A major trend upcoming in 2017 is the renewed focus on the 401(k) as the main solution for tackling America's general retirement saving problem. A March 2016 GoBankingRates survey found that 33% of Americans have zero saved for retirement.
This bleak retirement picture is one factor driving the following major 401(k) trends for 2017.
Small business owners required to offer retirement plans
In light of the retirement savings crisis, that states many American’s are behind on their retirement savings, many states are answering the call to action. Making saving for retirement easier and more automatic seems to increase the likelihood that individuals will actually participate in their employer’s 401(k), states a recent AARP study.
Several states are creating legislation that requires all but very small businesses to both offer and enroll employees in a qualified 401(k) plan. (Larger employers typically have pre-existing 401(k) plans.) Following are several of the states at the forefront of this movement:
- New York
- New Jersey
In 2017 (and forward), if your company goes belly up, you're covered
A recent Whitehouse.gov “Fact Sheet: Building a 21st Century Retirement System” promises that by year end, The Department of Labor will complete regulations to help employees receive their retirement plan assets quickly after a company bankruptcy. This legislation will assist bankruptcy professionals to quickly and efficiently take the assets from the bankrupt companies’ retirement plans and make them available to the firm’s employees.
Data security concerns for financial information are front and center in 2017
With the recent and well-publicized data breaches of the Democratic and Republican parties, data security is front and center. Retirement plans are not exempt from hacking attempts and in 2017, savvy firms will continue to safeguard the important data from their 401(k) accounts. A recent Jackson Lewis article discussed both current legislation that relates to online security and steps employers can take as well keep sensitive data protected.
Several recommendations from the article stress the importance to employers of performing due diligence on all 401(k) administrator’s systems. It’s also wise to keep access to private employee information to as few individuals as possible. Finally, employers need to focus on top level training for all 401(k) related personnel.
Passive index fund strategies continue
Hand-in-hand with the 2016 401(k) trend of lower cost funds is a movement towards added access to index and passively managed mutual funds. In 2015, 401(k) participants average annual fund management fees declined for a third year in a row found the Investment Company Institute. Index and passively managed funds charge lower management fees as a percent of assets under management (AUM) than actively managed funds.
The reason for the switch to more index-type funds is simple, in most cases lower fees correspond to higher returns. A 2015 Morningstar survey found that passive funds with the lowest fees had 10-year-trailing average returns of 7.3% in contrast with a 6.6% return for active funds. The movement towards passive index fund investing in retirement accounts is further documented in a recent Investment News article, “401(k) investors concentrated in low-cost mutual funds: Investment Company Institute” by Greg Iacurci.
The fiduciary rule brings uncertain changes
The Department of Labor recently instituted a rule that requires all financial advisors that deal with retirement accounts to maintain a fiduciary standard. In short, the plan advisor must put the client’s best interests ahead of their own.
“The financial institution and advisers must adhere to basic standards of impartial conduct, including giving prudent advice that is in the customer's best interest, avoiding making misleading statements, and receiving no more than reasonable compensation.”~Department of Labor Fact Sheet
This new, untested rule, poised to take effect in April 2017, is creating mandates for 401(k) plans along with a dose of confusion. There will be additional compliance costs for 401(k) plan administrators. All 401(k) plan administrators will need to review their offerings to ensure that they meet the new fiduciary standard. 401(k) administrators that offer a robo-advisor solution have additional problems as it’s difficult to determine whether they can actually serve as fiduciaries.
New SEC money market regulations will impact 401(k) plans
Historically, money market accounts were seen a sure thing for cash investors. With a steady $1.00 valuation plus interest, investors assumed there was no risk of loss of principal. In actuality, money market funds are invested in commercial paper, government bonds and other short term assets (investments) that vary in value. The money market fund issuers have kept the dollar valuation, eating the loss when the underlying principal values moved below a dollar.
Next month, the new law goes into effect and promises increased transparency. Contrary to prior convention, institutional money market funds will be required to maintain a floating net asset value (NAV) per share. This means that investors in the institutional money market shares risk losing principal value.
Depending upon which class of money market funds a 401(k) plan holds, your investment in these formerly secure investments could deviate from their $1.00 value. These changes will cause 401(k) plans to reevaluate their money market offerings for the future.
There are lots of changes coming up, but generally, your workplace 401(k) account continues to be one of the best places for employees to invest for the future and for employers to recruit and maintain top employees. The versatile 401(k) account continues to evolve as technology, the economy and investor regulations move forward.