How should plan sponsors respond?
Art by Melinda Beck
Retirement plan participants will always have questions, and plan sponsors, as fiduciaries, should
have proper answers when these arise.
Below are some common queries, and
suggestions for how you might respond.
Q: How much should I save in my
A: Lori Lucas, Chartered Financial Analyst
(CFA), executive vice president and defined
contribution (DC) practice leader at Callan
Associates in San Francisco, advises plan
sponsors to impress upon participants that
a good way to determine how much to save
in their defined contribution plan is to use
a retirement calculator. The good ones will
provide a reasonable estimate of what the
person will need in retirement and make
recommendations to help meet that goal.
The plan sponsor should point to a
calculator available on the plan’s benefits website or note that such tools are
available for free elsewhere online. “Of
course, they should also explain that, at
a minimum, people should by all means
contribute enough to receive their employer’s full matching contribution,” she says.
Plan sponsors can point to this amount
in the plan’s summary plan description
(SPD) or other plan education materials.
Q: What is the difference between
a regular deferral and a Roth
deferral? Which should I use?
A: Bruce Ashton, attorney at Drinker,
Biddle & Reath LLP in San Francisco,
suggests plan sponsors explain that a
regular deferral is an amount taken from
a participant’s salary, pretax—i.e., before
that income is taxed. He will pay tax on the
deferrals, plus any earnings, at the tax rate
in effect when he takes the money out.
A Roth deferral is an amount taken
from a participant’s salary after the income
is taxed—i.e., after-tax. Assuming the
money remains in the plan for at least five
years, when the participant takes it out, he
pays no income tax on either the deferrals
or on what they have earned.
“The ‘which should I use’ question
is more difficult to answer,” he says.
Participants can be told to ask themselves
whether paying income tax on deferrals upfront will put them in a financial
bind, or whether they can comfortably do
so, plus pay all of their living expenses,
including entertainment, travel and the
like, and still have money left over. Plan
sponsors should tell participants, “There
are many trade-offs between regular and
Roth deferrals, and which you choose
depends on your current financial situation and desired results later on,” he says.
Q: What is the net effect on my
take-home pay if I defer into the
A: “With pre-tax contributions, participants will forgo paying taxes on the
money they contribute to the plan,” Lucas
says. “For example, if their marginal tax
rate is 25% and they contribute $1,000,
they would save $250 in taxes, making the
actual cost of pre-tax contributions effectively $750.” A Roth deferral decreases
their pay by the actual deferral amount,
as tax on their income is paid before the
money is deferred.
Q: Where in the plan should I
invest my money?
A: “This may be one of the toughest questions of all for plan sponsors to answer,”
Lucas says. Assuming the plan has a
default fund such as a target-date fund
(TDF) alongside the core investment
lineup, if a participant is afraid to make
that decision and would like someone to
do it for him, she suggests that plan sponsors explain that the target-date fund or