A successful retirement plan program encourages and enables its participants to build sufficient retirement savings, choose the appropriate investments, manage investment risk, and generate a lifetime of income. Although there exist nearly as many retirement plan structures as individuals who participate in them, not all plans are created equal—and plan design can significantly influence savings and retirement decisions. However, due to the number of options available, plan design can be a complex undertaking. Learn more about the plan design features that will boost your plan participants’ readiness for retirement.
Automated Features
Studies have repeatedly shown that implementing an automated approach may significantly improve participant savings and investment outcomes.
Auto-Enrollment
Automatic enrollment in a retirement plan offers many advantages, including:
- Boosts plan participation,
- Attracts and retains talented employees,
- Helps employees start saving for retirement, and
- Offers tax advantages to employer.
Implementing automatic enrollment serves to overcome employee inertia at enrollment, as many employees find the enrollment process to be overwhelming and time-consuming. Employees who must manually take action to opt out of their retirement contributions are far more likely to simply let them ride, while employees who must manually set up their own contributions are less likely to start anything at all. Similarly, automatic enrollment can safely default participants into a qualified default investment alternative (QDIA).
Auto-Escalation
After establishing automatic enrollment, plan sponsors may also want to consider auto-escalation. Auto-escalation incrementally increases each participant’s retirement contribution by a percentage or two each year until they’ve reached a pre-determined cap. Many plans adopt a 1 percent annual increase, but there is no requirement for the escalation rate.
Although implementing these automated features can require some extra oversight and administration, it also provides extra protection. Following federal QDIA guidelines can protect plan sponsors—who have strict fiduciary responsibilities to their participants—from being held liable for participants’ investment losses.
Immediate Eligibility and Vesting
Employee demographics, plan features and company goals are all factors sponsors should consider when choosing eligibility for their plan, and eligibility can influence your plan’s and plan participants’ success. In today’s competitive employment market, it no longer makes sense for employers to make their employees’ participation contingent on working with the company for a certain amount of time.
Companies that offer immediate eligibility (and immediate vesting in any employer match) can see a near-instant improvement in participation rates and may be able to maintain a competitive edge when it comes to recruitment and retention.
Employer Contributions
Plan participants’ saving behavior can be heavily impacted by the contribution formula their plan sponsor establishes. Therefore, a plan sponsor should design its contribution formula with one goal in mind: encourage participants to meet minimum savings goals. The more common forms of employer contributions are traditional match, stretched match and profit sharing – employers may also do a combination.
Offering a match is a major incentive for employees to participate in their employer-sponsored retirement plan. If an employer can afford to match only 3% percent of an employee’s retirement contribution, they have several options:
- a 100% match on contributions up to 3% percent,
- a 50% percent match on contributions up to 6% percent,
- or a hybrid approach that combines the full and reduced match.
Using the 50 percent match option can spur employees who “max” the match to contribute a total of nine percent of their salary, compared to a total of only six percent when using the traditional match. By ensuring that even the smallest contribution receives a match, you’ll encourage participation from employees who might otherwise not be able to set any funds aside.
Establishing a profit-sharing program can be another way to boost employee participation and improve their retirement readiness. These compensation programs incentivize employees to set aside retirement funds by awarding them a percentage of company profits at the end of each fiscal year.
Simple and Diverse Investment Options
When it comes to creating an accessible and successful investment menu, simplicity is key. This usually means limiting menu offerings to just a few target date and lifecycle funds along with some broad index funds focusing on large caps, small caps, international funds, and bonds. It’s imperative to be sensitive to varying participant needs and creating a fund line up for all types of investors. However, the more funds you add to your plan’s lineup, the more confusion you risk introducing into the process.
It’s also important to pay close attention to how you present this investment menu to plan participants. Because part of a plan sponsor’s fiduciary duties to participants include protecting them from uncompensated losses, presenting participants with a context- and explanation-free investment menu can significantly increase their risk of selecting ill-suited options.
Plan and Investment Education
Even seasoned investors can benefit from financial education, from general financial literacy and budgeting courses to more detailed explanations of the structure and purpose of each of the funds in their retirement menu. By combining retirement plan education with other financial wellness education modules and making these programs available on-demand, plan sponsors can increase the overall financial literacy of their workforce and, by extension, boost retirement plan participation rates.
PlanPILOT Can Help
If you are interested in adding these features to your plan, it’s time to talk to an advisor. As an independent registered investment advisor, PlanPILOT helps deliver comprehensive retirement plan advisory services to 403(b), 457, and 401(k) plan sponsors. Our services minimize sponsors’ fiduciary risks while improving participant outcomes, a winning combination. Call us today at (312) 973-4911 or email info@planpilot.com.
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