Finance

By Mark Olsen, Managing Director at PlanPILOT

Behavioral finance is generally defined as the study of the influence of human psychology on decision-making in matters concerning money or finances, including the aggregate effect of a large number of individual decision-makers on financial market movements. It is based upon the theory that decision-makers (humans) are not always rational, cling to their biases or take cognitive shortcuts, and often succumb to emotional behavior or exceed their limits of self-control. 

These behaviors are often detrimental to successfully enrolling eligible employees into a company retirement plan, as well as encouraging participants, once enrolled, to remain in the plan and succeed in accumulating retirement savings for the future. By understanding how behavioral finance tendencies influence employee behavior in this regard and utilizing this understanding in plan design, plan sponsors can encourage higher participation and contributions by employees and assist them in their savings objectives.

Overcoming Human Inertia

The First Law of Motion, stated simply, is that an object at rest stays at rest unless acted upon by an external force. So it is with humans; we tend to stay with our status quo unless something compels us to act. Enrolling in a company retirement plan and deferring income to contributions (instead of spending today) can be intimidating and unpleasant to some participants. 

To counter this tendency, many plan sponsors have added automatic enrollment features into the plan once employees become eligible. As of the SECURE Act 2.0 in 2022, this feature is now required of all newly established qualified retirement plans. Studies have shown that auto-enrollment (even with an opt-out choice) dramatically increases participation rates within defined contribution plans.

Further, the effects of how this feature is presented to participants also matters. Structuring the alternative (to the default enrollment) as an “opt-out” tends to increase participation rates rather than the opposite (opting-in).

Help Participants With Loss Aversion

Loss aversion is a strong emotional behavior. The pain of loss has been shown to be twice the pleasure of potential gain. This tendency may deter employees from proactive decisions that could help them accumulate retirement savings. These include enrolling in the plan at all, choosing smaller payroll deferral contributions, or selecting overly conservative investment choices that could slow the growth of their account over time. Loss aversion also includes panic-selling of equity and other investments during inevitable market declines, often at what turns out to be market lows, which can be costly to a participant’s investment success.

Educational resources and access to investment advisors are two solutions to this issue. Equally important is to include risk tolerance assessment materials, information on market volatility, and interactive retirement account growth models that can help a participant understand the implications of contribution and asset allocation choices. Part of loss aversion is the fear of making a mistake when selecting investments or asset allocation. Providing education or the assistance of an investment professional can help alleviate this issue.

Overconfidence Can Lead to Poor Choices

Participant overconfidence can also be counter-productive to long-term success. There are those participants (due to age or inexperience) who have never directly endured a market correction and the emotional impact such events can cause. It is one thing to casually observe a correction in the news, but quite another to see the value of your own money decrease by as much as 30 percent over a short time period. Similarly, participants may expect more investment return than is realistic or choose investments with the belief that these “will always go up.” 

Just as with loss aversion, overconfidence can be resolved with educational materials, discussion with qualified investment professionals, and the other features mentioned above. Emphasis on historic and realistic investment return assumptions and potential downsides of aggressive investment allocations should be underscored.

The Benefits of Limiting Investment Choices

Retirement plans are often designed with wide varieties of investment options from a multitude of providers that appear to cover the spectrum of investment sectors. While the reasoning may be to provide suitable diversification and choice, the notion of “more is better” has actually been shown to deter participation, not enhance it. 

Even for those who profess to be “experienced investors,” sorting through a large menu of allocations or fund choices may be daunting. For inexperienced participants, too many choices (whether investment-related or even while enrolling in the plan itself) may provoke “decision paralysis” and trigger a psychological “flight” response where the employee declines to even enroll at all. Providing “target-retirement” funds as default investments may help participants who may be uncomfortable with such decisions.

Include Other Features to Improve Participation

Other enhancements to retirement plans can help participants improve their retirement savings success. Along with auto-enrollment, default contribution rates have been effective as a guide to enrollees of how much they might contribute each pay period to their retirement account. Many who are inexperienced with personal finance often ask their plan sponsor or the investment professional how much they should save in the retirement plan. A default contribution amount (which, of course, can be changed by the participant) can be a gentle guide at enrollment. Of course, such defaults ought to consider an available employer match and the advantages of maximizing that benefit.

