Hot Topics in Total Rewards

'Catch-up' contribution for those 50+ stays at $6,000, while contribution limit from all sources hits $55,000

By Stephen Miller, CEBS Oct 20, 2017

Employee 401(k) contributions for 2018 will top off at $18,500—a $500 increase from 2017, following two years without a boost—while the "all sources" maximum contribution (employer and employee combined) rises to $55,000, up $1,000, the IRS announced on Oct. 19.

Plan participants who contribute to the limit next year will be able to receive up to $36,500 from match and profit-sharing contributions ($55,000 minus $18,500).

For participants ages 50 and over, the additional "catch-up" contribution limit will stay at $6,000.

HR and payroll managers should plan to adjust their systems for the new year and to inform employees about the new limits in year-end open enrollment materials.

The employee 401(k) contribution increase "is the first since plan year 2015, and reflects a consumer price index increase of 1.97 percent between the third quarters of 2016 and 2017, the largest increase in the past six years," said Brian Donohue, a partner in the Chicago office of October Three Consulting, a retirement plan advisory firm. "Inflation has been historically low during the entire current economic recovery," he noted.

Due to a mild uptick in inflation, rounding rules required the 2018 contribution limits to be increased, while other plan limits that are tied to higher inflation targets remain unchanged. "Although inflation continues to be low, it was enough to finally push up the 401(k) and 403(b) contribution limit in 2018 by $500," said Harry Sit, CEBS, who edits The Financial Buff blog.

2018 Defined Contribution Plan Limits

In Notice 2017-64, the IRS highlighted the following adjustments taking effect on Jan. 1, 2018, for 401(k), 403(b) and most 457 plans:

HR professionals should convey to employees their plan contribution limits for next year. Not all plan participants will be able to fund their 401(k) accounts up to the maximum, of course, but the contribution cap is a goal they should keep in mind and may encourage those who can defer extra dollars for retirement savings to do so.

Conversely, high-earners may want to increase their contributions a bit to reach the full annual limit. They also may want to ensure that they don't hit the annual limit prior to year-end, which could mean losing out on employer matching contributions tied to paycheck deferrals, unless the plan sponsor has agreed to "make whole" with the full year's match those participants who max out prior to their final paycheck.

2018 Income Tax Brackets and Retirement Plans The IRS issued income tax bracket adjustments for tax year 2018 on Oct. 19.  The level of income that is subject to a higher tax bracket can influence how much salary employees choose to defer into a traditional 401(k), which reduces taxable income for a given year by the amount contributed, or whether to participate in a nonqualified deferred income plan, if that option is available through their employer.

After-Tax Contributions

ARoth 401(k) is funded with after-tax dollars and withdrawals are tax-free during retirement, while a "traditional" 401(k) is funded with pretax dollars and withdrawals are taxed as income during retirement.

Some plan sponsors will allow employees to make additional after-tax—but non-Roth—contributions to a traditional 401(k) once the 2018 participant contribution limit of $18,500 (or $24,500 after age 50) is exceeded, up to the "all sources" contribution limit of $55,000 (or $61,000 after age 50).

If the plan document allows contributions to a non-Roth after-tax 401(k), then by following the correct steps employees can convert these contributions to a Roth individual retirement account (IRA), so that the after-tax traditional 401(k) contributions become, effectively, Roth IRA contributions. This approach gives heavy savers who contribute up to the standard limit more access to Roth contributions than would be the case if they relied solely on direct Roth 401(k) or Roth IRA contributions.

Nondiscrimination Testing Affected

The annual ceiling on employee compensation that can be used to calculate employee-deferral and employer-matching contributions is increasing to $275,000 from $270,000. "The pay cap increase will lessen the impact on annual nondiscrimination testing of maximum deferrals taken by high-earners," at least somewhat, Donohue said, referring to the annual nondiscrimination tests—the actual deferral percentage (ADP) test and actual contribution percentage (ACP) test—that a qualified retirement plan must satisfy.

But other factors could make passing nondiscrimination testing more difficult, depending on workforce demographics. For instance, the dollar limit used to define a highly compensated employee (HCE) for nondiscrimination testing will stay at $120,000 next year.

"When the HCE compensation threshold doesn't increase to keep pace with employee salary increases, employers may find that more of their employees become classified as HCEs," noted Van Iwaarden Associates, a retirement plan services firm in Minneapolis and San Francisco. As a result, "plans may see marginally worse nondiscrimination testing results (including ADP results) if more employees with large deferrals or benefits become HCEs."

Defined Benefit Plan Limits

Regarding defined benefit pension plans, sponsors of traditional pension plans should note that the IRS announced the following cost-of-living adjustments under tax code Section 415, also taking effect on Jan. 1, 2018:

• Annual benefit limit. The maximum annual benefit that may be provided through a defined benefit plan rises to $220,000 from $215,000.
  

• Separation from service. For a participant who separates from service before Jan. 1, 2018, the annual benefit limit for defined benefit plans is computed by multiplying the participant's compensation limit, as adjusted through 2017, by 1.0196. This is an increase from the previous year, when the participant's compensation limit, as adjusted through 2016, was multiplied by 1.0112.
  

Separately, the federal Pension Benefit Guaranty Corp., which insures private-sector defined benefit pension plans, posted 2018 premium rates for single-employer and multiemployer pension plans.

​"PBGC premium rates will increase a lot next year—more than 7 percent for headcount premiums and almost 12 percent for variable premiums," Donohue observed. "These increases come on top of huge increases sponsors have already seen in the past few years, which tripled total premiums paid between 2011 and 2016."

SEPs, SIMPLES and Other Plans

• For SIMPLE (savings incentive match plan for employees of small employers) retirement accounts, the maximum contribution limit remains unchanged at $12,500.
  

• For simplified employee pensions (SEPs), the minimum compensation amount remains unchanged at $600.
  

• For employee stock ownership plans (ESOPs), the maximum account balance in the plan subject to a five-year distribution period will increase to $1,105,000 from $1,080,000, while the dollar amount used to determine the lengthening of the five-year distribution period rises to $220,000 from $215,000.
  

IRA Deduction Phase-Out Ranges

• The limit on annual contributions to an IRA will stay unchanged at $5,500. The additional catch-up contribution limit for individuals ages 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  

• Traditional IRA deduction phase-out. Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or his/her spouse was covered by a retirement plan at work, the deduction may be phased out until it is eliminated, depending on filing status and income. The phase-out ranges for 2018 are:
  

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
  
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is$101,000 to $121,000, up from $99,000 to $119,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between$189,000 and $199,000, up from $186,000 and $196,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains$0 to $10,000.
  
