Data & Research February 24, 2009

Market Woes Have Widened Retirement Savings Gap

While participants realize their retirement savings have taken a hit with the market downturn of the past year, they might not know just what that hit means for their retirement income goals.
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A new Hewitt Associates analysis indicates the gap between what employees are saving and what they need to save is even greater following the market downturn.

In July, Hewitt predicted that employees needed to replace, on average, 126% of their final pay at retirement, after factoring in inflation and increases in medical costs. However, most workers at large companies were on track to replace just 85% of their income (see “Participants at Large Companies Fall Short in Savings“). After factoring in the effects of the recent market downfall—where average 401(k) accounts decreased 18% during 2008—a new Hewitt analysis shows that most workers are now on track to replace just 81% of their income.

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In other words, Hewitt said, a typical 55-year-old employee with a current average 401(k) savings rate of 10% will need to save an additional 12% each year until age 65, or work two more years, to replace what was lost in 2008. The average 40-year-old with a current average 401(k) savings rate of 7% must work one more year or save an additional 1% of pay per year until age 65, according to the news release.

Even if employees are able to recoup their losses from the recent market tumble, Hewitt found projected retirement income levels are still expected to fall short. According to Hewitt’s analysis, before the financial downturn, an average 40-year-old with 10 years of service, earning $83,000 at retirement, in today’s dollars needed to save enough to provide $104,500 per year in retirement, but was only saving enough to provide $70,500—a $34,000 annual shortfall. Since the downturn, that shortfall has grown to $37,350 a year, or a lump sum amount of approximately $400,000.


Compliance February 24, 2009

IRS Issues Final Rules for Automatic Contribution Arrangements

The Internal Revenue Service (IRS) Tuesday published final rules relating to automatic contribution arrangements to reflect provisions of the Pension Protection Act and the Worker, Retiree and Employer Recovery Act of 2008.
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In the final regulations, the IRS addressed a question of whether employers should start rehired employees subject to qualified automatic contribution arrangements at the deferral percentage at which they were deferring when they terminated, or at the minimum deferral percentage under the arrangement. The IRS said that if the employee has been terminated for one year or more, then the plan sponsor can automatically enroll the employee in the plan at the minimum deferral percentage under the arrangement upon rehire.

The final rules also allow employers to provide for an automatic contribution percentage escalation in the middle of the plan year and not just at the beginning of each plan year to coincide with salary increases or performance evaluations, as long as the provision is applied uniformly to all employees.

Notification Requirements

The rules for qualified automatic contribution arrangements require that employees be provided notice of their automatic enrollment in the sponsor’s plan at 30 days and no more than 90 days prior to eligibility and annually prior to the beginning of each plan year (see “(Non)Testing Grounds’). This presented a problem for plans in which participants were immediately eligible for participation upon hire (see “Auto Enrollment Guidance Issued’).

The IRS’ final regulations addressed the problem by saying that if it is not feasible for the notice to be provided on or before the eligibility date, the notice will still be treated as provided timely, as long as the notice is provided as soon as it is feasible, and the employee is permitted to elect to defer all forms of compensation that may be deferred beginning on that date.

Other Rules for Automatic Contribution Arrangements

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Other provisions of the final rules for qualified automatic contribution arrangements (QACAs) and eligible automatic contribution arrangements (EACAs) include:

  • The safe harbor nonelective and matching contributions made under a QACA are not eligible for hardship withdrawal;
  • With respect to the correction of excess contributions for a plan year beginning on or after January 1, 2010, the final regulations provide that a plan that contains an EACA is entitled to the extended six-month period for correcting excess contributions and excess aggregate contributions without incurring an excise tax under section 4979, only if all eligible NHCEs (non-highly compensated employees) and eligible HCEs (highly compensated employees) are covered employees under the EACA for the entire plan year (or the portion of the plan year that the employees are eligible employees);
  • The final rules do not permit that the uniformity requirement to be eased if the plan is a multiemployer plan or a multiple employer plan, or if the sponsor wants to have different default contributions for collectively bargained and non-collectively bargained employees. However, the IRS says plan sponsors can accomplish a similar goal by establishing separate EACAs for each of these separate groups;
  • An employer is not permitted to limit the permissible withdrawal election to those employees who are automatically enrolled and who do not make a subsequent affirmative election of an amount (other than zero) within the 90-day election period.

The IRS said the rules relating to QACAs apply for plan years beginning on or after January 1, 2008, and the rules relating to EACAs apply for plan years beginning on or after January 1, 2010.

The final rules are here.

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