A guide for advisors, accountants, benefit brokers, payroll providers and other practitioners to help guide your employer clients with employees in the affected states.
With secure choice plans being offered in more and more states, it’s important to understand enough details to advise clients properly on their best options. Retirement plan decisions can have far-reaching consequences for both employer and employee.
State-mandated plans are basically Roth IRAs, which have different rules and regulations than 401(k)s. Plan designs and mandates vary from state to state.
Before your client takes the retirement plan plunge, ask these questions.
1. Are there a lot of part-time employees? Is employee turnover high?
Many employers, such as those in retail, food service, agriculture and temporary labor, experience high rates of employee turnover, especially within the first 3-6 months of employment. Secure Choice essentially requires all W2 employees (age 18 or over) to be added to the employer’s roster within 30-60 days of hire. This can be quite an administrative burden for some employers. Plus, there is a risk of fines for non-compliance.
With a 401(k) plan, an employer can limit eligibility to employees who work 1,000 or more hours in a year and/or have one year of tenure. With the recently passed SECURE Act, part-time employees are allowed to participate in a 401(k) after achieving 500 hours of service each year for three consecutive years. This gives dedicated employees the opportunity to participate, without overwhelming the employer with paperwork.
2. Would automatic enrollment cause confusion for employees?
As effective as automatic enrollment has been to help nudge better individual savings behaviors, it has had the unintended consequence of creating employee HR communications problems for employers. Employees may not see or understand communications and may realize what is happening only after they notice a change in their take-home pay. They will typically inquire with their employer’s HR/payroll function about what is happening. Even then, the employee must then contact the state (or Ascensus, the private company that manages many of the state plans) to stop or change the deductions, risking more confusion and delays.
While some 401(k) plans have an auto-enrollment feature, it’s not required.
3. Will a lot of highly paid employees or employees that already have personal IRAs participate?
Secure Choice programs are basically Roth IRAs subject to IRA contribution limits that fall on the individual employee to monitor. This is made especially more challenging for employees automatically enrolled (as mentioned in #2) who may not be paying attention. Roth IRAs are also subject to annual income limits (currently $124,000-$139,000 for single filers and $196,000-$206,000 for joint filers) as to how much can be contributed.
This causes two problems. First, highly compensated employees will not be able to contribute a very high percentage of their income, especially if they already have a private IRA. Second, employees who aren’t savvy or disciplined may find themselves in a sticky situation if they accidentally over-contribute to the secure choice plan.
4. Does the employer have employees in multiple states, especially in states with mandatory Secure Choice programs?
If so, this can be an administrative nightmare and can create an unfair balance of benefits in employees varying by their state of employment. It would likely be much easier to have a 401(k) plan for ease of administration and consistency with employee benefits.
5. Is the employer sensitive about sharing private data?
Employee data such as social security numbers, e-mails, mailing addresses, payroll details and other personal information as well as the employer’s tax ID number and bank information must be shared with the program administrator, typically Ascensus. By all accounts, Ascensus has the requisite cyber security bonafides, but with such a large database of information, they are certain to be a popular target for thieves.
Additionally, Ascensus may use this personal information to disseminate marketing and sales materials for their other products.
6. Is the employer technology-challenged/overwhelmed?
The employer’s responsibilities under secure choice require them to regularly add/update employee records, remit payroll deductions and other tasks by logging into an online employer portal and coordinating with their payroll vendor. No automated payroll integration with Ascensus currently exists. This may be too much for some employers to manage. By contrast, 401(k) plan administration can be outsourced to full-service providers, and payroll integration is widely available.
7. Is a percentage payroll deduction problematic?
When an employee’s payroll deduction is percentage-based it often results in unintended fluctuations in take home pay. This is especially true for many hourly and variable compensation (such as commision-based) employees who would prefer a dollar-based election like $20 per week. The current secure choice programs allow only a percentage-based election. 401(k) plans will often offer more flexibility that allows payroll deductions to be dollar-based, percentage-based or both.
8. Can the employer afford to pay? Do they need to reduce tax burdens?
Even if they can afford a little bit there are many low-cost 401(k) options available and some are zero cost to the employer. And the federal start-up 401(k) plan tax credits and other state and federal tax benefits can make it even more palatable.
9. Is the employer comfortable being a fiduciary?
Secure choice programs place no liability on private employers, while the sponsor of a 401(k) plan always has some fiduciary responsibility (for the DOL’s expectations for plan fiduciaries see here). However, an employer can enlist co-fiduciary professional specialists to handle administration such as a 3(16) fiduciary and/or an investment professional (such as an advisor) to act as a 3(21) or 3(38) fiduciary to minimize their fiduciary obligations substantially.
When to Choose Secure Choice
While state-mandated plans are often a mediocre choice for employers, a few will find them to be the best fit. Especially well-suited are:
- Those who have a lot of non-English speaking employees – secure choice plans usually provide support in multiple languages.
- Those who have previously mishandled an ERISA plan – if they’re prohibited from sponsoring another plan, or are under regulatory scrutiny, a secure choice program (which is non-ERISA) would be less risky.
- Those who want no fiduciary liability whatsoever – secure choice programs are designed to carry 100% of the responsibility so the employer won’t have to.
How to Help Your Clients
The best help an advisor can provide to their employer clients is to weigh not only the obvious costs, but also those that are harder to identify. Even though there is no fee to participate in secure choice programs, employers incur costs for handling payroll and employee data. Currently, there are no payroll integrations in place.
Together with your client, consider how burdensome the following necessary tasks will be:
- Estimate 5 minutes per employee to add or remove them from the program
- Estimate 15-30 minutes to remit payroll deductions each pay period
- Distributing program materials to new hires
- Typos, errors, or questions can take days or weeks to resolve
Besides time and money, there is the potential for additional problems that should be taken into account:
- Risk of penalties for failing to remit contributions
- Problems with employee relationships, especially due to auto-enrollment
- Lost opportunity cost – an employer-sponsored plan can provide better terms. Remember that Roth IRAs cannot roll over into 401(k)s.
If your employer client already has an eligible retirement plan in place, they will still need to deal with a few items.
- Check to see if the employer has registered their exemption with the state, and offer to help if they haven’t.
- Employers can still use secure choice for employees that are ineligible for the existing plan. Although it is not mandatory, some may want to use it to attract new employees or improve relationships with temporary or part-time workers.
- Consider how the existing plan is working, and whether their team is happy with it. If the company is thinking about terminating its plan, or making a switch, they will need to keep the mandates in mind.
You may have clients who are already subject to the mandate. (Deadlines differ depending on the number of employees.) Ask them if they are participating. If they are, inquire how it is going, whether it’s causing difficulties, and whether another option would work better for them. It’s good for advisors to understand the feelings and concerns of actual local clients.
If they’re not participating, remind them of the deadlines and potential fines for non-compliance. They may need help joining secure choice immediately, or they may be looking for alternatives. Either way, an advisor can earn trust by helping resolve early what could become a serious problem if allowed to continue.
Circumstances Affect Options
With so many considerations associated with retirement planning, one cut-and-dried answer for everyone does not exist. It’s important to talk through these details carefully with clients to help them experience the best long-term consequences.
Consider 401GO a uniquely beneficial alternative to secure choice plans. Our automated 401(k) platform was built for small businesses, to help them avoid the headaches and costs that are often associated with retirement plans, while still reaping the benefits for their employees.