  

• Roth IRA income phase-out. The adjusted gross income (AGI) phase-out range for taxpayers making contributions to a Roth IRA will be:
  

• For singles and heads of household, the income phase-out range is$120,000 to $135,000,up from $118,000 to $133,000.
• For married couples filing jointly, the income phase-out range is$189,000 to $199,000,up from $186,000 to $196,000.
• For a married individual filing a separate returnwho makes contributions to a Roth IRA, the phase-out range is not subject to an annual cost-of-living adjustment and remains$0 to $10,000.

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/2018-irs-401k-contribution-limits.aspx?utm_source=SHRM%20Friday%20-%20PublishThis_HRDaily_7.18.16%20(1)&utm_medium=email&utm_content=October%2020%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&SPCERT=&spMailingID=31109088&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1142601600&spReportId=MTE0MjYwMTYwMAS2

By Lisa Nagele-Piazza, SHRM-SCP, J.D. Oct 10, 2017

As devastating wildfires spread through Northern California's wine country, threatening to destroy homes and businesses in the area, organizations must activate their workplace safety and emergency action plans.

We've rounded up the latest news on how the fires are affecting employers. Here are SHRM Online resources and news articles from other trusted media outlets.

The wildfires have spread rapidly since Sunday evening through Napa, Santa Rosa and Sonoma counties. The destruction has left more than 15 dead, caused about 20,000 to evacuate and ruined more than 1,500 structures—including homes, wineries and other businesses.

(The New York Times)

Fires Hit Crops at End of Harvest Season

Napa and Sonoma county wine-country workers would ordinarily be picking and processing ripe grapes on Oct. 9 at the end of the harvest. Instead, many wineries were closed due to power outages, evacuation orders and roadblocks that kept employees from getting to work. A few wineries in the area have been destroyed and many others have been damaged after the wind-fueled fires spread at a rapid pace. The Napa Valley Vintners trade association said that most of the grapes had already been picked, but it's hard to say how smoke and other damage will affect the crops this year. "I think we'll be OK, but it's not an ideal situation," said Alisa Jacobson, vice president of winemaking at Joel Gott Wines. "But more importantly, all our employees seem to be doing OK."

(The Chicago Tribune)

Employee Safety Is First Priority

A natural disaster can hit suddenly, and employers should know in advance how to account for workers. Local fire authorities ordered Medtronic, a global medical technology company, to evacuate several of its facilities in Santa Rosa on Oct. 9, because of their proximity to the fires. Medtronic initiated its business continuity plans and a spokesman said the company is keeping in contact with workers. The company also had to activate emergency preparedness plans last month when its manufacturing facilities in Puerto Rico were affected by Hurricane Maria. "We are closely monitoring the wildfires in Santa Rosa and Sonoma County, and our first priority is the safety of our employees, many of whom are being evacuated," the spokesman said.

(Minnesota Star Tribune)

Employers Must Be Prepared

October marks the start of fire season in California—and fire dangers pose a threat to more than just the northern part of the state. In Southern California, Santa Ana winds—that originate inland and move west—bring winds, dust, dryness and fires toward the coast. Employers should be prepared for a natural disaster caused by such conditions by keeping emergency supplies on hand, developing evacuation plans and ensuring that workers leave promptly when there's a threat. Employers should also know the legal risk-management requirements for their locations. In Ventura County, for example, property owners in fire-prone areas must remove brush that is within 100 feet of a structure.

(Ventura County Star)

California Marijuana Growers Also Harmed

Medical (and soon recreational) marijuana use is legal in California, and the northern part of the state has the world's largest concentration of cannabis farms. Sonoma county surveys estimate that there are between 3,000 and 9,000 cannabis gardens in the county—which are now threatened by the wildfires. Not only are crops being destroyed just before the harvest, but smoke-exposed crops are vulnerable to disease and unhealthy levels of mold, mildew and fungus. CannaCraft, a Santa Rosa cannabis manufacturer employs 110 workers—but it shut down on Monday and told employees to stay home. For employees who couldn't go home, the manufacturer opened its headquarters (located outside the evacuation zone) as an evacuation center.

(SF Gate)

State Encourages All Businesses to Have a Plan

The California Division of Occupational Safety and Health (Cal/OSHA) says it's a good idea for all businesses to have an emergency action plan, even if such a plan isn't explicitly required under Cal/OSHA or city or county law. The division suggests that employers form an emergency committee that involves different department representatives and a mix of employees and managers. Plans should address state and local safety laws and must comply with governmental agency regulations.

(California Department of Industrial Relations)

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/ResourcesAndTools/legal-and-compliance/state-and-local-updates/Pages/California-Wildfires-Trigger-Employer-Emergency-Action-Plans.aspx?utm_source=SHRM%20PublishThis_CaliforniaHR_7.18.16%20(24)&utm_medium=email&utm_content=October%2010%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&SPCERT=&spMailingID=30972107&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1141346855&spReportId=MTE0MTM0Njg1NQS2

A $100-a-month employer contribution can get workers out of debt years sooner

Oct 2, 2017

Helping employees pay off their student loans as a workplace benefit continues to generate a lot of buzz even though it's offered by a small minority of employers—just 4 percent according to the Society for Human Resource Management's 2017 Employee Benefits survey report, based on a January/February poll of the organization's members.

WorldatWork, an association of total rewards professionals, conducted a January benefits survey and also found that 4 percent of employers provided loan repayment assistance, while 8 percent of companies with 40,000 or more employees did so.

Despite these relatively low numbers, in September the Consumer Financial Protection Bureau—a federal consumer protection agency—predicted that loan repayment programs could grow quickly as employers recognize the value of offering financial well-being benefits.

"We are seeing an increasing number of employers adding student loan repayment assistance to their benefits programs as a powerful differentiator in attracting and retaining employees," said Heather Coughlin, solution leader for financial wellness at Mercer, an HR consultancy.

"Student loan repayment assistance has the potential to affect more than 44 million Americans burdened by student loan debt," said Scott Thompson, CEO of Tuition.io, a benefit administration firm. "The $1.4 trillion student loan crisis has … heightened financial stress, which can lead to disengagement in the workplace," he noted.

"We know student debt weighs heavily on people—more than a third of Fidelity retirement plan participants surveyed have student debt, and 80 percent of those say it delays retirement planning," said Kevin Barry, president of workplace investing at Fidelity Investments.

Advantages for Employers and Employees

"Companies are choosing to help their employees get out from under student loan debt because it can help them become an employer of choice. And when they are, they can hire faster, retain talent longer, and even improve gender and cultural diversity," said David Aronson, CEO of Peanut Butter, which helps employers offer student loan assistance as a benefit, when he spoke at the September EBN Benefits Forum and Expo held in Boca Raton, Fla.

"Many employers are targeting a $100-a-month contribution," Aronson said. "The average person with student debt has $31,000 outstanding. They're paying it off over 10 years at a 6 percent interest rate, so $100 extra a month is going to help them save $11,000 in principal and interest, and get out of debt two years faster than they otherwise would."

