Workplace demographics should drive a plan鈥檚 design and its educational outreach
Plan sponsors typically spend significant time and effort trying to boost participation and contribution rates among their employees. They employ a range of outreach and education efforts in an attempt to move their employees closer to retirement readiness. It can be an uphill struggle to overcome employee inertia, lack of financial and investment literacy, and fear of the unknown.
Plan sponsors may be overlooking one key factor that can help increase employee participation rates and drive increased participant contribution percentages鈥攖he employer鈥檚 workforce demographics, particularly age and salary levels. Understanding plan demographics can help plan sponsors to determine which plan design features will appeal to specific employee groups. A deep understanding of workforce demographics will also empower plan sponsors to tailor education and communication strategies so that they have maximum impact in plan health metrics.
For example, matching formulas, automatic enrollment, loans, hardship withdrawals, and automatic escalation can all help improve participation among lower-paid and younger workers. Workforce demographics will also impact a plan鈥檚 investment lineup. Too few options can deter more sophisticated investors from participating, while too many can intimidate novice investors. What follows is an overview of how plan sponsors can tailor specific plan design elements based on employee demographics.
Crafting design elements
If a workforce is composed largely of lower-skilled and lower-paid employees who do not prioritize retirement saving, the sponsor could drive participation by modifying the formula for its matching contributions. For example, introducing a match of 100% on the first 3% of pay in place of a matching contribution of 50% on the first 6% of pay could stimulate the interest of lower-paid employees and encourage them to participate in the plan.
Other design elements that can be used to meet the needs of other employee groups include:
Automatic enrollment: Plan participation rates are closely aligned with income levels. Higher-earning employees have higher plan participation rates while lower-earning employees have lower rates. Plan sponsors with high numbers of lower-paid employees could consider introducing an automatic enrollment feature to get more lower-earning workers into the plan.
Adding a Roth 401(k) feature: Unlike traditional defined contribution retirement plans that permit tax-deferred contributions, contributions to a Roth 401(k) are taxable. However, Roth participants can withdraw their plan assets tax-free upon retirement. Younger employees who tend to be in a lower tax bracket may take advantage of this feature if they are educated on the benefits of this feature. The Roth feature also tends to be attractive to higher-income employees who earn too much to qualify for a Roth IRA.
Plan eligibility: Determining when employees become eligible to participate in the retirement plan is an important decision in plan design. Typically, plan sponsors want to enroll employees in the plan as soon as possible. However, if the plan sponsor finds that certain employee demographics tend to experience higher than normal attrition rates, then it may be prudent to delay plan eligibility for a certain period. This design change can help keep plan administrative costs in line. However, there are limits on the criteria an employer may set for plan eligibility. These should be understood and discussed with legal counsel before taking this action.
Investment choices: One of the more challenging decisions facing plan sponsors centers on how many and what types of investment options should be offered to plan participants. Again, the decision should consider workforce demographics. Certain segments of the employee population who are inexperienced-making investment decisions may be intimidated by too many options. The more sophisticated employees who seek maximum control and choice when it comes to investing their retirement assets may be unhappy if their plan offers a limited number of choices. The experience and the insights of a professional investment advisor or consultant can be extremely helpful to plan sponsors who may struggle with structuring a menu of investment options that aligns with the education, salary level, and age of their employee base.
Loans and hardship withdrawals: The ability to access plan contributions in case of an emergency is often the deciding factor in signing on to the plan for certain employee segments, particularly lower-paid employees.1 Understanding the importance of this plan design feature should encourage plan sponsors to implement and communicate their plans鈥 loan and withdrawal features.
Education and communication
Plan sponsors should be aware that workforce demographics impact other areas beyond plan design. The age, gender, salary level, and education level of a workplace鈥檚 employees will influence participant outreach and communication. For example, sponsors need to be aware that their Gen Z employees are the first true digital natives. They have grown up in a world connected to the Internet by mobile devices 24/7, so plan communications to this employee group will be more successful if they speak to this demographic in the manner they prefer. Short videos; bright, colorful graphics; short, bulleted online content; and interactive quizzes will catch and retain their attention.
Millennials are also technologically savvy and want content that鈥檚 delivered to their mobile devices. Older, highly educated employees want details and specifics and may respond better to a combination of traditional and digital media. However, most demographics respond well to
in-person seminars/meetings that explain how the plan works, its tax benefits, its investment menu, and what steps they need to take to get to a financially secure retirement.
