In recent years, there has been a wave of lawsuits targeting defined contribution retirement plans. It is a good practice for sponsors of 401(k) and other defined contribution retirement plans to review their fidelity bonds and fiduciary liability policies on an annual basis to ensure that they are sufficiently protected.
Pension law (ERISA) requires most employer-sponsored retirement plans to buy a fidelity bond to protect the plan against losses caused by the fraudulent or dishonest acts of plan officials.¹ Fiduciary liability insurance, while not required by ERISA, protects the plan and the fiduciaries against claims for losses resulting from the act or the omissions of a fiduciary.
Who requires fidelity bonding?
Plan fiduciaries and others who “handle” plan funds and other property (“plan officials”) must be bonded unless they are covered under a regulatory exemption. The general criteria for determining “handling” include:
– Physical contact with cash, checks or similar property
– Ability to transfer funds to the plan
– Ability to negotiate plan property
– Authority to sign checks and direct disbursements
– Decision-making responsibility for activities that require bonding²
“Funds or other property” generally refers to all funds or property that the plan uses or may use to pay benefits to participants and beneficiaries. That includes land, buildings, mortgages and stock in closely held corporations.
The parties to fidelity bonds.
In a typical arrangement, the insurer provides the bond, and the plan is named as the insured party. The bond covers those handling funds or other property of the plan. The plan can make a claim on the bond if a plan official causes a covered loss to the plan because of fraud or dishonesty.
Plans must ensure bond coverage is adequate.
Each individual generally must be bonded in an amount that is at least 10% of the amount of the plan funds that they handled in the prior year. The minimum amount is $1,000 and the maximum is $500,000 per person, or $1,000,000 for a plan that holds employer securities.³ However, there is no specific penalty if coverage falls below the minimum amount. Retirement plans that are under-bonded on a consistent basis may attract the attention of the federal Department of Labor and may end up under investigation.
It makes sense that fiduciaries review the adequacy of bonding amounts at the beginning of each plan year as plan asset totals change. Since the fidelity bond is purchased to protect the plan, plan assets may be used to pay for the bond.
In situations where more than one plan is named on a bond, the above requirements apply on a per-plan basis. Additionally, the bond’s limit of liability has to be sufficient to insure each plan as if it were separately bonded. Moreover, the amount of coverage available to one plan cannot be reduced by the payment of a loss sustained by another plan.⁴
Plans must review other key features of fidelity bonds.
Plan sponsors and fiduciaries must review the features of fidelity bonds they are considering acquiring. For example, they must ensure that the fidelity bond does not have deductibles or other features that transfer risk to the plan. However, a deductible may apply to any coverage purchased in excess of ERISA requirements. In addition, the bond must offer a one-year discovery period after the bond is terminated in order to enable the discovery of losses that occurred during the bond’s term.
Fiduciary liability insurance
Many plans maintain fiduciary liability insurance, even though it is not mandated by ERISA. They do so in recognition that plan liability may arise out of breaches of the numerous fiduciary duties involved in administering a plan. Fiduciary liability insurance protects the plan and fiduciaries against losses that result from acts or omissions, such as failures to observe the many and complex regulations, statutes, court rulings and other forms of guidance that define a fiduciary’s obligations to the plan.
Who is covered?
Fiduciary liability insurance provides coverage to:
– Administrators
– Trustees
– Committees
– Plan sponsors
Coverage of fiduciaries can often include past and present fiduciaries and all plan and trust fund employees who are fiduciaries. The policy may also offer the plan protection for a situation in which a fiduciary was aware of a breach by a co-fiduciary and failed to remedy the breach. In addition, a plan may carry a fiduciary liability insurance policy to protect itself from losses that arise from a fiduciary’s involvement in a prohibited transaction.
How much coverage is required?
When deciding on how much coverage to buy for the plan, a fiduciary must buy the most suitable coverage at a cost no greater than necessary. Moreover, the insurance company that the fiduciary buys the policy from must have a satisfactory rating from a reputable rating agency.
Please consult with your legal counsel to determine your individual requirements.
