It’s no secret that human resources professionals and CEOs have a lot going on. Each day, they are pulled in many directions, from managing health benefits to recruiting employees.
As plan sponsors they may find it more difficult to juggle a healthy, successful retirement plan on top of these obligations. But it’s crucial for plan sponsors to give employees extra attention in this area, as many workers are falling short of their retirement savings needs. In 2013, the average 401(k) plan account balance was $72,383, and the median balance was $18,433. Approximately 39 percent of participants had account balances of less than $10,000, while about 20 percent had balances above $100,000, varying by factors like age, asset allocation and contribution rates.
The good news is, an effective retirement plan isn’t out of a plan sponsor’s reach—with an organized course of action and the help of a plan advisor, plan sponsors can help employees save adequately and be prepared for retirement. Read on to learn about the three ways to a healthier plan.
1. AUTOMATE ACTIONS
Plan sponsors can fight employee inertia by implementing automatic enrollment and automatic escalation features. Consider adding automatic enrollment for both new and existing employees, as well as automatic escalation to increase savings rates each year. Data from 2014 suggest that 26 percent of companies now use automatic enrollment, up from 17 percent five years ago. In 2006, only 2 percent of companies offered it. The problem, however, is that most companies using automatic enrollment use a beginning savings rate of 3 percent or less, which is not enough for retirement.
While individual goals will vary, employees should consider saving 10 percent to 15 percent of their salaries—including the employer match—with a goal of saving eight to 10 times their annual salary to live on in retirement. Unfortunately, employees’ average deferral rate is only 6.4 percent.
For plans that offer automatic enrollment, the Pension Protection Act of 2006 provides a safe-harbor exemption from required annual testing to ensure there is no discrimination in favor of higher paid employees.
To comply, a plan must:
- Defer at least 3 percent of employees’ pay during the first year to a qualified default investment alternative (QDIA). This can include a target date fund or risk-based option.
- Automatically increase contributions by one percentage point each
year to at least 6 percent, but not more than 10 percent.
- Match the first 1 percent of employee contributions, as well as half of additional employee contributions up to 6 percent of pay.
By using automatic features, plan sponsors can help employees create an easy foundation for saving and can, therefore, devote more time to education, communication, advice and overall financial wellness. Benchmarking the plan each year can help measure whether savings and participation goals are being met, and the plan sponsor can work with an advisor to create an action plan for any areas that need improvement.
2. ELEVATE EDUCATION
Once employees are in the plan, the work doesn’t stop— plan sponsors should educate their participants beyond the basics like investment options, and guide them on how to make smart financial choices. In the past 15 years, companies have increasingly looked at the holistic wellness of their employees, implementing programs that offer health advice and incentives. Likewise, employers are beginning to add financial wellness programs and seminars for retirement plans, as well as for general financial issues like debt management. These programs can help employees prioritize planning for the future, as some employees may delay saving for retirement because of a belief that investing is too complicated, or because they do not fully understand the importance of saving. Financial wellness programs and seminars can help employees retire on time, not to mention potentially help the company save money.
To launch a holistic financial program, consider enlisting the expertise of an advisor, who can provide resources to improve employee education and communication. Empowering employees with education can help them feel more confident about saving for retirement.
3. IN-PLAN ADVICE
In addition to group education, one-on-one in-plan advice may help improve an employee’s financial picture. This advice—elected and paid for by the participant—offers him or her the chance to work with an investment professional to create a customized retirement savings plan and also ensure goals are being met.
According to a 2014 study, 49 percent of 401(k) plan participants believe they would achieve better investment results if they had access to personalized investment advice, and 70 percent say they would feel “extremely” or “very confident” in making the right investment decisions if they had the assistance of a financial professional.
In-plan advice has been known to increase employees’ confidence about saving, and employees who use advisory services in their plans have a significantly more positive outlook about the future than those who do not use in-plan advice. Those who use advice are much more likely to feel like they have enough money to retire, believe their retirement lifestyle can be equal to or better than when they were working, and feel confident they will not have to delay retirement.
The most effective strategy may be a combination of group financial wellness seminars—whether face-to-face, online or mobile—and personalized, in-plan retirement advice from a retirement plan advisor. In-plan, personalized advice typically has no plan-level cost and can help employees create individualized paths to retirement readiness based on their specific needs.
A retirement plan advisor can work with a plan sponsor to assess the health of a retirement plan and put into motion changes that can help the plan “get well.” An advisor can suggest appropriate solutions, such as automatic features, holistic financial wellness education, and personalized, in-plan advice. If your plan is not producing adequate results for your employees, consult with an advisor to discuss areas of improvement. Simple plan design changes and enhanced education programs that incorporate the total financial picture can have the potential to markedly improve participant outcomes.
1 EBRI Issue Brief, no. 408, and ICI Research Perspective , Vol. 20, no. 10. “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2013.” Jack VanDerhei, Sarah Holden, Luis Alonso, Steven Bass, and AnnMarie Pino. (December 2014) 2 MarketWatch: “How 401(k) help can hurt your savings” (April 2014) 3 PLANSPONSOR Defined Contribution Survey (2014) 4 The Principal Financial Group® Retirement Study (2013) 5 American Psychological Association: “Stress in America: Paying With Our Health” survey (February 2015) 6 Schwab Retirement Plan Services Study (August 2014) 7 Mercer Workplace Survey (2013)
This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.