More than 6 in 10 union members are behind in saving for retirement,1 and it may be because they don’t have all the tools they need. That’s where a 401(k) plan can help. Because they’re automatic, tax favored, and generally able to offer high-quality, institutionally priced investment options—as well as professional savings and investment advice—they can help fill the gap in members’ retirement readiness.
The benefits of adding a 401(k) plan
You provide your members with a valuable benefit in the form of an annuity plan. But many of your members may need more help saving for retirement.
By adding a 401(k) to your trustee-directed defined contribution plan, you can provide greater savings opportunities for members—and give them access to professional help. 401(k)s can help improve member retirement readiness because they allow for:
- Pretax deferrals, which lower current taxable income and let savers enjoy tax-deferred growth
- Investment discretion, which allows for the creation of a personalized investment mix based on a member’s age, risk tolerance, and goals
- Savings and investment advice, to help members set goals, make a savings plan, and keep on track
- Access to funds through hardship withdrawals or loans, for members who need emergency cash
Additionally, the investments available to a 401(k) plan tend to be less expensive than retail alternatives because they’re institutional—that is, they’re available only to larger investors such as retirement plans. And because 401(k) plans are subject to ERISA, members contributing to a 401(k) plan receive legal protection they wouldn't enjoy in a retail IRA.
A 401(k) plan is flexible
401(k)s can, within limits, be designed to accommodate a wide variety of savings and investment needs.
For example, a 401(k) can allow both pre-tax and after-tax contributions and can offer a wide range of investments for the self-directed investor. It can also provide personalized advice on savings rates and investment strategy for members in need of help. And it can make withdrawal assistance and advice available to members at or nearing retirement.
This flexibility allows you to meet a broad range of member needs, and to fit plan features to your goals. Key plan design decisions you’ll need to make to afford members optimal savings and investment opportunities include:
- Eligibility—who can participate and when?
- Enrollment period—when can eligible members sign up?
- Enrollment method—will signing up be form driven, electronic, or automatic?
- Investment options—how many and what types of funds, including the default fund, will be allowed in the plan?
- Maximum allowable contributions—the IRS caps total DC plan contributions (the so called Section 415 limits), so you must determine contribution limits.
Your third-party administrator (TPA) or plan recordkeeper can assist with these plan design decisions and help ensure that your members get the most out of a 401(k) plan feature.
ERISA and other considerations
The sponsor of a 401(k) incurs some additional fiduciary obligations, such as the requirement to offer investments that are diversified, chosen prudently, and monitored for continued suitability.
There are also additional administrative duties, plan compliance responsibilities, and costs to consider.
For example, employers must collect member 401(k) contributions each payroll period and submit them to the plan recordkeeper on a timely basis. Any additional recordkeeping costs can usually be passed on to participants without violating fiduciary duties, as long as they're deemed necessary and reasonable. In addition, some compliance requirements associated with 401(k) plans (e.g., average deferral percentage testing) can be avoided by adopting a safe harbor 401(k) feature.
And because 401(k) deposits must be made as soon as administratively possible, your collective bargaining agreement (CBA) should assign responsibility for contribution remittance to participating employers. Updating your CBA can help minimize the impact of potential penalties resulting from contribution remittance errors.
Have a plan for your 401(k) plan
If you’re considering adding a 401(k) feature, discuss potential next steps with your plan’s recordkeeper or TPA. They can help you amend your plan and understand testing and member communications requirements. And you’ll want to get your ERISA attorney involved early—they can help you consider everything from plan design features to revising your CBA to include language on 401(k) remittance.
But before doing any of these things, you and your fellow trustees should talk about plan objectives. It’s particularly important that you agree on your goals and how you’d like your members to use a 401(k) feature. Once you have clear, measurable goals, you can determine if the time and expense involved in establishing a 401(k) plan is likely to be well spent.
1"John Hancock sixth annual financial stress survey,” John Hancock and Greenwald & Associates, June 2019. A survey of more than 3,500 workers to learn more about individual stress levels, their causes and effects, and strategies for relief.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. John Hancock does not provide investment, tax, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made here.
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