The Internal Revenue has released 2025 cost-of-living adjustments for pension plans and other retirement-related items. What’s notable about this year is the addition of a “super catch-up” provision for participants aged between 60 and 63 years in 2025. The table below compares the limits for 2025 and 2024.1
| 2025 | 2024 | |||
Defined contribution plan dollar limit on annual additions | $70,000 | $69,000 | |||
Defined benefit plan limit on annual benefits | $280,000 | $275,000 | |||
Maximum annual compensation used to determine benefits or contributions | $350,000 | $345,000 | |||
401(k), 403(b) and 457 plan deferrals | $23,500 | $23,000 | |||
Catch-up (50 – 59 or 64 or older) | $7,500 | $7,500 | |||
SECURE 2.0 super catch-up (age 60 – 63) | $11,250 | N/A | |||
SIMPLE deferrals | $16,500 | $16,000 | |||
Catch-up (50 – 59 or 64 or older) | $3,500 | $3,500 | |||
SECURE 2.0 super catch-up (age 60 – 63) | $5,250 | N/A | |||
Compensation defining highly compensated employee | $160,000 | $155,000 | |||
Compensation defining key employee (officer) | $230,000 | $220,000 | |||
SEP annual compensation triggering a contribution | $750 | $750 | |||
IRA contribution | $7,000 | $7,000 | |||
Catch-up | $1,000 | $1,000 | |||
PBGC maximum guaranteed monthly benefit for a 65-year-old retiree | $7,431.82 | $7,107.95 | |||
Social Security taxable wage base (affects plans that consider Social Security in determining benefits or contributions) | $176,100 | $168,600 |
Under ERISA, plan fiduciaries, including plan sponsors, generally may use plan assets only to provide benefits to plan participants and beneficiaries and to pay reasonable expenses of administering the plan. The question for plan fiduciaries is what specifically constitutes a plan asset. That’s particularly important when it comes to float income and the manner in which it should be handled by fiduciaries. What follows is an overview of float income, how it is generated and how it has the potential to benefit retirement plans, as well as the potential danger that a retirement plan could run afoul of ERISA if it does not have a clear set of transparent and ethical guidelines for generating and handling float income. Included also is a discussion of best practices when it comes to governance and participant disclosure regarding float income.
What constitutes float income
Float income is essentially the interest or returns earned by financial institutions, trustees and third-party administrators on funds that are temporarily retained within a retirement plan system before being paid out. Typically, this money is held in an interest-bearing, short-term account pending investment or distribution.
How float income is generated
There are three primary ways in which float income is generated in a retirement plan.
- Contributions and distributions: During the times that plan participants contribute funds or make withdrawals from their plan, the cash may be parked in an interest-bearing account until those funds are invested or distributed. The interest earned during this holding period is float income.
- Investment delays: Unclear or delayed instructions for how contributions are to be invested can sometimes result in an increase in the time that contributions are retained in an interest-bearing account before being invested.
- Delays in disbursing checks: A financial institution may earn interest on funds transferred to it until checks are presented for payment.
How float income can be used
Additional income that’s generated by float has the potential to enhance a plan’s overall return. Over time, this additional income can potentially add to participant account balances. In addition, plan administrators and recordkeepers can use float income to offset many of the costs involved in the operations of a retirement plan. This can result in reduced fees that can enable plan participants to keep more of the returns that their investments earn. Finally, float income can provide a steady source of income to the plan that can help the plan mitigate the risks associated with volatile financial markets or an unanticipated surge in plan withdrawals by plan participants.
Areas of concern for plan fiduciaries
The potential for litigation against plan sponsors for breaches of their fiduciary duties raises the question as to what actions, if any, fiduciaries and plan sponsors should take to address their fiduciary responsibilities regarding float income.
A recent class action lawsuit2 filed against Fidelity Investments, one of the nation’s largest investment management firms and two plan sponsors, United Airlines and Hewlett-Packard, claims that the income generated by certain assets held temporarily in short-term investment accounts should have been credited for the benefit of the plans and that the investment management firm committed fiduciary breaches by retaining the float income. The lawsuit also named the plan fiduciaries for allowing Fidelity to engage in these practices.
Courts have previously held that the practice of fiduciaries keeping float established that, under normal concepts of property law, float was not a plan asset, and thus, trustees did not engage in self-dealing when they retained the float.3
However, the Department of Labor, in its most recent issued authority on float income,4 warned plan providers that they had to make disclosures about their float practices to avoid the charge of self-dealing. It also noted the steps fiduciaries must take to comply with their ERISA obligations with respect to float income.
Best practices for plan fiduciaries
Given the potential for litigation and the uncertainty surrounding the issue, plan fiduciaries should focus on adhering strictly to their obligations under ERISA. Best practices include:
Identify float income: Fiduciaries need to work closely with their recordkeeper and consultants to clearly identify and understand float income specific to their retirement plans. They need to determine if cash is held temporarily in interest-bearing or non-interest-bearing accounts. If float income is retained by the recordkeeper, that fact should be disclosed in the services agreement. Relevant information, according to FAB 2002-3, includes the earnings rate and an estimate of anticipated income. Plan fiduciaries can request that float income be paid to the plan.
Establish procedures for treating float income: If the retirement plan generates float income, fiduciaries need to determine how the float is handled and the reasonableness of its treatment. Fiduciaries may require that their agreements with their recordkeeper and trustees specify a maximum number of days in which cash contributions can be retained in a cash account prior to investment. Fiduciaries are then better able to determine that the time the cash is held uninvested or undistributed aligns with the agreement. Generally, recordkeepers already have policies in place that detail how they should handle float income. If not, plan fiduciaries need to establish and implement these procedures.
