How Online 401(k) Plans Can Address Your Clients' Pension Concerns

The Center for Retirement Research says more than 60 percent of workers may not be able to maintain their standard of living in retirement because of their lack of retirement savings. More than half of all working Americans have less than $50,000 saved for retirement, and 40 percent of Generation X consumers (ages 27 to 42) have saved less than $25,000 — with another 20 percent reporting no savings at all. So it should be of no surprise that the U.S. Department of Labor reports that one-third of all eligible employees fail to participate in their employers’ 401(k) plans. In addition, a Watson Wyatt survey showed that half of all employees of firms with 401(k) plans who earned between $10,000 and $25,000 do not participate.

So, how does a small business address this very real problem? One action proven effective and encouraged by the PPA legislation is for companies to simply go ahead and enroll all employees in the 401(k) plan — through an automatic enrollment election. Then, it is no longer a question of whether employees choose to participate, but rather if they will elect not to participate. This can be accomplished quickly by uploading a standard employee census through a Web interface, whereby all employees are set to a default participation rate — say 3 percent of pay. In fact, the nonprofit Retirement Survey Project reports that companies with automatic enrollment show participation rates of 80 to 90 percent — versus less than 70 percent for elective enrollment plans. However, under the PPA’s automatic enrollment rules, employees must be given a 90-day grace period to change their automatic enrollment — with absolutely no tax implications. So, the online providers are uniquely positioned to handle this kind of plan provision.

But as smart retirement planning demands that employees continue to increase their 401(k) contributions, the PPA also allows employers to create what is called a qualified automatic contribution arrangement (QACA). Under this additional safe harbor, every participant’s deferral rates are automatically increased each year according to a schedule stipulated when the plan is set up. Then, the online plan software automatically calculates these deferrals every year, making the scheduled changes for every employee.

So, whether employees join their 401(k) plan on their own or are automatically enrolled, individual employees can use the Internet or a telephone voice response system to set up their accounts and make their initial investment selections. Once enrolled, employees have 24/7 online access to review their accounts and make investment changes as they wish.

Nevertheless, many employees are poorly prepared to take full advantage of the retirement savings potential. In a 2006 survey, The Scarborough Group found that 90 percent of 401(k) plan participants interviewed were categorized as naive to some extent about investing. As a result, the PPA allows an employer to appoint a financial professional to serve as a fiduciary advisor to meet with participants.

These advisors can explain the plan, the investment options offered, and how each employee might structure their individual portfolios to meet their retirement objectives. When an advisor is serving a small business with an online plan, the provider usually offers the advisor a secure, password protected access to the plan so they can better serve the participants.

Still, a surprisingly high number of participants avoid making their own investment decisions and instead pass that responsibility on to their employer. In the past, small-business owners have viewed this as an unwanted liability. But thanks to the PPA, this is no longer the case. Companies can place its employees’ contributions in any investment designated as a qualified default investment alternative (QDIA), and be provided with yet another safe harbor to remove the potential for legal liability. The PPA establishes the guidelines for an investment to qualify.

To warrant the protection of these new safe harbors, under the PPA, employers are also required to make a minimum contribution to each employee’s account. However, a separate participant vesting schedule can be created for these corporate contributions. If an employee leaves the company before becoming fully vested in the employer’s portion of their account, those funds remain in the plan.

Insurance agents preparing to aggressively sell online 401(k) plans to the small business market should be prepared for intense competition. Banks, credit unions, financial consultants, and brokerage firms are among the segments of the financial services market that see the potential for these products. Professional and trade associations are offering plans to attract members, some state governments are exploring government-provided plans for small companies, and one major retailer has even been rumored to be considering a small-business 401(k) product. Because participant contributions are deducted from each paycheck, an increasing number of payroll service companies are now offering online 401(k) plans.

Nevertheless, with only 17 percent of small businesses offering plans today, there would appear to be ample opportunity for everyone who takes the time to understand the true retirement needs of the market and appreciate the ability of a properly managed online 401(k) plan.

Mark Gutrich is president of ePlan Services. He can be reached at 303-567-8940 or [email protected].