A Success Story

"This is one of those benefits that we probably get the most questions about when our new employees are starting or when we're going through the talent acquisition process, because it's something new and very exciting," said Nicole Skaluba, director of employee services at Rise Interactive, a Chicago-based digital marketing agency that began offering student loan repayment assistance to its 233 employees just over a year ago.

"The average age of our employees is 27, and they were telling us they couldn't invest in our 401(k) plan because they needed to pay off their student loan debts first," said Skaluba, who co-presented with Aronson at the EBN Benefits Forum.

Rise Interactive launched its program by offering a loan-repayment contribution of $50 per month because "we want to get a sense of who would enroll and what that would mean to our bottom line," she said.

"We talk about this in great detail during our recruitment process," Skaluba added. "We want to get people excited about it because we know it's a strong recruitment tool for us. I can make this a selling point for people I want to bring into the organization."

Rise Interactive had 10 percent of its employees enrolled on the day the program went live, "and we're now up to 25 percent of our people enrolled," Skaluba noted. "As we bring into the organization roughly 10 people per month, we're seeing the bulk of them join, so we know it has had a tremendous impact."

Aronson and Skaluba drew these lessons from Rise Interactive's experience:

• Start slow and grow. "Although we see $100 as the most common monthly loan-repayment contribution target, we see $50 as the most common starting point," said Aronson. "You have more control over your budget by starting at a lower dollar amount and can always increase the contribution."
  

• Keep it simple. Rise Interactive made all employees eligible to receive contributions from their starting date of employment. "There aren't any special tiers or requirements related to the plan, so it's easy for HR to communicate and for employees to understand," Skaluba said.
  
  There are exceptions to this advice, however. "While most commonly we see employers offer one flat-dollar monthly contribution to all employees, that's not right for every organization," said Aronson. A retail organization, for instance, "may choose to offer one amount to their corporate employees, a different amount to store managers and another to part-time associates. You can target your benefits that way as well."
  

• Have shared accountability. At Rise Interactive, employees must continue making at least the minimum payment on all their loans to participate in the program. "Employers should ensure that participants are making loan payments through direct debit from their bank because "almost every loan servicer across the country offers a 25 basis point [0.25 percent] discount for borrowers who make loan payments through direct debit from their bank," Aronson said. "If employees aren't already doing that, we help them to put this in place," he added.
  

The benefit can be integrated with payroll administration, although "if not, it generally takes about one-half hour of HR staff time per month to administer," Aronson said.

He and Skaluba suggested that companies also provide advice on how employees can consolidate and refinance all their borrowing, to help those in debt to improve their finances as they pay down their loans.

While some companies provide a roughly equivalent benefit to employees without student loans—such as subsidized gym memberships—most don't, "and we haven't seen this becoming an issue," Aronson said. "Employees seem pleased to work for a caring employer, whether they benefit directly from this program or not." 

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/launching-student-loan-repayment-benefit.aspx

Businesses affected by Hurricane Irma in parts of Florida and elsewhere have until Jan. 31, 2018, to file certain tax returns and make tax payments, the Internal Revenue Service (IRS) announced this week.

The IRS also announced that 401(k)s and similar employer-sponsored retirement plans can expedite loans and hardship distributions to victims of Hurricane Irma and members of their families. This is similar to relief that the IRS granted last month to victims of Hurricane Harvey.

Eligible retirement plan participants can access their money more quickly with a minimum of red tape, the IRS said. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

A person who lives outside the disaster area also can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. Plans can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in IRS Announcement 2017-13.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10-percent early-withdrawal tax.

Additional 401(k) Relief Sought

House Ways and Means Committee Chairman Rep. Kevin Brady, R-Texas, is considering legislation that would not only suspend, in hurricane-affected regions, the 10 percent penalty imposed when 401(k) plan participants tap their 401(k) retirement savings before age 59.5. "It will include tax provisions, some of which will help people access their retirement funds without penalty for rebuilding activities," he told reporters on Sept. 7.

Tax Filing Relief

The tax-relief action announced by the IRS postpones various tax filing and payment deadlines starting on Sept. 4, 2017, in Florida and Sept. 5, 2017, in Puerto Rico and the Virgin Islands. Affected businesses will have until Jan. 31, 2018, to file returns and pay any taxes that were due during this period, including quarterly estimated tax payments.

In addition, the IRS is waiving some late-deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period, which began Sept. 4 in Florida. The IRS is offering this relief to disaster areas designated by the Federal Emergency Management Agency, as listed on the disaster relief page at IRS.gov.

Hurricane Irma "has been a devastating storm for the southeastern part of the country, and the IRS will move quickly to provide tax relief for victims, just as we did following Hurricane Harvey," said IRS Commissioner John Koskinen in a statement. "The IRS will continue to closely monitor the storm's aftermath, and we anticipate providing additional relief for other affected areas in the near future."

Pension Payment and Filing Relief

The IRS, the Department of Labor and the Pension Benefit Guaranty Corporation (PBGC) alsoannounced in Notice 2017-49 that they are providing affected employee benefit plan sponsors with relief from certain filing requirements under the Employee Retirement Income Security Act.

Separately, the PBGC said that it is waiving certain penalties and extending certain filing deadlines for defined benefit pension plan sponsors in response to Hurricane Irma. For example, if affected plans have premium filing deadlines from Sept. 4, 2017, through Jan. 31, 2018, the PBGC will waive applicable penalties but not the applicable interest charge.

Preparing for the Next Disaster—or Everyday Emergencies

While many plan sponsors will focus on the immediate impact of Hurricanes Harvey and Irma, "plan sponsors might also take this time to plan for the future or to refine existing policies designed to assist employees year-round," Jack Towarnicky, executive director at Plan Sponsor Council of America, a trade group, advised in a blog post.

Leave-sharing and employee donation plans are examples of policies that employees can have in place for personal emergencies as well as natural disasters.

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Source: The Society for Human Resource Management

https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/Hurricane-Irma-tax-filing-relief.aspx?utm_source=SHRM%20Thursday%20-%20PublishThis_HRDaily_7.18.16%20(71)&utm_medium=email&utm_content=September%2014%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&SPCERT=&spMailingID=30600092&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1121693306&spReportId=MTEyMTY5MzMwNgS2

ADA and GINA regulations were arbitrary, court decides

By Allen Smith, J.D. Aug 24, 2017

The Equal Employment Opportunity Commission's (EEOC's) rules about the fees employers can assess workers who do not participate in wellness programs were ruled arbitrary by the U.S. District Court for the District of Columbia on Aug. 22. Rather than vacate the rules, the court sent them back to the agency for redrafting in an attempt to avoid business disruptions. But the decision still creates "confusion and uncertainty" about employer wellness programs, said Ilyse Schuman, an attorney with Littler in Washington, D.C., and co-chair of the firm's government affairs branch, the Workplace Policy Institute.

