Understanding Retirement Plan Changes in 2025
As annual retirement plan notices roll out, it’s a perfect moment to reflect on the changes coming in 2025 and how they might impact your retirement goals. Whether you're an employee navigating contribution strategies or a sponsor managing fiduciary responsibilities, understanding these updates can empower you to make informed decisions.
Retirement plans are more than just savings vehicles—they’re a delicate balancing act of meeting participant needs, helping highly compensated employees (HCEs) maximize benefits, and managing the sponsor’s legal and financial obligations. Behind the scenes, I’ve been working with sponsors and committees to simplify this complexity, focusing on investment oversight, fee monitoring, and participant education—all while helping sponsors establish lasting best practices that improve outcomes and reduce risks.
For sponsors, the legal requirement to act in participants’ best interests drives continuous improvement and accountability. For participants, these plans offer unique benefits, like access to institutional-grade investment funds with lower costs and expert management compared to retail options. Let’s break down the key changes and opportunities to ensure you get the most out of your plan.
Key Changes for Plan Participants and Sponsors
Automatic Enrollment and QDIA Updates
Participants: Starting in 2025, many new retirement plans will include automatic enrollment for eligible employees, typically at a 3-10% salary deferral rate. Default investments, often in qualified default investment alternatives (QDIA) like target-date funds, can help participants save without needing to take immediate action. Sponsors: This feature increases participation rates, benefiting both employees and highly compensated employees (HCEs) by improving compliance testing results. Ensure your default investment options are carefully selected, monitored, and aligned with participant needs.
Target-Date vs. Target-Risk Funds
Participants: Target-date funds adjust risk automatically as you age, while target-risk funds maintain a steady level of risk. Both have pros and cons, but choosing the right one depends on your financial goals and time horizon. Sponsors: Monitoring the performance and fees of these funds is essential. Target-date funds may align better with automatic enrollment, but educate participants on their features to avoid mismatched expectations.
Active vs. Passive Management
Participants: While passive funds often have lower fees, actively managed funds could reduce losses and capitalize on gains in volatile markets. Know your risk tolerance and investment objectives to decide what suits you best. Sponsors: Actively managed options can demonstrate your commitment to participant outcomes but require consistent evaluation of performance and fees.
Annual Fee Disclosures 404(a)(5)
Participants: You’ll receive disclosures about fees and plan performance. Review these to understand how costs affect your long-term savings. Sponsors: Clear communication is vital. Regularly benchmark your plan’s fees to ensure competitiveness and compliance.
Matching Contributions and Education
Participants: Take full advantage of employer matches—it’s free money! Understanding your plan's features through provided education sessions can empower you to save effectively. Sponsors: Enhanced matching contributions attract and retain talent. Invest in ongoing participant education to improve financial literacy and retirement readiness.
Caution on "Funds of Funds"
Funds of funds (FoFs) bundle multiple investments, potentially leading to higher fees and diluted returns. Both participants and sponsors should evaluate these funds critically. Look out for expense ratios, overlap in holdings, and overall performance compared to simpler options.
The Role of PEPs, MEPs, and CITs
Participants: These pooled plans offer professional management and reduced costs but often lack fee transparency. Review disclosures carefully. Sponsors: While pooled plans simplify administration, you remain responsible for fiduciary oversight. Ensure all aspects of the plan—from fees to investment selections—are clearly communicated and well-documented.
Final Thoughts: Balance Compliance and Outcomes
Retirement plans require a delicate balance between meeting legal obligations and achieving positive participant outcomes. For sponsors, this means fostering transparency and monitoring costs. For participants, it’s about being proactive in understanding plan options and making informed decisions.
If you’re a plan participant looking for guidance on maximizing your retirement savings or a plan sponsor seeking fiduciary best practices, I’m here to help. Let’s discuss how you can navigate these changes with confidence and clarity.