Similarly, many plan sponsors incorporate a graduating contribution percentage schedule that helps a participant overcome inertia and assists them in achieving a higher savings rate over time. Such schedules might follow historical inflation and wage-increase data toward a target savings rate that might not otherwise be reached without a disciplined structure for the participant to approve and follow.

Utilizing Professional Assistance

PlanPILOT is uniquely positioned to help employers customize and design benefit plans that meet their needs and objectives and those of their participants. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

With the continued shortage of quality workers to fill emerging available jobs across the growing economy, companies are recognizing that retaining older workers as long as possible has become a greater necessity. In addition, managers and HR directors are realizing significant advantages of this growing employee demographic. Along with their accumulated wisdom and experience, late-career employees are still interested and able to stay employed. They also embrace desirable employee habits, such as a traditional work ethic, a duty of care toward their responsibilities, and steady reliability.

To incentify such individuals to stay, however, it may be worthwhile to revisit your benefits program and look at what upgrades or enhancements might be implemented to accommodate older employees in your workforce. Here are some suggestions.

Address Older Worker Healthcare Needs

It’s no surprise that healthcare benefits would be a primary concern for older workers and measures can be taken to address those needs. Contrary to what might be surmised, older workers are less prone to injury at the workplace than younger workers, but often take longer to recover from injury. Providing greater choice in healthcare options and allowing more time off for healing and physical therapy may be worth investigating. 

Having the company provide a higher percentage of health, dental, and vision plan premiums (maybe 100%) may also be advantageous. Depending upon the coverage, older workers may be willing to continue working if their employer healthcare coverage meets their needs, even if they qualify for Medicare benefits. Include coverage for physical and rehabilitative therapy.

To help older (or all) eligible employees with rising healthcare costs, implementing a health savings account program with employer contributions could be a significant benefit with several tax advantages. Employer contributions may be made whether or not a Section 125 plan is implemented. 

A Greater Interest in Insurance Coverage

Younger employees in the prime of their lives are generally less concerned about life and disability insurance, but you can be sure your older workers are quite interested in these benefits. Company-provided life and disability insurance are top-of-mind benefits for these individuals. Offering additional coverage at discounted rates may also be added.

Accident and critical illness plans would be attractive too. These insurance programs pay lump-sum benefits to workers who are either in a severe, debilitating accident or suffer prolonged illnesses, such as heart attacks, organ transplants, or cancer.

Encourage Retirement Saving With Matching and Education

Older employees naturally have less time than their younger colleagues to save for retirement. Offer them assistance with higher employer matching contributions and profit-sharing. Provide educational workshops on retirement income planning that explain the long-term benefits of payroll deferrals to retirement accounts and the higher contributions limits for those over age 50. Schedule regular visits to the workplace by investment advisors to the company plan and allow for work-time meetings so older workers can ask questions or receive updates about retirement saving, investing, and financial wellness.

Consider Legal Assistance As a Company Benefit

A lesser known but growing company benefit offered by most Fortune 500 companies is legal services. These programs can be flexible in design for the older demographic in the workplace, providing legal advice on topics specific to them, such as creating a Last Will or other estate planning documents, late-life divorce, or long-term care concerns. Individual attorney fees are expensive and getting to see an attorney outside working hours may be difficult. Arranging for legal consultations would be a welcomed and valuable benefit.

Flex-time and Other Benefits

Having flexibility in their work schedule remains a primary benefit for many older workers. At this point in their lives, maintaining a greater work-life balance is a priority, as well as the ability to schedule and meet healthcare appointments, making time to help with grandchildren care and activities, and attend to other personal or family obligations. According to a 2023 McKinsey & Company report, those 55-64 years of age cited “workplace flexibility” as the third most important reason for leaving a current job.

Providing learning and skill development programs may also be attractive to older workers. An AARP study found that the majority of older workers (especially those among minority populations) were keenly interested in learning new skills and interest increased into the 90th percentiles when employer support was provided. These conclusions help support the value of retaining older workers despite rampant accusations (over 70 percent of respondents) of age discrimination in the workplace—something every company would want to avoid.