HR professionals should know that the decision threatens the viability of wellness programs, and an employee may push back on an employer that uses financial incentives or penalties to encourage wellness program participation, said Ann Caresani, an attorney with Tucker Ellis in Cleveland and Columbus, Ohio.

"The EEOC's regulations were helpful to employers because they finally resolved the long-pending question of what EEOC would consider to be a permissible incentive under ADA [Americans with Disabilities Act] and GINA [Genetic Information Nondiscrimination Act]," said Frank Morris Jr., an attorney with Epstein Becker Green in Washington, D.C. "This permitted employers who wanted to use incentives to design [them] with reasonable certainty that they would be lawful under the two statutes."

Employers should keep in mind, however, that the court's decision does not vacate the EEOC rules, said Sarah Bassler Millar, an attorney with Drinker Biddle in Chicago. "In the absence of other guidance, it would be prudent for employers to take steps to ensure compliance with the final ADA and GINA regulations in their current form," she said. 

But Erin Sweeney, an attorney with Miller & Chevalier in Washington, D.C., recommended that employers closely examine wellness program incentives and penalties in light of the decision.

Rules Permitted Raised Premiums

In a lawsuit filed Oct. 24, 2016, AARP challenged the portions of the EEOC's 2016 workplace wellness regulations under the ADA and GINA that let employers impose greater premiums of up to 30 percent of self-only coverage on employees who refuse to disclose medical and genetic information through wellness programs at work.

"The court found that the rules are unlawful because the EEOC did not justify its rules: it didn't consider any factors relevant to whether penalties make these exams and inquiries coercive and did not respond to comments raising significant concerns about the hardship workers would face if they exercise their right to keep private information private," said Dara Smith, an attorney with the AARP Foundation.

AARP argued that the penalties violate the civil rights statutes' requirements that any exams and inquiries in employee wellness programs be voluntary, Smith noted.

Court Rejects EEOC's Rationale

"While the court did note that it is likely difficult for the EEOC to figure out when exactly an incentive [or penalty] renders a wellness program involuntary, the court ruled that the EEOC needs to provide a well-reasoned and supported justification for setting the [percentage]. The EEOC failed to do so in this case," said James Plunkett, senior government relations counsel for Ogletree Deakins in Washington, D.C.

"The EEOC failed to develop any concrete data, studies or analysis to support its conclusion that a 30 percent incentive level made the incentive 'voluntary' under the ADA and GINA. It just borrowed the 30 percent level from the Health Insurance Portability and Accountability Act (HIPAA) regulations, where there is no 'voluntary' requirement," Caresani said.

"These regulations apply in addition to existing regulations under HIPAA and were intended to harmonize with HIPAA regulations, to the extent possible."

The EEOC argued principally that it adopted its rules to harmonize ADA and GINA regulations with HIPAA regulations on wellness programs and to encourage more individuals to participate in wellness programs, as that was a goal expressed by Congress in the Affordable Care Act, the court said.

The EEOC's regulations did not achieve consistency with HIPAA, which calculates the 30 percent incentive level differently: The HIPAA level is based on the total cost of coverage, which includes the cost of family coverage, rather than the cost of self-only coverage that the ADA rule adopted. The HIPAA regulations also place no cap on the financial incentive or penalty for participatory wellness programs (e.g., gym membership), which are more common than health-contingent wellness programs (e.g., reaching a goal weight in a weight-reduction program).

"Even assuming that the ADA rule had achieved consistency with HIPAA, the agency's failure to consider the fact that HIPAA contains no 'voluntary' requirement might be fatal to its chosen interpretation," the court stated.

Stacking of Incentives Not Considered

Further, the court questioned the potential cumulative effect of ADA and GINA incentives and penalties. "With the adoption of the GINA rule, an employee and his or her family may face stacked penalties or incentives for the disclosure of information," the court noted.

An employer may adopt a 30 percent incentive for the disclosure of an employee's ADA-protected information and a 30 percent incentive for the disclosure of the employee's spouse's GINA-protected information. "The potential cumulative effect of these incentives is surely relevant to the question of whether disclosure is voluntary or not. But beyond the mention in the final rule that stacking is possible, there is no indication that the EEOC considered this at all," the court said.

"The EEOC can appeal, but that won't relieve the agency of its obligation to start working on revising its regulations," Smith said.

This decision is AARP v. EEOC, D.D.C., No. 16-2113.

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Source: Society for Human Resource Management (SHRM) 

https://www.shrm.org/ResourcesAndTools/legal-and-compliance/employment-law/Pages/AARP-EEOC-wellness-regulations.aspx?utm_source=SHRM%20Thursday%20-%20PublishThis_HRDaily_7.18.16%20(68)&utm_medium=email&utm_content=August%2024%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&spMailingID=30315268&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1102818013&spReportId=MTEwMjgxODAxMwS2

A legal perspective on human resources idiosyncrasies in the Golden State

By Mishell Parreno Taylor and Deidra A. Nguyen Aug 22, 2017

This is the second article in a three-part series about California-specific workplace compliance issues. Part One focused on four leave-law idiosyncrasies.

Wage and hour compliance in California can be complicated, particularly in light of the ever-changing landscape. On Jan. 1, 2017, alone, employers faced approximately 30 new or amended state or local labor and employment requirements—many of which focused on wage and hour compliance.

Below are just a few areas for businesses to be mindful of if they have employees working in California.

1. Daily Overtime

While the federal Fair Labor Standards Act requires overtime to be paid at one and one-half times a nonexempt employee's regular rate of pay for all hours worked beyond 40 in a workweek, the Golden State takes it one step further.

Employers in California must also pay nonexempt workers one and one-half times their regular rate for all hours worked over eight in a day.

In practical terms, this means that an employee who works less than 40 hours in a week may still be entitled to overtime if he or she works more than eight hours in a given day. The good news is that the law does not require employers to pay both daily and weekly overtime when doing so would result in paying overtime on hours that are already being paid at an overtime premium.

It is important to be mindful that California daily overtime requirements may be applicable to employees who work in California even on a temporary basis. Furthermore, employers should note that they must pay double time in some circumstances.

2. Rest Breaks

Under California law, an employer must "authorize and permit" employees to take a 10-minute rest break for each four hours or "major fraction thereof" worked. The following table illustrates what this means based on hours worked:

 

The good news is that if an employee's workday is less than three and a half hours, employers are not required to provide a paid rest break. Another piece of good news is that a critical wage and hour decision (Brinker v. Superior Court), rendered over five years ago, brought clarity to what is required of a California employer when it comes to rest break obligations.

As confirmed by the court in Brinker, a California employer only has to provide its eligible employees with the required rest breaks and does not have to force employees to take them.

