Overcoming Benefit Reductions

A Center for Local Government Excellence report about reductions in state pension benefits should motivate employers to help employees participate more fully in their 403(b) and deferred compensation 457(b) plans so they can comfortably retire at normal retirement ages.

According to the April 2014 study, 24 states have changed pension benefit calculations, resulting in reduced benefits for participants. The reduction in benefits in these states averages 6.44%, which creates an additional gap in employee savings amounts needed to encourage timely retirement. Other states are considering similar reductions. The study states: “Given the benefits reductions, employees will need to take advantage of supplemental savings vehicles… As a result, many plan administrators are providing enhanced financial education and promoting supplemental savings vehicles.”

Finally, the study says: “Of course, the impact on each individual participant will need to be calculated to arrive at the gap between retirement income expected before reform and retirement income expected after reform.”

Employers have an incentive to have employees retire at normal retirement age versus continuing to work: substantial savings in salary and benefit costs. According to one public school district’s salary schedule, a long-term teacher at the top of the schedule will earn a base salary of $71,500, while a newly-hired teacher will earn $32,000. The difference of $39,500, plus some 15% to 20% or $5,925 in reduced fringe benefit and payroll tax savings, will be a real difference in dollars saved for every teacher who retires at normal retirement age. That amounts to nearly $450,000 annually for only 10 teachers in a district.

403(b) regulations require that “meaningful opportunity” be provided for employees to enroll in and make changes to their 403(b) plan. A senior Internal Revenue Service (IRS) staff member in the Audit Division defines “meaningful opportunity” as “year round activity” that includes employee education and workshops. The IRS is also checking employee participation rates in 403(b) plans. If those rates are found to be inadequate, the IRS is asking employers to share their employee education plans. Reports from IRS Field Examiners reveal that a participation rate of less than 20% may trigger an audit.

General financial education, as well as education about the retirement plan, can help employees get on track to a more comfortable retirement. Employers must carefully consider the elements of the employee financial education programs they offer.

One consideration for employers in developing a participant education program is whether the employer should provide access to financial advisers to provide personal consultations to their employees.

Case Studies

One financial adviser began calling on districts that adopted a financial literacy program after the IRS focus on “meaningful opportunity” was reported in late 2013. Districts would contract the adviser for mandatory generic financial literacy workshops, followed with voluntary “study halls” where employees could learn more. In addition to those meetings, the adviser and his staff would distribute a list of all the approved product providers, with contact information, so each employee could select his or her own provider and financial adviser.

In one school district, the program was launched in 2013, and after only four months participation in the 403(b) plan had doubled. Participation increased for all the approved product providers, which the district credits to improved awareness of the program and how it works.

At another plan sponsor where the financial adviser had already implemented financial literacy workshops at all of the district’s work sites before the 2013 audit reports, the district reports a participation increase of more than 500%. The presentations to employees successfully improved retention and recruitment by discussing how the district’s employee benefits work for them.

For one school district, the financial literacy/study hall program began in January, 2014, but participation has already more than doubled. The financial adviser and his staff covered all worksites for this district, including classified staff—an often overlooked group. The district is benchmarking the success of the program by focusing on a comparison of participation rates before and after the launch of the program. Its success, according to the financial adviser, is because “the districts have gotten solidly behind the program by helping employees understand how vital [the plan offering] is to them.”

When plan sponsors contract them for individual meetings, advisers spend considerable time with employees and plan participants doing all the important calculations, showing them how to “fill the gap” In their savings. This means a thorough analysis of expected retirement income (including expected Social Security and/or state retirement system benefits) and other resources for retirement, versus the actual costs an individual will face in retirement. The adviser then assists clients in calculating the amount that must be saved in voluntary savings plans to fill that gap. Advisers also help their clients construct investment portfolios that are appropriate for their individual ages and risk tolerances.

Ellie Lowder is a consultant for PlanMember Securities Corp. She is based in Tucson, Arizona.