PSNC 2022: Innovative Ideas for Plan Design

Creative plan design ideas can help retirement plan participants accumulate more savings and improve their overall financial wellness.

Sometimes a participant request or special circumstance requires plan sponsors to be creative with plan design.

This was the case for ASM Research, as described by Tammy Lassiter, the firm’s human resources administrator, during the 2022 PLANSPONSOR National Conference in Orlando. Lassiter explained that a Muslim employee presented ASM Research’s retirement plan committee with an issue: The Islamic faith does not allow for interest to be earned on funds, and thus those who follow Shariah cannot participate in most 401(k) plans.

The new employee was very concerned that she was automatically enrolled in the company’s 401(k). While it was an easy fix to change her deferral rate to 0%, there was no way for her to waive the employer discretionary contribution. With the help of its plan adviser, Sagemark Consulting, ASM Research made two plan changes: a religious exemption was added to the plan document to allow non-participation in the plan, and a Shariah-compliant fund was added to the fund lineup. This second change ensured that Muslim employees can participate in the plan and benefit from company contributions.

While these plan design changes were prompted by an employee’s specific issue, plan sponsors can also proactively adopt innovative ideas for plan design to help participants with accumulating retirement savings or overall financial wellness.

Led by Judy Faust Hartnett, managing editor of PLANSPONSOR magazine, Lassiter and Neal Stamper, corporate retirement director, financial wellness director, vice president and financial adviser at Graystone Consulting, a business of Morgan Stanley, discussed the following plan design options:

  • Directing participant contributions into an individual retirement account once they have reached the IRS limits placed on annual tax-advantaged plan deferrals;
  • Auto-enrolling employees into an emergency savings account;
  • Auto-enrolling participants making less than $40,000 a year into making Roth deferrals instead of a pre-tax deferrals;
  • Auto-enrolling employees into financial literacy education;
  • Implementing a waiting period after a retirement plan loan is paid back before a participant is allowed to take another loan; and
  • Adding a Roth conversion, or what is called a “backdoor Roth,” feature.

Stamper told conference attendees that they need to be cautious about directing participant contributions into an IRA once they have reached the IRS limits on elective deferrals because there are limits on individual income related to amounts that can be contributed to IRAs. “But, if participants want to contribute more, plan sponsors can suggest they put money into an IRA,” he said. “Those contributions might not be tax-deductible due to the income limits.” Stamper added that directing contributions in excess of the statutory limits to an IRA is a good idea if the plan sponsor doesn’t offer a nonqualified deferred compensation plan.

Regarding auto-enrollment into emergency savings accounts, Stamper said some recordkeepers allow for the plan sponsor’s payroll provider to send contributions to savings accounts that are not part of the retirement plan.

Stamper explained that the reason plan sponsors might want to auto-enroll participants making less than $40,000 into Roth deferrals is because of Roths’ tax advantages, which get less valuable the more income a participant makes.

Stamper said even if plan sponsors auto-enrolled employees into financial literacy education, participants might not engage. He suggested offering incentives to get them to use the education.

Implementing a waiting period after a retirement plan loan is paid back before a participant can take another loan helps to slow “revolving door” loans and stop the debt cycle for participants, the panelists explained.

A Roth conversion, or “backdoor Roth,” allows participants to convert savings that were contributed on a pre-tax basis to an after-tax account that will not be taxed in the future. This is especially helpful for high-income participants who are restricted by the IRS income limitations for contributing to Roth accounts. The IRS has no income limits on Roth conversions.

The panelists suggested that plan sponsors offer the backdoor Roths to the non-highly compensated employees first to determine whether they should offer them to highly compensated participants. Low use by NHCEs could affect nondiscrimination testing results for the plan.

On a final note, Stamper told plan sponsors that if their adviser or recordkeeper suggests an “automatic” plan feature, sponsors should consider the costs. In addition to costing the plan sponsor more in contributions—as auto-enrollment does—there could be additional sales costs for some automatic features. “It’s not necessarily a bad thing, just something sponsors should be aware of,” he said.