Plan demographics are not static
It鈥檚 important that plan sponsors understand that workplace demographics are dynamic and change over time. As a new generation of workers enter the workplace and the company鈥檚 goals evolve, plan sponsors have to respond to these changes and make adjustments to their plan design to reflect this evolution.
Work with your 蜜豆视频 advisor
Encouraging plan participants to become more active and take the steps that will move them closer to retirement security is an ongoing, challenging process. For input and assistance with your participant messaging and engagement efforts, consult your 蜜豆视频 advisor.
Why plan sponsors must monitor the target-date funds their plans offer
Target-date funds have become increasingly popular in retirement plans. With almost $3.1 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $1.4 trillion in hybrid funds, which included Target-Date Funds (TDFs) as of 2024, according to data from the Investment Company Institute.2
It鈥檚 easy to account for the popularity of TDFs. They are structured to simplify investing for plan participants by putting the decision to allocate assets on autopilot. TDFs simply require participants to invest in the fund with a target date that is closest to their projected retirement year. The fund鈥檚 asset allocation will be adjusted gradually so that it becomes more conservative as the participant鈥檚 retirement date draws near.
Investing in a TDF relieves participants from the pressure of deciding how to allocate their assets among equities, fixed-income securities, and other investments. Moreover, with a TDF, participants do not have to determine the opportune time to rebalance their assets. Once participants decide to invest in a TDF, they can forget about it and move on. However, plan sponsors cannot take a similar approach to TDFs in their investment lineups. Just like any other designated investment alternative in the plan鈥檚 investment lineup, the plan sponsor has a fiduciary duty under ERISA to monitor the investments that they choose to make available to participants. The bottom line is that plan sponsors must devise a prudent process for selecting and monitoring TDFs that their plans may offer.
What follows are several issues that plan sponsors need to cover in reviewing their plan鈥檚 TDFs.3
Reexamine the TDF鈥檚 glide path
TDFs automatically rebalance their asset allocations and generally become more conservative as the target date gets closer. The change in asset allocation is referred to as the glide path. It鈥檚 important that plan sponsors understand a fund鈥檚 glide path, which can be either 鈥渢o retirement鈥 or 鈥渢hrough retirement.鈥
With 鈥渢o retirement鈥 TDFs, the equity portion of the fund鈥檚 asset allocation is reduced to its most conservative point at the target retirement date. 鈥淭hrough retirement鈥 funds reach their most conservative asset allocation some years after the retirement target age.
Glide paths of funds with the same target dates may vary from fund to fund. For example, funds may differ in the percentage originally allocated to equity. They may also differ in when they start reducing their equity exposure and the rate at which it鈥檚 reduced. Another difference is that the asset allocation may follow an established glide path or be actively managed based on market conditions.
Since these differences can have a significant impact on the performance of a fund and on the risk that investors are exposed to, fiduciaries need to focus on understanding the glide path of the TDFs their plan offers and ensuring that it is appropriate for their plan鈥檚 participants.
In a fact sheet issued for fiduciaries, the Department of Labor (DOL) noted that funds that use a 鈥渢hrough retirement鈥 glide path are generally for employees who intend to make periodic withdrawals from their 401(k) savings in retirement. Funds that reach their most conservative allocation at the target date assume that employees will opt to cash out of the plan as soon as they retire. This strongly suggests that plan sponsors should review a TDF鈥檚 glide path to make certain that it is appropriate given the plan鈥檚 experience with participant withdrawals.
Consider fees and expenses
In cases where a TDF invests in other funds, the TDF鈥檚 fees and expenses are generally based on the costs of the other funds. Moreover, there may be overlay fees, which are used to pay the cost of establishing and managing the TDF. It鈥檚 important that plan sponsors familiarize themselves with all the fees and expenses that the TDFs in their plans incur since these can impact the amount of savings that participants who invest in the funds can accumulate.
If, for example, the expense ratios of a TDF鈥檚 individual component funds are substantially lower than for the overall fund, then the fiduciaries should seek answers that can explain the difference. If the fiduciaries conclude that the added expenses were reasonable, then they should document the reasoning behind their conclusion.
Other issues to consider
Plan sponsors should review several other issues when examining their plans鈥 TDFs. These include:
- The fund鈥檚 performance relative to appropriate benchmarks.
- Whether the funds are adequately diversified.
- Any recent changes in the TDF鈥檚 investment strategy or management.
- The compatibility of the plan鈥檚 TDF offerings with participant demographics and behaviors.
- Whether participants have been given general educational information about TDFs鈥攖heir structure, how they work, the fact that investments in a TDF are not guaranteed鈥攁s well as the specific options their plan offers. Have participants received required notices if the TDF serves as the plan鈥檚 qualified default investment alternative?