Utilizing Professional Assistance

PlanPILOT is uniquely positioned to help employers customize and design benefit plans that meet your unique needs and objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

It’s no secret that the advent of remote work has forced a wide range of challenges and benefits to employers and employees. Both have realized the benefits of cost savings and flexibility and are also making adjustments to accommodate each other’s goals of productivity and accountability in this new environment. And studies indicate this trend will likely continue.

One area that may be lacking appropriate attention thus far is the effect of this new paradigm on retirement plans and employee saving behavior. Studies by investment companies such as Morningstar indicate that physical absence from the office environment may be altering how employees participate in their employer-sponsored plan. The conclusions suggest that plan sponsors take measures to address and take advantage of these changes by adapting their retirement plans to accommodate this new mode of employment to foster goodwill and employee satisfaction of remote workers.

Reallocation of Cost Savings Toward Retirement

While working remotely, employees may be enjoying savings on commuting expenses, the lower need for professional attire, and not paying for lunches out. According to surveys by FlexJobs, remote workers have saved as much as $6,000 annually by working from home, and recent statistics by the U.S. Career Institute indicate savings could actually average over $10,000 per year. These savings may be redirected toward retirement plan deferrals. In addition, since the amounts saved through remote work are in after-tax dollars, the actual pre-tax amounts that could be directed toward retirement savings could be significantly more.

Employers can actively encourage employees to use these savings to increase their retirement contributions. One approach is through targeted financial education programs that emphasize how small adjustments, such as reallocating savings from reduced commuting expenses, can significantly boost retirement savings over time. Employers can also influence behavior by illustrating how saving an additional $50-$100 a month can grow over the course of a career, using personalized examples in financial wellness workshops or interactive retirement calculators.

Additionally, employers can highlight these opportunities in benefit enrollment communications or through dedicated sessions with financial advisors who explain the impact of contributing extra savings to retirement accounts. Incentivizing higher deferral rates, perhaps through additional employer matching, can further motivate employees to take advantage of the savings they’ve gained through remote work arrangements.

With lower workspace expenses, plan sponsors who have adopted the remote work culture may find themselves with extra cash flow to offer a higher employer match or profit-sharing in their retirement plans, as well as offering other employee benefits to attract better talent and retain high-value employees. Some plans may be upgraded to include educational features, professional advisor services, and other benefits.

Retirement Plans May Need to Adapt for the Remote Worker

One challenge faced by plan sponsors will be to ensure equal access to plan resources. Traditionally, participation and access required face-to-face interactions with administrators or HR, which may not be as available to remote employees, even with the availability of Zoom or FaceTime technology. Accommodations to these workers, such as virtual benefits education workshops and robust online platforms, may need to be implemented to be certain of equal access and to meet plan requirements. A side effect of implementing virtual access to resources or presentations (and a deterrent to remote employee participation) may be “Zoom fatigue,” where workers avoid or decline engaging in an additional virtual meeting that is not required by their job.

Reaching remote employees with plan information, access availability, and promoting participation may be another significant challenge. Along with the lack of normal office banter or casual communication, remote workers may feel less informed and connected to their retirement plan. This lack of connection may lead to lower enrollment and participation, especially for employee stock ownership plans (ESOPs). A MetLife open enrollment survey indicated that nearly half of remote workers had difficulty understanding their employee benefits, versus 29% of in-house colleagues with a similar issue.

Remote Workers May Invest Differently

Those who work outside their company offices are likely to be more independent in their behavior and thinking patterns. As such, their approach to their retirement account allocations and benefits may differ from their in-house colleagues. Reports indicate that remote participants may be less inclined to use default investments, such as target-date funds, and may be more interested in personalized service from plan financial advisors or prefer a wider menu of investment options or managed accounts.

It May Be Management Who Is WFH or WFA.

The demographics of remote workers play a key role in retirement saving patterns as well. 2024 statistics indicate that while 54% of junior-level employees work remotely, a full 64% of senior-level employees work at least part-time outside the office. In addition, the greater number of remote employees are found in the professional service and technology fields. Both of these groups tend to be higher-compensated and higher-educated, implying that benefits plans need to accommodate their retirement planning objectives and provide for increased retirement savings needs.

