Is your company’s retirement plan helping employees save adequately for the future? Are older workers retiring in a timely manner to make way for new talent? An effective retirement plan helps employees save adequately for the future and allows older workers to retire in a timely manner to make way for new talent. The retirement plan should serve the needs of the company and its employees. If it doesn’t, it’s time for a change.
Perhaps you originally established your retirement plan to attract, retain and reward employees. Maybe you were concerned about productivity as workers delayed retirement. Or maybe you simply wanted to do the right thing and help your employees retire with confidence. Whatever the case, it’s important to review whether the retirement plan you envisioned back then is living up to your objectives today.
Here are some signs that your retirement plan could use a tuneup:
- Are certain groups (among ages, departments and salary) enrolling at a lower rate?
- Are account balances low?
- Are participants not properly diversifying their investments?
Here, we will review the steps you can take to evaluate your plan’s performance and whether it meets your objectives. If you find that it falls short in some areas, your retirement plan advisor can help you get back on the right track. For example, if your plan has low participation within a certain group, you may need to alter your plan design. You may also need to ramp up retirement plan education and communication.
First Things First: Get to Know Your Plan
What is the top priority for your retirement plan? To begin, list your plan objectives in order of importance. Here’s a list of common retirement plan objectives to give you an idea:
- Attract and retain employees
- Help employees save for the future and retire in a timely manner
- Offer a form of savings with tax advantages for the employer and employees
- Help the owner and key management group build retirement savings
Once you have created your list of objectives, rate how well your plan is achieving each of them (on a grade scale of A through F). Which objectives received a passing grade, and which ones failed? It’s important for all objectives to pass, but your top objectives, in particular, should receive good grades.
A healthy retirement plan will meet your objectives and help employees retire ready. This means employees will have a balance that can replace their income in retirement based on their needs. While it’s true that you cannot control how your employees save, you can provide them educational resources as well as adjust your plan’s design and features to make it easier for them to save.
The Picture of Health
These metrics will help you assess whether your plan is helping employees save adequately for retirement:
Solid Participation Rates
A high participation rate across the board is a big indicator of a healthy retirement plan. Measure the overall participation rate, as well as the rate within employee groups. Are 20-somethings at your company not contributing at all to the retirement plan, while 50-somethings are saving at a high rate? If so, you may want to increase savings education for younger workers. Some other considerations: How do employee contributions vary based on salary or title, and are employees in certain departments saving less?
High Account Balances
A high average account balance is also important—but there’s more to consider. Highly compensated employees may have high balances, while lower paid employees are lagging behind in their savings. Therefore, the average account balance might be high but the majority of employees have not saved very much. Employers should also evaluate the rate of growth of the accounts, year over year, to determine whether loans or distributions are exhausting account balances.
Managing your investment lineup is an ongoing fiduciary duty, usually performed on a quarterly basis. Many plan sponsors hire investment professionals to select and manage their menu of plan investments. You can work with your advisor to determine whether your investment options are sufficiently diverse, and whether the investment menu has an appropriate number of options. Remember: A healthy plan does not overwhelm participants with too many investment options, and it makes it easy for them to diversify their portfolios. If employees are frequently changing investments, investing in every option in the menu or never adjusting their allocation after enrollment, these may be signs that they need investment education.
It’s also important to pay special attention to your default investment options, such as a target-date fund, balanced fund or managed account. If your default option isn’t a qualified default investment alternative (QDIA), you may want to evaluate whether this option will be appropriate for your participants and whether you would benefit from the fiduciary protections associated with a QDIA. Evaluate what percentage of your participants use the default investment. If you find that most of them are recently hired employees, you may want to educate tenured workers about this option. Your advisor can provide investment advice or create targeted educational programs.
On the Mend: How to Meet Your Objectives
There are several potential ways to improve your plan metrics and meet your plan objectives. These include:
Plan Design Changes
1. Education:Work with your advisor to provide employees with education about saving for retirement and making appropriate investment decisions. Employees may benefit from information about long-term investment strategies, asset allocation, rebalancing and good savings habits.
2. Automatic enrollment: This feature can increase plan participation rates by eliminating the need for employees to actively elect to participate. Consider a deferral rate that will be high enough to promote retirement readiness. Your advisor can help you determine a rate that’s best for your plan. Example: Some plan sponsors begin at a lower rate of 3 percent or 4 percent and increase the deferral rate each year until it reaches 10 percent.
3. Adjusted matching contribution: You can also increase the amount employees defer into the plan by requiring a larger deferral to receive the full matching contribution. Example: Let’s say a plan provides a 50 percent match on the first 4 percent of pay contributed to the plan. This means employees only have to defer 4 percent to receive the full matching contribution. If the formula were changed to a 25 percent match up to 8 percent of compensation, the employer’s matching contribution remains the same but employees must contribute more to receive the full match.
TIP: More isn’t better when it comes to the number of investment options. Some evidence shows that offering more than a dozen investment options confuses participants.
4. Distribution options:How do your plan’s distribution and loan options affect retirement savings? If participants are depleting their retirement savings through loans, your loan and other hardship distribution provisions may need to be more stringent. On the other hand, if employees are not participating in the retirement plan because they are afraid they can’t access their money in an emergency, the provisions may be too stringent. In addition, investigate whether it would help your employees to have flexible distribution options that allow phased retirement. Remember that your advisor can help you through every step of this process, providing education and information about your plan.
5. Automatic Rebalancing: After analyzing your plan metrics, if you find that employees are not adjusting their allocation after enrollment, consider adding an automatic rebalancing option to your plan.
This checklist can help you create an action plan for identifying, measuring and meeting objectives to improve the health of your plan. Remember that your advisor can help you through every step of this process, providing education and information about your plan.
Prioritize plan objectives
Grade objectives, A through F
Analyze plan metrics for various segments of employee population
Benchmark your plan
Evaluate the plan’s investment menu
Create a list of areas for improvement, based on analysis of plan metrics
Review plan features and plan design
Determine the need for support services, such as investment advice
An advisor can help you identify, measure and meet plan objectives. He or she can help you improve the plan’s health through plan design changes, enhanced participant education, investment advice or investment modeling tools. If your plan could use a refresher, contact your advisor today.
Plan design references do not constitute authoritative guidance or accounting, tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.