Failure to comply can be costly. An employer that doesn't provide an employee with a timely rest period will face a penalty of one hour of pay for each day the break was not offered.

3. Alternative Workweek Schedules

The alternative workweek schedule is a tool, common in manufacturing industries, that provides employers some reprieve from daily overtime requirements while imposing very specific and unusual procedural requirements.

Nonexempt employees in a pre-existing, identifiable work unit or group may elect to work a defined schedule that differs from the standard schedule of eight hours per day, five days per week without receiving daily overtime.

For example, employees may elect to work a four-day schedule of 10 hours each. While such a schedule would ordinarily require payment of two hours of daily overtime for each day of the schedule, a properly adopted alternative workweek schedule obviates the requirement to pay daily overtime. 

To properly adopt an alternative workweek schedule, the employer must:

• Select an identifiable group or unit in the workplace that will work the alternative workweek schedule (e.g., a shift, department or facility).
  
• Disclose to employees within the affected group or unit how the alternative workweek would impact employees' working conditions, including their wages, benefits and hours.
  
• Conduct in-person meetings with affected employees to allow employees to ask questions about the proposed alternative workweek schedule.
  
• Conduct an election—at least 14 days after the meeting—by secret ballot, during which affected employees can vote on whether to adopt the proposed alternative workweek schedule.
  

If at least two-thirds of affected employees vote in favor of the alternative workweek schedule, the employer may require employees to begin working the new schedule no sooner than 30 days after the election and must report the results of the election to the California Division of Labor Statistics and Research.

Although alternative workweek schedules are a useful tool because they eliminate the need for daily overtime, they greatly limit scheduling flexibility and impose costly repercussions for work outside of the defined schedule.

4. Fair Scheduling

Fair scheduling, also called predictable scheduling, represents a burgeoning area of the law that—like many employment laws—started in San Francisco and is systematically taking root across California (and in other states, too).

In November 2014, San Francisco passed two ordinances imposing scheduling requirements on private employers. The cities of San Jose and Emeryville followed suit, passing fair-scheduling laws that took effect earlier this year.

Outside of California, New York City and Seattle have passed fair-scheduling laws and Oregon just enacted the first statewide law.

Although the laws differ in each jurisdiction, they generally embrace one or more of the following requirements:

• A good-faith estimate of the employee's anticipated work schedule prior to or at the commencement of employment.
  
• Employees' right to request input into their work schedules.
  
• The right to rest between work shifts.
  
• Advance notice of the work schedule.
  
• Compensation for schedule changes.
  
• Offers of work to existing employees before hiring externally.
  

Employers should note that some of these laws apply to large retail and hospitality employers while others have a broader reach.

California's ever-evolving wage and hour laws, and the accompanying penalties for even minor violations, highlight the importance of periodically reviewing and possibly updating handbooks and policies on wage and hour practices. Additionally, training a workforce on an employer's updated policies and how to properly partner with human resources on compliance-related matters are key components of successful compliance.

Up next in our three-part series will be a discussion on the expansive and highly regulated area of anti-discrimination laws in California.  

Mishell Parreno Taylor and Deidra A. Nguyen are attorneys with Littler in San Diego. 

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/resourcesandtools/legal-and-compliance/state-and-local-updates/pages/4-wage-and-hour-challenges-california.aspx

By Lisa Nagele-Piazza, SHRM-SCP, J.D. Jul 28, 2017

Flexible work arrangements—such as telecommuting and compressed workweeks—can benefit businesses and workers alike, but California employers that wish to offer such arrangements must tackle complex workplace compliance issues. Here's what employers in the state need to know.

Workplace flexibility or "workflex" options are important to employees. Having the flexibility to balance work and life obligations is among the top three benefits rated as "very important" to employees (just behind paid time off and health care benefits), according to the Society for Human Resource Management's (SHRM's) 2016 Employee Benefits survey. 

Many California employers are embracing workplace flexibility. SHRM research shows that organizations in the state are providing employees with the following workflex options:

• Telecommuting (63 percent).
  
• Flextime (48 percent).
  
• Mealtime flex (34 percent).
  
• Flexible break arrangements (30 percent).
  
• Compressed workweek (23 percent).
  
• Shift flexibility (21 percent).
  

"At its core, workflex is about improving business results by giving people more control over their work time and schedules," according to SHRM.

While there are many benefits to offering flexible work arrangements, unique challenges can arise for employers that offer flexible work arrangements in California, said Helen McFarland, an attorney with Cozen O'Connor in San Francisco and Seattle.

"The most important challenge that employers face in offering flexible work arrangements is to properly manage compliance with California's wage and hour requirements and the company's security policies," said Grace Horoupian, an attorney with Fisher Phillips in Irvine. 

For example, she said, employers may have difficulty ensuring that employees who are working remotely are not working off the clock and are accurately recording all hours worked.

Employers may also find it challenging to ensure employees follow the company's information security requirements when working from home, Horoupian added.

California Laws to Consider

Employers that want to offer workflex options should keep the following state rules in mind:

• Daily overtime pay. Nonexempt employees in California are entitled to daily overtime at a rate of time-and-a-half after eight hours and double time after 12 hours. "If an employer offered four 10-hour shifts rather than five eight-hour shifts, in California, unlike many other states, the employer would be required to pay overtime for the extra two hours worked each day," McFarland explained. "Ten-hour shifts would also mean potentially offering two meal periods rather than one," she added.
  
• Alternative workweeks. In certain situations, employees waive their right to daily overtime pay and work regular shifts that exceed eight hours in a day. Employees can vote by secret ballot to approve such an alternative work schedule for a work unit (such as a department, team or job classification)—but employees still must receive overtime pay if they work more than 10 hours a day or 40 hours a week under those arrangements. "Unless an alternative workweek is in place, a compressed workweek means that daily overtime requirements must be met," Horoupian said.
  
• Meal and rest breaks. Nonexempt employees must also be provided rest breaks and meal periods at certain times and for certain durations during a shift. "Employees working remotely lack supervision and would be responsible for documenting their own work hours and meal and rest breaks," McFarland noted.
  
• Make-up time. Employees can make up work time that is missed for personal obligations without counting the made-up time as overtime hours if certain conditions are met. The employee must voluntarily request the make-up time, and it must be worked in the same workweek as the missed time, and time worked can't exceed 11 hours in a day or 40 hours in the workweek.
  
• Business expense reimbursement. California employers must reimburse employees for all business expenses they incur, McFarland said. This can make remote work arrangements complicated because California employers must pay for and establish remote workstations, she said. "This could include Wi-Fi fees, additional computer equipment and other unforeseen costs."
  

HR's Role

"Employers should establish clear, written policies regarding all flexible work arrangements and make sure to apply their policies fairly and evenly," McFarland said.

Horoupian said remote work policy should address:

• The hours that the employee is expected to work.
  