Consider providing participant disclosure and governance: Fiduciaries should provide disclosures regarding float income generated by the plan to its participants. Plan sponsors would be responsible for drafting this disclosure. Float income disclosures are commonly added to the 404(a)(5) participant fee disclosure notice. Regular, transparent communications with participants as to how float income is used—and accounted for—will assist plan sponsors in addressing their responsibilities as fiduciaries. Moreover, fiduciaries are obligated under ERISA to ensure that the services provided to their plans are necessary and that the costs of these services are reasonable, and this includes float income.
Your ERISA legal counsel can provide additional information on what fiduciaries need to consider when it comes to their plan’s float income.
In 1940, Ida May Fuller of Vermont became the first person in the country to receive a monthly Social Security check. A decade later, in 1950, the number of Social Security beneficiaries stood at almost 3.5 million. By 2024, about 67.7 million people collected Social Security benefits. In fact, 86% of the population ages 65 and over were receiving benefits, and that percentage increased to about 92% for those ages 75 and older, as of June 30, 2024.5
87% of Americans6 agree that Social Security should remain a priority for the nation no matter the state of budget deficits.
For some workers, Social Security retirement payments will be all that they will have to support them financially once they exit from paid employment. For some workers, Social Security supplements their personal savings and money saved and invested through a retirement plan such as a 401(k) plan and an individual retirement account. The bottom line is that Social Security is extremely important in ensuring that the retired, their dependents and the disabled have a financial underpinning that protects them from poverty.
The tendency to overestimate how much Social Security will pay
Social Security is an important part of what’s described as the “three-legged stool”—a metaphor for the three primary sources of retirement income: Social Security, employer-sponsored retirement plans and personal savings. While it does offer the prospect of some retirement security and it does replace a percentage of a worker’s preretirement income, some workers may overestimate just how much they will receive from Social Security. Moreover, other workers may fail to factor in the impact of inflation on their future living expenses. This tendency to overestimate how much of an individual’s day-to-day expenses in retirement will be covered by Social Security payments may lead to a reluctance on the part of some workers to take advantage of an employer-provided retirement plan or to under contribute to their plan.
Employers should consider taking a proactive approach toward those employees who believe that they will be able to get by in retirement on Social Security payments alone. They can incorporate multiple strategies that can help boost enrollment and contribution rates among their employees. In particular, a multimedia approach that presents plain, easy-to-understand facts about Social Security and how much employees can expect to receive in retirement from Social Security can assist workers to think about the steps they can to take to ensure their own future financial security.
Incorporating the below data and talking points in employee communications can help employers move their employees to action.
Discuss average monthly Social Security benefit
The average annual Social Security benefit for all retired workers in 2024 is $22,884 a year. That works out to $1,907 per month.
Talk about replacement rates
According to many financial experts, retirees need about 75% of their annual preretirement income to maintain a comfortable lifestyle. According to the Center on Budget and Policy Priorities, the replacement rate for an average wage earner who worked all their adult life, had average earnings and retired at age 65 is about 37%.7 Social Security benefits are progressive in that they represent a higher proportion of an employee’s prior earnings for employees at lower earnings levels. While lower earners receive a higher percentage of their average wages, the dollar amount itself may not be sufficient.
Annual benefits and earnings for workers retiring at age 65 in 20248
Past Average | Social Security | % Replacement | |||
$29,813 (Low) | $15,477 | 51.90% | |||
$66,251 (Medium) | $25,544 | 38.60% | |||
$106,002 (High) | $33,769 | 31.50% | |||
$163,084 (Maximum) | $41,201 | 25.20% |
Remind employees that Social Security alone leaves little room for extras
Expecting Social Security benefits to pay all the expenses a person will likely face in retirement makes little sense. While it’s true that some expenses may go down in retirement (a mortgage may be paid off and children may be self-sufficient), other expenses will probably rise. For example, health care expenses could increase. Health care expenditures for individuals between the ages of 65 – 74 were $7,942 in 2023 and $8,145 for those aged 75 and older.9 Of course, an individual’s personal health and the cost of medical care in the location where the individual resides can impact how much will be spent on medical care. Moreover, what if retirees want to travel or pursue a hobby or other interest after retiring—all of which can be expensive?
Note that inflation never sleeps
Employees should factor inflation into their retirement planning. The US inflation rate for 2023 was 4.12% while it was 8.0% in 2022 and 4.7% in 2021.10 Employers can explain that the potential for inflation always exists, and use examples of its impact on the cost of food, utilities, and other goods and services.
Discuss the financial underpinnings of Social Security
In 1950, 16.5 workers were putting money into the Social Security system for every retiree drawing benefits. In 2023, the ratio of covered workers per each Social Security beneficiary was 2.7. It’s estimated that the ratio will decline even more—possibly to as few as 2.3 covered workers for each beneficiary by 2036.11 The declining worker-to-retiree ratio could be offset by increased productivity per worker. However, many experts believe the Social Security system may need some changes if it is to remain healthy. Various think tanks have discussed a variety of remedies, including raising the age for Social Security eligibility and increasing the Social Security payroll deduction. No matter what the future brings, employees need to be aware that it’s not wise to rely only on Social Security to finance their retirement.
Getting there
The bottom line for plan sponsors is that they should be fully engaged in ensuring that their employees take advantage of the opportunities presented by their retirement plan. Ongoing educational programs that stress the benefits of participation and regular, growing contributions can help employees attain a level of future financial security irrespective of what, if any, changes may occur with Social Security.