Retirement plan advisers’ golden opportunity: IRS restatement requirements

Advisers have an enormous opportunity in the retirement plan market, but they must recognize it before the window closes. The opportunity comes in the form of an Internal Revenue Service requirement that employers who sponsor 401(k)s or similar defined contribution plans must amend and restate their plan documents by April 30, 2016. The restatement must incorporate the language and provisions from the Pension Protection Act (PPA), and various other required amendments that took effect between 2007 and 2011.
On its face, this PPA restatement process appears to be a simple compliance exercise. The IRS generally requires employers with pre-approved retirement plans — those typically offered by most retirement plan providers — to review, update and refile their plan documents every five or six years to reflect any changes and conform to the latest tax laws. But there is more to this IRS requirement below the surface.
The PPA restatement requirement may provide the perfect opportunity for advisers to connect with employers that have yet to amend and restate their plans, and review the effectiveness of their retirement plans. The review process and subsequent findings allow advisers to determine if retirement plans are meeting employers’ goals and helping the employees prepare for retirement.
PERFORMANCE FALLING SHORT
Unsurprisingly, the actual performance of many plans is falling short. Consider that only 28% of Americans who have access to an employer-sponsored retirement plan are “very confident” they will have enough money for a comfortable retirement, according to the 2015 Retirement Confidence Survey by the Employee Benefit Research Institute. The lack of confidence indicates that few retirement plan participants are saving enough to continue their lifestyles in retirement.
(Related read: Multiple-employer plans provide potential for retirement plan advisers)
The good news: the PPA restatement process review may help a sponsor identify any number of plan improvements and enhancements with the ultimate goal of boosting plan participation, increasing retirement savings, and helping more plan participants become “retirement ready.”
What’s more, many providers have introduced new tools to help advisers and plan sponsors assess the relative health of retirement plans. Many of these new plan analytics address questions and concerns by employers about how well their employees are prepared for retirement. Increasingly, plan sponsors are asking advisers and providers what they can do to get employees who are off track back on.
Retirement readiness is at the core of the new plan health tools. The most effective ones are predicated on a universal definition of retirement readiness. MassMutual, for instance, measures a plan’s health by the percentage of participants who are on track to replace 75% of their preretirement income at age 67. The analysis takes into consideration retirement savings, the availability of Social Security, and a defined benefit pension, if applicable.
HEAD-TO-HEAD COMPETITION
So what differentiates the most effective analytical tools? In a head-to-head competition, the best analytics rely on actual participant financial data — not averages or assumptions — to appropriately measure and improve results. Having real data not only helps advisers and sponsors get an accurate picture of retirement readiness at both the plan and participant levels, it provides a path for the most effective action steps.
If the retirement-readiness benchmark falls short of expectations, then advisers and plan sponsors are encouraged to work closely with their provider to identify possible improvements.
(More on retirement readiness: Clients face a $24 billion 401(k) savings shortfall)
At the plan level, providers can work with advisers to implement a broad range of solutions to boost retirement readiness over time. Before filing the restatement, plan sponsors looking to enhance the effectiveness of their plans may consider a broad range of amendments from redesigning their plan, incorporating features such as automatic enrollment or automatic escalation of retirement plan contributions, or updating investment offering, to name a few.
Providers have resources to help sponsors better market their plans to employees, which may increase participation and boost contributions. The most effective campaigns employ a broad range of consumer-marketing techniques and resources to connect with participants where they live, on their own terms.
It’s critical to effectively target participants as accurately as possible to win hearts, minds and, most importantly, wallets. After all, the need to save for retirement is in direct competition for consumers’ attention and dollars against the immediate gratification of a shiny new car, big screen TV, dinner out or shopping.
The path to creating a more effective plan can start with the restatement process, with the ultimate goal of raising retirement readiness for as many plan participants as possible.
E. Thomas Foster Jr. is the assistant vice president of strategy and relationships for MassMutual Retirement Services.