• Specifics of how to comply with information security policies.
  
• The need to keep accurate recordings of hours worked.
  
• How and when to report work-related injuries.
  
• Office attendance requirements.
  
• The company's right to revoke the remote work option at any time.  
  

Employees should sign an acknowledgment that they received and reviewed the remote work policy.

"Employers should also have all hourly employees working remotely sign an attestation that their reported hours of work are accurate," Horoupian added.

"Communication regarding expectations is key," McFarland said. "It may be beneficial to set up a trial period to determine whether the new system is workable and effectively meets the employer's and the employees' needs."

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/ResourcesAndTools/legal-and-compliance/state-and-local-updates/Pages/CA-flexible-work-arrangements.aspx?utm_source=SHRM%20PublishThis_CaliforniaHR_7.18.16%20(20)&utm_medium=email&utm_content=August%2008%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&spMailingID=30097271&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1100936027&spReportId=MTEwMDkzNjAyNwS2

Restrained pay raises likely to continue next year

By Stephen Miller, CEBS Aug 7, 2017

With salary increase budgets expected to remain at 3 percent for both 2017 and 2018, employers are continuing to leverage variable pay to differentiate rewards for high-performers.

"With a tight job market and reported financial gains, we might have expected to see more growth in salaries," said Kerry Chou, WorldatWork senior practice leader. "In the United States in particular, there are factors that might explain this plateau in growth, including the increased use of variable pay or noncash-based rewards."

Variable Pay

As companies hold down base pay increases to maintain a handle on fixed costs, "employees are still seeing increases in pay through improved variable pay plan payouts," Chou said.

The percentage of organizations using variable pay vehicles—such as annual or quarterly bonuses based on individual, team and organizational goal achievement—rose 1 percentage point for the third straight year, to 85 percent in 2017, according to research from WorldatWork, an organization of total rewards professionals, in its new 2017-2018 Salary Budget Surveyreport.

Variable Pay Programs (U.S.) Variable pay awards, representing a percentage of base pay, are differentiated by employee classifications. Results are shown for the median* percentage.
	Nonexempt Hourly Nonunion	Nonexempt Salaried	Exempt Salaried	Officers/ Executives
Average percent paid, 2016	5.0%	5.0%	11.0%	34.0%
Projected percent paid, 2017	5.0%	5.0%	12.0%	35.0%
Source: WorldatWork. *The median is the middle value after listing reported budget increase expectations in successive order. Outliers, or extreme values on either the high or low end, have less effect on the median than on the mean, which is the mathematical average.

The report reflects the results of a survey of WorldatWork members, most of whom work at large companies. Survey data was collected from March 27 through May 5 and included 1,819 respondents from U.S. organizations with at least 10 employees. "Top level" results from the survey were released last month.

Merit Salary Increase Awards

Base salary increases are being awarded to 89 percent of employees in 2017, on average. For high-performers, the anticipated 2017 median merit increase award remains at 4.0 percent, the same as last year. 

2017 Merit Increase Awarded by Performance Category Results are shown for the median percentage.
	High Performers	Middle Performers	Low  Performers
Percentage of employees estimated to be rated in this category	22%	70%	5%
Average merit increase estimated for this performance category	4.0%	3.0%	0.0%
Source: WorldatWork.

Minor Regional Differences

As in recent years, a comparison of salary budget increases among employers in different states for 2017 showed little variance. The average (mean) increases ranged slightly from 2.9 percent to 3.1 percent, with the median at 3.0 percent for every state.

Metropolitan areas showed a bit more average salary budget variance this year, ranging from 3.0 percent to 3.3 percent.

"The metropolitan areas that show the highest percentages, such as the Pacific Northwest, Los Angeles, Dallas or Atlanta, tend to be in regions of the U.S. that are driven by high-tech or minimum-wage increases," Chou noted.

No city came in below the 3 percent number. The highest average salary budget increases this year were in:

• Atlanta: 3.3 percent.
  
• Dallas: 3.2 percent.
  
• Los Angeles: 3.2 percent.
  
• Portland, Ore.: 3.3 percent.
  
• San Francisco: 3.2 percent.
  
• San Jose, Calif. 3.2 percent.
  
• Seattle: 3.2 percent.
  

These findings also may in part reflect local and state government increases to minimum-wage rates, Chou said.

Another View of Merit Pay

Separately, New York City-based compensation firm Empsight shared preliminary results from its 2017 Policies Practices and Merit Report during a webcast at the end of July. The findings are based on mostly multinational and Fortune 500 companies in the firm's client database (70 percent with revenues above $5 billion).

The firm provided this comparison of merit increase budgets for 2017 and 2018.

Merit Increase Budget for 2017
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	2.79%	2.50%	3.00%	3.00%
Management	2.76%	2.50%	3.00%	3.00%
Professional	2.77%	2.50%	3.00%	3.00%
Support/Nonexempt	2.78%	2.50%	3.00%	3.00%
Source: Empsight.

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Merit Increase Budget for 2018
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	2.81%	2.50%	3.00%	3.00%
Management	2.82%	2.50%	3.00%	3.00%
Professional	2.82%	2.70%	3.00%	3.00%
Support/Nonexempt	2.82%	2.70%	3.00%	3.00%
Source: Empsight.

"Overall, merit budgets remained the same from 2016 levels across all industries," said Susan Bell, principal consultant at Empsight. While slightly higher budgets were found in the professional service, pharmaceutical, energy and consumer product sectors, "overall, merit budgets remained the same from 2016 levels across all industries," she said.

"The forecast appears slightly higher in 2018 merit projections versus 2017, but not by much," she noted. "Expectations are that spending will remain the same."

Total compensation increase budgets, which include merit increases, promotions and special adjustments, ranged between one-quarter to one-third percent on top of merit increases, Empsight found.

Total Compensation Budget Forecast for 2018
Employee Category	Mean	25th Percentile	Median	75th Percentile
Executive	3.22%	3.00%	3.00%	3.50%
Management	3.23%	3.00%	3.00%	3.50%
Professional	3.23%	3.00%	3.00%	3.50%
Support/Nonexempt	3.24%	3.00%	3.00%	3.50%
Source: Empsight.

"The 2018 forecast expects about the same spending across job levels, which is up only slightly from 2017," she noted. Overall total compensation budget increases are forecast to increase 3.25 percent (mean) and 3.00 percent (median) for 2018, compared with 3.21 percent (mean) and 3.00 percent (median) for 2017.

"Companies tend to target the median of the marketplace for both base and total cash compensation," added Jeremy Feinstein, Empsight managing director.

"For almost the last eight years, it's been a 3-percent merit world," limiting employers' ability to use pay to foster employee retention, he noted.