Plan sponsors should be aware that the Government Accountability Office (GAO) has asked the DOL to update its guidance on TDFs.4 It noted that the DOL last updated its guidance in 2010 for participants and in 2013 for plan sponsors to help them select TDFs. The GAO specifically cited variations in the performance and risk exposure of TDFs as a cause for concern. The GAO wrote that 鈥渧ariations in TDF design affects their performance and risk. Asset managers design TDFs鈥 investment mixes to shift from higher risk assets (e.g., stocks) to lower risk assets (e.g., fixed income) over time, based on participants鈥 targeted retirement dates.鈥 The GAO noted that analysis of TDF data found that these mixes varied more in investment performance and risk as they approach the specified retirement date. The DOL has disagreed with the GAO鈥檚 recommendations. Nonetheless, it is an issue that may reappear in the near future, and plan sponsors should stay aware that things may change.
DOL allows fiduciaries to move missing participant balances to unclaimed property funds
Missing and unresponsive participants and beneficiaries have left some employers with numerous, oftentimes low-balance retirement plan accounts. These account balances can create additional burdens for plan fiduciaries, including increased expenses for required disclosures and recordkeeping. They can also be time-consuming to administer and can present a potential liability exposure. Employers want to know the best way to handle these accounts. Many are confused as to the available options and want to understand if there are any compliance risks involved in exercising some of these options.
A recent field assistance bulletin from the federal Department of Labor鈥檚 (DOL) Employee Benefits Security Administration provides a measure of relief to plan sponsors who struggle with the appropriate response to this issue. Before delving into the specifics of this policy change, it may be helpful to look into the history of the DOL鈥檚 interest in the problem of missing participants and beneficiaries and its focus on mitigating this problem.
The backstory
The DOL has taken various measures over the past two decades to address the concerns and problems that arise with the issue of missing participants.
In 2004, for example, the DOL provided safe harbor guidance5 on the proper procedures for locating missing participants in terminated defined contribution plans but not in ongoing plans. Nearly a decade later, an advisory council to the DOL published a report6 that outlined a series of best practices that should be adopted by ongoing plans and made a number of suggestions for improving the existing regulatory framework. In 2021, the DOL again issued a report7 that outlined best practices that pension plans could use in dealing with the issue of missing plan participants.
Additionally, in keeping with the provisions of the SECURE 2.0 Act,8 the DOL developed the Retirement Savings Lost and Found, a database website that allows participants and beneficiaries of covered retirement plans to search for the contact information of their plan administrator to make a claim for benefits. The database can help individuals locate their plan administrator as well as keep plan contact information updated.
The current situation
As things stand now, ERISA requires plan fiduciaries to exercise prudent and loyal judgment with respect to handling retirement benefit payments if a participant or beneficiary is missing. The DOL has identified Individual Retirement Accounts (IRAs) as the preferred destination for a distribution from a retirement account or benefit owed to a missing participant or beneficiary from a terminated defined contribution plan. However, the DOL has also recognized that an IRA may not always be available for a distribution and has provided fiduciaries of terminating defined contribution plans with the option of transferring distributions to a state unclaimed property fund or to an interest-bearing, federally insured bank account under certain circumstances.
The DOL鈥檚 new policy change
A new policy from the DOL9 says it will not take action under ERISA Section 404 (a) against fiduciaries who transfer entire benefit payments owed to missing participants of $1,000 or less to state unclaimed property funds, if specific requirements are met. To qualify for the relief, fiduciaries must meet certain conditions, including:
- The transfer to a state unclaimed property fund is a prudent location for the benefit payments;
- The plan fiduciary has put in place a prudent program to find missing participants consistent with the DOL鈥檚 Best Practices for Pension Plans and has nevertheless been unable to find the participant or beneficiary;
- The plan fiduciary selects the state unclaimed property fund offered by the state of the last known address of the participant or beneficiary;
- The plan鈥檚 summary plan description explains that retirement benefit payments of missing participants or beneficiaries may be transferred to an eligible state fund and identifies a plan contact for further information relating to the eligible state funds to which the benefit payments are transferred; and
- The state unclaimed property fund qualifies as an 鈥渆ligible state fund鈥 as defined in the guidance.
Plan sponsors should be aware that the memorandum does not preclude the DOL from pursuing violations under ERISA Sections 107, 209, and 404 for a failure to maintain records.
Finally, it should be noted that the DOL says it intends to consider more formal guidance regarding the voluntary transfer of plan benefit payments from ongoing pension benefit plans to state unclaimed property funds.