Many employers who offer a retirement plan to their employees believe that offering a comprehensive menu of attractive employee benefits is essential if their business is to entice and retain highly productive employees. They are also committed to working with their employees to help them lay the groundwork for a financially secure retirement.5
It’s important for employers to benchmark the success of their retirement plans and gauge their employees’ satisfaction with this important benefit. Access to specific information related to plan participation, contribution and satisfaction rates allows plan sponsors to refine their retirement plans to better meet the needs of their employees and ensure they align with their own corporate goals.
The Investment Company Institute’s (ICI) most recent annual American Views on Defined Contribution Plan Saving6 report summarizes results from a nationally representative survey of Americans aged 18 or older. The research indicates that most US households have favorable impressions of 401(k) and similar retirement plans and appreciate the key features of these plans.
General overview
The research found that a majority (71%) of Americans held a “very” or “somewhat favorable” impression of Defined Contribution (DC) plans. Appreciation was highest among the households that owned employer-sponsored plans and individual retirement accounts, with 82% holding very or somewhat favorable opinions. However, 43% of households that were not account owners had a positive impression as well.
Deep dive into the data
For the most part, surveyed defined contribution account owners were extremely positive about the key features of their retirement plans, agreeing on the following points:
– Employer-sponsored retirement plans helped them “think about the long term, not just my current needs” (88%).
– Payroll deduction “makes it easier for me to save” (87%).
– The availability of a retirement plan at work can help facilitate saving. A common thread was, “I probably wouldn’t save for retirement if I didn’t have a retirement plan at work” (50%).
– The plan’s tax treatment is a big incentive to contribute (82%). Agreement was high among all age and income groups, though it tended to increase with age and household income.
– Saving from each paycheck “makes me less worried about the short-term performance of my investments” (80%).
– The plan offers a good investment lineup (84%).
– Having a choice in and control of account investments is very important (93%).
Americans reject changing key features of retirement plans
The survey asked respondents for their views on changing several key defined contribution account features. Their responses demonstrate overwhelming support for the status quo and a deep opposition to making substantial changes to how defined contribution plans operate.
– A very large majority (87%) disagreed that the government should take away the tax advantages of DC accounts.
– Almost nine out of 10 (89%) of all surveyed individuals opposed reducing the individual contribution limits.
– Any plans to reduce the amount that employers can contribute to DC plan accounts were also opposed by an overwhelming majority (89%) of surveyed individuals.
– Eighty-eight percent of all surveyed individuals disagreed with the idea of not allowing individuals to make investment decisions in their DC accounts, while 80% opposed a proposal for the government to “invest all retirement accounts in an investment option selected by a government-appointed board of experts.”
Plan accounts can help workers meet retirement goals
Employers who sponsor a 401(k) salary deferral plan should take heart from the survey results that illustrate participants’ high level of confidence that their retirement plans help them meet their retirement goals. Twenty-eight percent of defined contribution and IRA-owning individuals were “very confident,” while 53% were “somewhat” confident that retirement plan accounts can help them meet their retirement goals.
The survey’s authors conclude that their data shows that the majority of Americans appreciate their retirement plans and express a strong preference for preserving retirement account features and flexibility. They further note that this is especially true for individuals who need their plans the most as a way to supplement their Social Security benefits in retirement.
Do you need to re-engineer your retirement plan?
If your own research indicates that lower-than-hoped-for numbers of employees participate in your retirement plan and contribution levels for those that do contribute are lower than the average for your peers, you may need to revisit your plan to determine what improvements might be helpful. Think about employing the following strategies:
– Leverage automatic features. Would retooling your plan’s design increase participation and contribution levels? For example, with automatic enrollment, contributions can be set at a default deferral rate that automatically increases on a specified schedule, unless the employee opts out or elects a different contribution percentage.
– Communicate regularly. Your communications with employees should not be a one-time or occasional effort. Take advantage of multiple platforms—e-mails, videos, messaging apps, direct mail, seminars and face-to-face meetings—to reinforce the importance and value of starting retirement planning as soon as possible and to outline the steps that will help bring your employees closer to financial security. Be sure to deliver relevant content. Communications should focus on the issues that generally matter to participants while recognizing that they are individuals with their own personal experiences and goals.
Your UBS Advisor can help you examine the steps that may be helpful in driving participation, contribution and engagement levels among your business’s employees.