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Source: Society for Human Resource Management (SHRM)

https://www.shrm.org/ResourcesAndTools/hr-topics/compensation/Pages/salary-raises-variable-pay.aspx?utm_source=SHRM%20Monday%20-%20PublishThis_HRDaily_7.18.16%20(54)&utm_medium=email&utm_content=August%2007%2C%202017&SPMID=00330610&SPJD=07%2F25%2F1996&SPED=04%2F30%2F2018&SPSEG=&spMailingID=30076108&spUserID=ODM1OTI0MDgxMjMS1&spJobID=1100791438&spReportId=MTEwMDc5MTQzOAS2

Madeline Farber

Jul 19, 2017

Madeline Farber

Jul 19, 2017

Employers in San Francisco soon won't be allowed to ask job applicants about their salary history.

The new city law, which was signed by Mayor Ed Lee on Wednesday and is going into effect next year, aims to narrow the wage gap between men and women. Philadelphia and New York have passed similar laws, based on the idea that questions about salary history solidify the gender pay gap, making it difficult for women to escape a cycle of being paid less than men at each new job they take.

Equal pay advocates hailed San Francisco's move as a way of removing that disadvantage to women, but the question remains: How effective will the new law be?

"We want results immediately," says San Francisco Board of Supervisors member Mark Farrell, who sponsored the equal pay measure, which passed the board unanimously and has faced little opposition. "Practically speaking, as more and more women interview for jobs, it should have an immediate impact. When that aggregates to statistical differences — that will take a longer time. But you have to start somewhere."

According to recent data from the U.S. Census Bureau, women in San Francisco earn 84 cents for every dollar that their male counterparts make, only slightly better than the national average of 82 cents for every dollar. There are already federal laws on the books to address the issue, including the Equal Pay Act of 1963, which outlawed wage discrimination based on gender. But there are subtler forms of disadvantage for women than outright discrimination, and that's what San Francisco's new law aims to tackle.

Here's what experts say are the benefits and pitfalls of the new law:

It's a start

Equal pay advocates have largely praised the law, saying that while it won't erase the wage gap, it's better than nothing. The law "makes it less likely that inequities earlier in your career shape your entire career," says Emily Martin, general counsel and vice president for workplace justice at the National Women's Law Center, a non-profit organization that advocates for women's rights through litigation and policy initiatives.

Martin expects the law to prompt companies to think "more rigorously about how to set pay." She believes companies will begin setting clearer scales for compensation based on metrics such as experience and skills, instead of relying on an applicant's salary history.

Some companies have already started doing this. The Massachusetts-based Eastern Bank, for example, has previously said it reviews compensation data regularly to ensure any variation in pay for employees in the same or similar positions is based on experience and performance, not past salary history.

I ntel, too, uses similar metrics. In 2015, the company conducted an equal pay audit by comparing employees by job type and education level, experience, performance and responsibility — later reporting that it does not have a gender pay gap.

The law won't just benefit women

Taking a different approach when setting pay isn't just good for women, Martin says.

"Asking about salary history harms a lot of people, like people of color who tend to have lower wages, and people who are moving from the non-profit sector to the for profit-sector. It even harms people who are maybe trying to enter a new field and are willing to take a pay cut," she says. "It's a step toward fairer pay structures and benefits working people more broadly."

For example, Pew Research Center found that African Americans earned 75% as much as white workers in median hourly earnings in 2015, another gap that could be narrowed if companies stop asking about salary history.

But there are potential loopholes

While the new law prevents employers from asking about salary history, there's a significant loophole, experts say: Employers can still ask applicants about their salary expectations. And since women who are making less money than men may give lower numbers for their expected salary, that question could lead to potentially unequal pay, says Joelle Emerson, who founded a diversity consultant group called Paradigm.

"Often with these laws, it's not always so hard to get around it. If an employer asked about salary expectations, a candidate will give an answer that's grounded in their current salary," Emerson says. In other words, "these laws aren't necessarily going to eliminate the pay gap."

And it doesn't solve the issue of salary negotiations

Even if women are offered the same starting salary as men, women still tend to make less money because they are less likely to negotiate their salary. Women may choose not to negotiate because they lack confidence on how to do it, or because doing so presents a socially awkward situation, known as the "social cost" of negotiation. Research shows that women who don't negotiate are leaving money on the table, and it's a major reason that the gender wage gap still exists.

That's why Emerson suggests that companies limit salary negotiations, or stop doing them altogether. At Paradigm, for example, job candidates are told salary negotiations are not allowed — unless the candidate suggests that the salary being offered is lower than it should be. If Paradigm agrees with the candidate, the salary for everyone in the same role is adjusted accordingly. So far, Emerson says this has happened twice.

Accenture, a professional services company, GoDaddy, and Jet.com are other companies that have prohibited salary negotiations. Jet.com, for instance, eliminated salary negotiations in 2015 and instead implemented a compensation structure with 10 levels that sets all employee salaries based on position.

While there's still more to do, Emerson is optimistic that the San Francisco law will make a difference. "I think that having greater clarity will push companies to reflect more on their processes, and decide to take a different approach when determining pay," she says.

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Source: Fortune.com 

http://fortune.com/2017/07/19/san-francisco-salary-history-law/

• Gen Xers borrow the most from their 401(k) plans
• Boomers participate in 401(k) plans at a greater rate than younger coworkers, but investment diversification lags

CHARLOTTE, N.C.--(BUSINESS WIRE)--Rates of saving for retirement and investing habits differ from one generation to the next, according to a recent analysis of four million people who participate in 401(k) plans provided by Wells Fargo. Retirement plan data for Boomers, Generation X, and millennials reveal ways each generation can learn from the others when it comes to saving for retirement. The full analysis can be found in the Wells Fargo 2017 Driving Plan Health report.

Millennials show 13% gain in participation in past five years

Millennials have demonstrated the biggest gains in the percentage of those participating in their 401(k) plans over the last five years, with an increase of 13.3%. They’re also the most-diversified generation, with 83% meeting Wells Fargo’s minimum diversification goal*. This diversification number drops to 80% for Gen X and 77% for Boomers. In addition, 30% of millennials contribute enough to maximize their full employer match when one is offered. This number falls to 27% for Gen X and 25% for Boomers.

“This engagement among millennials is encouraging because the sooner they get started, the more prepared they will be for retirement — they have the power of time to help grow their nest egg,” said Mel Hooker, director of relationship management for Wells Fargo Institutional Retirement and Trust. “This generation is benefitting from legislation that made it easier for employers to automatically enroll employees into their 401(k) plan, and from the use of default investments that help them meet a minimum level of diversification.”

Millennials are also the greatest users of Roth 401(k) plans, which allow participants to contribute after-tax income. Millennials use this option, when offered by their employer, at a rate of 16% compared to 11% of Gen X and 8% of Boomers.

“It’s important to note that the use of Roth 401(k) plans is an intentional choice on their part, perhaps as a tax diversification strategy,” added Hooker.