In sum, those companies with a significant remote employee population may be wise to review these effects and carefully consider how upgrading and adjusting their plans may result in greater employee satisfaction and favorable participation by remote workers.

Utilizing Professional Assistance

At PlanPILOT, our company is uniquely positioned to help you meet these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

Due to the significant amount of fiduciary responsibility of a retirement plan committee to both consider the best interests of the participants and properly oversee the administration of the plan, committee meetings ought to be as efficient and effective as possible. Like any other executive meeting, proper preparation and processes can deliver meaningful benefits to both the participants and the committee members themselves.

In our experience at PlanPILOT, effective preparation for plan committee meetings is a multifaceted endeavor, but doing so in a careful and structured manner should enable the committee to cover the many areas of plan administration, functionality, regulation changes, and investment evaluation. Here is a sampling of what we recommend.

Prepare a Structured Agenda

Like any other effective meeting, having a structured agenda at the ready is essential. Prepare the agenda well ahead of time and circulate drafts to committee members to solicit their input, potential sticking points, and innovative ideas. Steer and emphasize discussion topics toward critical areas of plan management to ensure due diligence requirements are fulfilled.

Investment analysis, selection, and monitoring are only a few aspects of the committee’s responsibilities. Include a comprehensive review and regulatory update of the committee’s fiduciary duties, such as overseeing plan administration and managing fees. Include elements of fiduciary training for committee members, which is a growing focus of the DOL and plan auditors. Include a rough timetable to get through the agenda while allowing adequate time for discussion and Q&A as needed. Once the meeting starts, stick to the agenda and rough timetable to avoid getting sidetracked and so the meeting ends as scheduled.

Assign Pre-Meeting Homework to Committee Members

Few things derail a meeting’s effectiveness more than unprepared committee members. Everyone should arrive at the meeting with a clear understanding of the agenda, the objectives of the discussions, and have their questions or concerns ready. Along with sending the prepared agenda to members in advance (that includes prior feedback), make sure to include—or provide access to—key documents that will be referenced or reviewed, and encourage members to review these beforehand. These documents can include investment performance reports, Investment Policy Statements (IPS), and other plan governing documents. If regulatory changes are to be considered, include summations of the changes and the implications for the plan going forward. Allow time for the members to ask and get answers to quick clarification questions ahead of time so the discussion isn’t interrupted or delayed unnecessarily.

Plan Meeting Topics Out a Whole Year Ahead

Each meeting should include the following agenda items:

• Review of the previous meeting’s minutes and acceptance by the committee
• Fiduciary training
• Investment due diligence
• Review of fund utilization

From there, if time remains, schedule other topics over the year that should cover all aspects of the plan which the committee should monitor:

• Changes in industry regulations and the marketplace

1. Updates on legislative and regulatory changes affecting the business and therefore the plan
2. Insights from recent litigation and key takeaways
3. Innovations in products or technology and emerging industry trends that may enhance or detract from future company profitability and growth

• Plan Investment Evaluation

1. Overview of financial market and economic conditions
2. Assessment of current investments against IPS standards; does the investment strategy and offerings meet these standards or is revision necessary?
3. Analysis of participant allocations across investments options; are some outdated or are new options available, requested, and viable?
4. Review of investment-related expenses; do these continue to meet industry standards and would satisfy DOL or auditor review? How do these compare with competitor or peer plans?
5. Regular discussion with the plan investment advisors as to whether changes in strategy, fund investments, and recordkeeper platform is warranted or needed

• Review of Plan Administration

1. Summary of plan activities including loans, contributions, and distributions. Are there symptoms that indicate problematic trends requiring plan amendments?
2. Examination of operational issues and testing outcomes
3. Addressing participant complaints and concerns
4. Evaluating participant education and effectiveness of these programs regarding participant understanding of plan benefits and options
5. Upcoming deadlines and reporting obligations for the plan. Are these imminent and being met in a timely fashion?
6. Potential for deficiencies as a result of annual audits and regulatory examinations

As mentioned, the complexity of plans and the inherent responsibility of retirement plan committees requires careful and diligent attention to a myriad of details. Only with careful and thorough meeting preparation can these committees efficiently carry out periodic meetings and successfully fulfill their duties and objectives.

