Data & Research November 17, 2014

Many Leave Employer Match Dollars on the Table

While participation in employer-provided 401(k) plans is strong among younger workers, data from Aon Hewitt shows many are not taking full advantage of matching 401(k) contributions.
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Simply put, many workers in their 20s and 30s are not saving enough of their own salary to receive the full company match for their retirement account contributions—potentially leaving thousands of dollars on the table and negatively impacting their long-term financial health.

Aon Hewitt’s analysis of more than 3.5 million employees eligible for defined contribution plans shows that, while the average participation rate of workers age 20 to 29 is a strong 73%, nearly four in 10 are saving at a level that is below the full company match threshold. The numbers improve somewhat moving up the age scale, with 31% of workers age 30 to 39 saving below the full match level.

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“Automatic enrollment has significantly improved participation in 401(k) plans for all employees over the past 10 years—but even more so for young workers,” notes Rob Austin, director of retirement research at Aon Hewitt. “However, once they’re in the plan, young workers seem to fall victim to inertia, with many continuing to save only at the default rate, or slightly above, and risking their long-term savings by not receive the full employer matching contributions that are offered.”

Leaving matching contributions on the table can cost young workers a significant amount of long-term savings, Aon Hewitt finds. The firm points to a theoretical 25-year-old worker making $30,000 annually, working for an employer that provides “a typical company match” of $1-for-$1, up to 6%. If this individual starts saving the full match amount of 6% immediately upon employment and continues to do so until reaching age 65, he could have more than $950,000 saved in the 401(k).

If the same worker waits until age 30 to begin saving 6%, he will have less than $715,000 saved at age 65. In other words, Aon Hewitt says five years of missed contributions will cost about $225,000 over a career. In order to make up the gap, an individual would need to increase savings by an additional 4% and start saving 10% of pay each year for the next 35 years. And even that might not be enough, as the figures assume a relatively generous 2% pay growth and a 7% annual return on invested assets.

“For young workers, it may seem insignificant to increase 401(k) contributions by a few percentage points, particularly at a point in their career and life when they’re likely earning a smaller salary, but the long-term effects can be remarkable,” Austin explains.

Austin suggests employers can help Millennials improve their financial outlook by encouraging them to save at least at the match threshold through targeted communications and online tools and resources.

“To take it a step further, they can also increase the default contributions so that workers are saving at the match threshold immediately upon enrollment into the plan,” he adds, “or by offering automatic contribution escalation, which increases a workers’ contribution rate over time. The bottom line is young workers need to save more, starting now.”

Aon Hewitt observes that many Millennials are using premixed target-date, target-risk, and diversified funds, and are therefore more heavily invested in equities than older workers. Workers age 20 to 29 have 83% of their balance allocated to equities, while those age 30 to 39 have 76% of their exposure to equities.

“Younger workers benefit from having a longer time horizon in which to invest and therefore can take more risk with their investments,” Austin concludes. “It is also not surprising to see so many Millennials using premixed funds since they are the default investment portfolio for the majority of plans.”

Compliance November 14, 2014

Form 5500 Precision Is All in the Details

Sometimes, Form 5500 errors can come down to something as simple as a single number. Here are some goofs for retirement plan advisers to keep an eye out for.
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“It’s a good idea to review,” Mike Webb, vice president of Cammack Retirement Group, tells PLANADVISER. The Form 5500 is complicated, and requires a full audit, which is also complicated. Webb recommends plans work with a trusted adviser to review the document before submitting it. Sometimes the plan sponsor picks up an irregularity; sometimes the adviser does. Webb says it is possible for either to find a problem area, and mistakes are common. “Fifty percent of the time, I find a mistake,” he says.

They sound simple, but they are common, Webb says. Especially common: a nonmatching number of participants from the previous year. Every year, the form asks two questions: the number of participants at the beginning of the year, and the number at the end of the year. The year-end number of participants should match the number at the beginning of the next year, Webb says, but a lot of times this number does not match up. This is often because the plan sponsor didn’t bother to check the previous year and reconcile, Webb notes. The Department of Labor (DOL) does actually investigate these numbers, he warns.

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Sometimes the plan sponsor has the wrong number of participants on the form. The reason? “A lot of people don’t get the employer contribution right away, but they can make their own contributions,” Webb explains. The form asks the plan sponsor to count everyone eligible to make contributions whether they do or not. Counting just the employees who are actually contributing to the plan is a very common mistake, he says, for 403(b) plans as well as 401(k) plans.

Finally, Webb says, every plan has its own plan number. “Most plan sponsors assign it as 001, 002, 003 if you have multiple plans,” he says. However, over time, plan sponsors may forget that a number has been used for a previous plan—and the same plan number cannot be used on different plans, which a sponsor that froze a plan could be tempted to do. The result would be that the DOL thinks the old plan is being resurrected, and the plan sponsor would have to explain why it is filing under this plan.

For plan sponsors with multiple plans that want to create new plans, Webb recommends making the number one digit higher than the last number used. “Always go up a number,” he says. “And sometimes the recordkeeper puts the wrong number on the form, so always check that number.”

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