A recent paper from the Center for Retirement Research at Boston College7 found that “Late Boomers” have surprisingly low levels of retirement wealth compared to earlier cohorts. The paper’s authors note that a decline in some wealth components for Late Boomers was to be expected because of the rise in the full retirement age for Social Security and the shift from pension plans to defined contribution plans that occurred over the last 40 years; however, increasing 401(k)/Individual Retirement Account (IRA) balances were, according to the authors, anticipated to offset the gap. That did not occur; retirement wealth fell across all but the top quintile.
The paper attempts to answer why this occurred, using data from the Health and Retirement Study8 (HRS), a biennial longitudinal survey of American households over age 50. The paper also used the Survey of Consumer Finances9 (SCF) for insights on the experiences of Late Boomers over their work life. What follows is a top-down view of the study’s results.
Wealth components of Late Boomers
Researchers used data from the HRS to calculate retirement wealth from three sources: Social Security, defined benefit plans and defined contribution plans. The researchers analyzed five birth cohorts and focused on households ages 51 to 56 in order to compare the most recent cohort to the others.
The researchers employed the following assumptions:
- Social Security wealth is equal to the expected present value of benefits at age 62, discounted back to the age at the survey year and prorated (based on earnings) to facilitate a comparison to other wealth that the household has accumulated by ages 51 to 56.
- Projected income from defined benefit plans is also transformed into a wealth measure, like Social Security, by calculating the expected present value of lifetime benefits.
- Defined contribution wealth is self-reported account balances.
In running the numbers, the researchers found that the results for the middle wealth quintile show that the pattern of wealth accumulation across all cohorts is fairly as much as expected. The pattern shows defined benefit wealth declining, Social Security wealth remaining roughly constant and defined contribution wealth growing. However, the pattern changes radically with Late Boomers in that defined contribution wealth falls sharply.
The study’s authors additionally analyzed the Survey of Consumer Finances.³ This triennial survey is conducted every three years and asks households about their income, wealth and pension coverage, to try to construct “synthetic” cohorts to illustrate a picture of employment, earnings and wealth trends across lifecycles. Leveraging this survey, the paper’s authors determined that until their late 40s, Late Boomers held more 401(k)/IRA assets than earlier cohorts at the same age; however, after that, growth stopped and their average assets fell.
Evaluating the results
The authors examined a variety of factors that might explain this decline in Late Boomer retirement wealth, but ultimately determined that the primary cause for the decline was due to what they described as “the weakened link between work and wealth.” They noted that the Late Boomers were in their 40s during the Great Recession, and this major downturn in the economy impacted them greatly.
Analysis of the SCF illustrated that the employment rate of Late Boomers during the Great Recession dropped sharply, and the percentage of those working did not rebound fully as the economy recovered. Moreover, their average earnings were flat and then declined continuously afterward. The result? They entered their 50s with earnings well below those of Early and Mid-Boomers. Concurrent with their lower earnings, Late Boomers also saw their 401(k) plan balances flatten during the Great Recession and thereafter remain largely below those of other Boomers.
The study concludes that work for these middle quintiles of Late Boomers did not produce the boost to wealth accumulation that it had for prior generations.
Helping Late Boomers
What role can plan sponsors play to help Late Boomers boost their overall retirement savings? Plan sponsors could consider targeted outreach and communication efforts to encourage this cohort to increase the amount they contribute to their plans. Plan sponsors could also incorporate longevity statistics to drive home the point that contemporary retirements often last for several decades and that the biggest concern that retirees have is that they will outlive their retirement savings.
Additionally, plan sponsors may want to review their match to determine if it is in line with what’s offered by businesses of a similar size within their industry. If the match is not aligned with other businesses, it may be worthwhile looking into whether it is economically feasible to boost the match. Likewise, plan sponsors should review the investment options offered by the plan to determine if expanding the investment menu would drive increased participation and contribution rates.
Encouraging employees from every age group to become more actively involved in retirement planning and to take the steps that will move them closer to retirement security is an ongoing process. For input and assistance with your participant messaging and engagement efforts, consult your UBS Advisor.
6 ICI Research Report, February 2024. American Views on Defined Contribution Plan Saving, 2023. Sarah Holden, Daniel Schrass, Michael Bogdan and Jason Seligman. Available at ici.org/files/2024/24-ppr-dc-plan-saving.pdf
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