Utilizing Professional Assistance

At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

For a large percentage of today’s young workers, student loan debt continues to be a significant financial burden. Even with efforts by the federal government to ease loan burdens through forgiveness proposals, student loan payments are impacting the ability to move forward with their lives and financial goals. Specifically, surveys indicate that younger professionals and other workers are less willing or financially able to contribute to their employer-sponsored retirement plans, due to the high student loan payments they need to make each month.

Fortunately, employers now have a tool to help. A little-known provision in the SECURE 2.0 Act allows employers to make contributions to an employee’s retirement plan account that match the student loan repayments made by that employee each month or year. This allows the employee to both continue to make timely payments to reduce and pay off their student loan debt and grow their retirement accounts (through their own and employer matching contributions) at the same time.

Why Are Early Retirement Plan Contributions So Important?

In a word: compounding. Many studies demonstrate the importance of starting retirement contributions early in life. Early contributions allow the magic of compounding earnings in a retirement plan to grow more over a longer time period before retirement withdrawals begin. If younger workers delay starting or contributing to their employer plan accounts, they may have less favorable alternatives to build their retirement assets (e.g., saving more later on, deferring retirement and working longer, or compromising potential retirement lifestyle spending).

Advantages to Employers

Competition for talent is acute for employers. According to Bureau of Labor statistics, employees changing jobs has continued to increase since 2008. In 2023, 44 million workers quit their jobs and 3.4 million did so in January 2024 alone. Yet, hiring has still outpaced job changes, indicating employees (especially young employees) are seeking better opportunities and more attractive company benefits.

Logically, offering an employer benefit that potentially addresses a young job candidate’s chief financial concern (i.e., how to save for retirement while paying off higher-education debt) could be a key factor in attracting and retaining young talent. A higher employer match based on a young employee’s retirement plan contributions may not matter much to the job candidate if they’re unable to contribute to the plan in the first place.

Employers may also benefit from the goodwill generated by recognizing and providing a potential solution to a large societal and financial problem. Helping younger workers boost retirement savings while reducing debt can alleviate employee stress and financial concerns and promote job satisfaction and talent retention. Today’s younger generations are also looking at companies who demonstrate they care about their employees as people, not just workers.

How the Benefit Works

Employers who sponsor 401(k), 403(b), and governmental 457(b) plans or SIMPLE plans can make matching contributions to an employee’s retirement account if the employee is making regular qualified student loan payments (QSLPs) as long as the employer’s plan treats student loan payments the same as normal elective deferrals for match rates, vesting, and eligibility purposes. At present, employees must certify to their employers they are actually making student loan repayments and employers are allowed to rely on such certification without substantiation. Further refinements and regulations are likely forthcoming.

Qualified student loans are those loans utilized for qualified higher-education purposes (such as tuition, fees, room and board, etc.) as defined by IRC Section 221. The annual limit, including salary deferral elections, would be the same as allowed by the annual elective deferral limit. 

Example: Maureen, age 35, participates in an employer-sponsored 401(k) retirement plan that matches QSLPs as well as salary deferrals. The 2024 salary deferral limit for employees under age 50 is $23,000; Maureen defers $14,000 from her salary to her retirement plan. If she also makes $11,000 of QSLPs in 2024, only $9,000 ($23,000-$14,000) of those repayments can be matched by her employer. 

There are other preliminary rules that must also be followed. Since this benefit is relatively new to both employers and employee participants, careful discussion with recordkeepers and TPAs is essential, as well as providing proper and thorough education to employee-participants.

Utilizing Professional Assistance

Implementing new aspects to a retirement plan can present significant challenges to a plan sponsor, especially when considering the complexity of choices, fiduciary duties and responsibilities, and avoiding liability issues. You also want to facilitate a smooth implementation process and “get it right the first time” to foster confidence with your participants.

At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.