1(d)(3)(iii)(B) of the Income Tax Regulations if it is for one or more of the following:

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  • Expenses for medical care deductible under section 213(d) for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Costs directly related to the purchase of a principal residence;
  • Payment of tuition, related educational fees, room and board expenses for up to the next 12 months of post-secondary education for the employee or the employee’s spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan;
  • Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure of the mortgage on that residence;
  • Payments for burial or funeral expenses for the employee’s deceased parents, spouse, children or dependents (as defined in section 152) or primary beneficiary under the plan; or
  • Expenses for the repair of damages to the employee’s principal residence that would qualify for the casualty deduction under section 165.

NEXT: What the examiner will do

The memorandum states that the examiner should determine whether the employer or third-party administrator, prior to making a distribution, obtains source documents (such as estimates, contracts, bills and statements from third parties), or a summary (in paper, electronic format, or telephone records) of the information contained in source documents. If a summary is used, the agent should determine whether the employer or third-party administrator provided the employee with notification required prior to making a hardship distribution. (Notifications are included as an attachment to the memorandum.) 

The examiner should then review the source documents to determine if they substantiate the hardship distribution, or examine the summary of information on source documents to determine whether it contains the relevant items listed on the notification to employees.

If the notification provided to employees in or the information reviewed are incomplete or inconsistent on its face, the examiner should ask for source documents from the employer or third-party administrator to substantiate that a hardship distribution is deemed to be on account of an immediate and heavy financial need.

The IRS agents will also look to see if employees have received more than two hardship distributions in a plan year. In the absence of an adequate explanation for the multiple distributions and with managerial approval, they may ask for source documents from the employer or third-party administrator to substantiate the distributions. The IRS says examples of an adequate explanation include follow-up medical or funeral expenses or tuition on a quarterly school calendar.

The agency also tells examiners “If a third-party administrator obtains a summary of information contained in source documents, determine whether the third-party administrator provides a report or other access to data to the employer, at least annually, describing the hardship distributions made during the plan year.”

If all applicable requirements are satisfied, the plan should be treated as satisfying the substantiation requirement for making hardship distributions deemed to be on account of an immediate and heavy financial need.

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