*Minimum diversification goal in 401(k) plans is defined by Wells Fargo as when a participant is either (1) invested in a diversified investment option such as a target-date fund, managed account product, or comprehensive advice program, or if they are self-directed or (2) invested in at least two different classes of equity funds and at least one fixed income fund and less than 20% invested in employer stock.

Diversification and asset allocation do not assure or guarantee better performance and cannot eliminate the risk of investment losses.

Is Gen X feeling the squeeze?

Gen X has seen an 11% uptick in participation over the last five years. However, they’re leading the pack in loans from their 401(k) plans: 25% of Gen X participants have a loan, compared to 16% of millennials and 19% of Boomers.

“This may be a case of sandwich-generation syndrome, in which people are juggling the challenge of raising kids and helping aging parents — all during a period of increasing financial complexity in their lives,” said Hooker. “Unless you need the money for an emergency, however, it’s best to resist the urge to tap your retirement funds. And if you need to do it, be sure to understand the terms.”

While many 401(k) plans allow participants to borrow from their 401(k) accounts, there can be some unintended consequences that people need to be aware of before making that decision.

• Smaller retirement savings: When you take out a loan, you are losing the benefits of investment growth, and that could leave you with a smaller retirement savings. How much smaller? This depends on a number of factors, including the size of the loan, the repayment period, whether you continue contributions during this period, the earnings on your account, and the loan interest rate. Also, if you stop contributing while you are paying back your loan, you won’t receive any employer matching contributions.
• Repayment requirements: If you lose your job or take another one, you’ll have to repay the money quickly, usually within 30 to 60 days. If you can’t, the IRS considers the money you’ve taken out to be a withdrawal, which means you’ll have to pay taxes — and if you’re under age 59½, you may owe a penalty as well.

Boomers participate at higher rates, but lag in diversification

Early this year, the first wave of Boomers turned 70½, reaching the age at which they are required to start drawing down their 401(k) savings. As this population nears retirement, the number of those participating in their plan has increased by 8.3% over the last five years; although this is a lower rate of increase than millennials and Gen X, overall more Boomers participate than younger generations.

A little over a third of all participants are more conservative in their own investments than a typical target-date fund appropriate to their age. But more than half of Boomers have greater equity exposure than an age-appropriate target-date fund, which could expose them to significant investment risk.

“It’s a delicate balance; lower returns for overly conservative participants can hurt balances in the home stretch to retirement, but overly aggressive participants face an even larger potential threat to their retirement income in the form of investment risk,” said Hooker. “It’s important to encourage employees to create a plan for saving and stick to it. Consistency in contributions and diversification are a better path to success than chasing returns or trying to time the market, because retirement success is a long-term proposition.”

Who is on track?

For the purposes of setting a goal and tracking progress, Wells Fargo measures the percentage of participants on track to replace 80% of their pay in retirement*, and it appears that many of the behaviors in which millennials take the lead are pointing to a higher percentage on track: 66% of millennials are on track to reach this goal in retirement, compared to 51% of Gen X and 41% of Boomers.

*Income replacement assumptions include a goal of replacing 80% of income during retirement, a retirement age of 65, and Social Security beginning immediately. In addition, the calculation assumes income increases of 2% per year, investment returns averaging 7% annually before retirement (and 4% after retirement), and 3% annual inflation in retirement.

How employers are helping

While there are many ways employers can help their employees save more for retirement, this analysis points to some stand-out opportunities for employers.

1. Closing the participation gap through automatic enrollment

While participation remains lowest among younger, more recently hired, and lower-earning employees, these populations have seen greater gains than their counterparts, leading to a narrowing of the participation gap for all three demographic dimensions. The biggest driver? Automatic enrollment — when this younger age group is automatically enrolled, 85% stay in the plan. In the absence of automatic enrollment, the participation rate falls to 38%.

2. Increasing default deferral rates

When employers automatically enroll their employees in the 401(k) plan, the most common default deferral rate is 3%. At this rate, 11.1% of people opt out of the plan — meaning nearly nine in 10 employees stay in the plan. However, when people are automatically enrolled at a 6% contribution rate, participants have a nearly identical reaction, with 11.3% opting out of the plan. Given contribution-rate challenges, defaulting employees at a higher contribution rate to begin with may help significantly.

3. Automating regular contribution increases

Today, 20% of plans include a feature that automatically increases their employees’ contribution rate on a regular basis (often annually) and requires employees to take action to turn it off, or “opt out.” This is a significant uptick from 8% of plans that offered this feature in this fashion five years ago. In addition to encouraging higher contribution rates by defaulting employees into a plan at a higher rate to begin with, adding automatic contribution increase as a feature employees need to elect to turn off, rather than offering it and making them take the steps to turn it on, will drive employees to a 10% contribution rate more quickly than if they simply stagnate at the automatic enrollment contribution rate.

“Employers don’t have to guess anymore. The data reveal exactly what they need to do to move the needle on each behavior,” said Hooker. “In particular, when we see retirement plan contribution rates are in a stagnant state relative to other important behaviors, we can put in place the plan design features that will help improve this metric. Employers can use the data to inform their decisions based on their defined goals for helping their employees save for retirement.”

See also:

• Tips for plan sponsors: 6 ways to build effective 401(k) plans
• Tips for employees: 6 things you can do today to boost your 401(k)

Investment and Insurance products:
Not Insured by FDIC or any Federal Government Agency			MAY Lose Value			Not a Deposit of or Guaranteed by a Bank or Any Bank Affiliate

Recordkeeping, trustee, and/or custody services are provided by Wells Fargo Institutional Retirement and Trust, a business unit of Wells Fargo Bank, N.A.

Wells Fargo Bank, N.A. and its affiliates, including their employees, agents, and representatives, may not provide “investment advice” to any participant or beneficiary regarding the investment of assets in an employer-sponsored retirement plan. Please contact an investment, financial, tax, or legal advisor regarding your specific situation.

About Wells Fargo

Wells Fargo & Company (NYSE:WFC) is a diversified, community-based financial services company with $2.0 trillion in assets. Wells Fargo’s vision is to satisfy our customers’ financial needs and help them succeed financially. Founded in 1852 and headquartered in San Francisco, Wells Fargo provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 8,500 locations, 13,000 ATMs, the internet (wellsfargo.com) and mobile banking, and has offices in 42 countries and territories to support customers who conduct business in the global economy. With approximately 273,000 team members, Wells Fargo serves one in three households in the United States. Wells Fargo & Company was ranked No. 25 on Fortune’s 2017 rankings of America’s largest corporations. News, insights and perspectives from Wells Fargo are also available at Wells Fargo Stories.

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Source: Wells Fargo

https://newsroom.wf.com/press-release/wealth-and-investment-management/wells-fargo-millennials-make-greatest-gains-401k