The majority of employers believe their retirement plans are beneficial for the work environment. Approximately 89 percent of companies currently offering a 401(k) or a similar DC plan state that a retirement plan attracts and retains talent.
Company 401(k) plans are vital to an employee’s engagement, well-being and recognized worth. Below are five actionable ways that seek to improve a retirement plan for employee engagement and subsequent retention.
1. Automatic enrollment
Unfortunately, new hires often fall into a period of inertia when choosing benefits for a new company, especially if the new hire is a younger employee. Implementing automatic enrollment provides the opportunity for increasing participation and overall retirement savings in the long term.
Automatic enrollment puts passive employees into retirement saving by doing the work for them. The plan still allows for opting out but choosing to do nothing results in enrollment in a retirement plan.
Aiming high with ambitious deferral rates, as well as an auto-escalation scheme, has the potential to encourage better saving habits in newer and younger employees. Employees look favorably upon automatic increases, with 83 percent of workers saying they would take advantage of a plan that increased automatically yearly or with every pay increase.
Saving would become second nature with active choices allowing for decreases or discontinuation. Automatic enrollment is found mostly in large companies with 55 percent of DC plans set to auto-enrollment, while only 27 percent of small companies and 21 percent of micro companies are set to auto enrollment.
2. Financial advisors and professional services
Retirement savings and 401(k) asset allocations can be confusing and overwhelming, therefore taking away some of the confusion should increase saving behaviors. Some of these professional services include managed accounts, Social Security tools and health savings accounts (HSA). The delivery of these services are typically best handled by Financial Advisory firms that specialize in 401(k) plans and are positioned to provide objective advise to the participants. These advisors should always be “fiduciaries”
LifeStyle funds and/or target date funds are a time-tested method that strives to increase participation. Both options decrease an employee’s need to actively manage their accounts, and thus, decrease intimidation.
Providing access for employees to Social Security optimization tools will help employees understand the advantages of deferring Social Security collection. Also, giving employees a full picture of retirement allows them to understand how plan assets can help them bridge the gap between retirement and when to collect Social Security, maximizing their savings and retirement options.
Additionally, offering an HSA is a helpful supplement to retirement savings. Unfortunately, Americans can put off saving for retirement in order to confront other financial challenges including health expenses. HSA options are a tax-advantage way for employees to meet existing health care expenses while maximizing their retirement options.
3. Roth 401(k)
There are no income limitations when it comes to Roth 401(k)s. Older employees generally benefit from a Roth 401(k) because Roth IRAs have income limitations that prevent higher income investors from contributing. No such limitations apply to Roth 401(k) options.
Deferrals can be separately directed into either the traditional 401(k) or the Roth 401(k) in any combination not to exceed the IRS limits, which is $19,000. Investors age 50 or older can defer up to $6,000 more for a total of $25,000 in total employee contributions. Roth accounts have tax-free growth potential, and the option provides balance to any retirement savings portfolio. Currently, 63 percent of plans provide Roth options to their employees.
4. Prior employer plan auto-deferral rate
Not every recruit or new hire is fresh out of college, which means employees often have retirement savings from previous employers. Auto-enrollments can benefit all employees with savings accounts, but they can result in an auto-decrease if the deferral amount is less than what an employee was saving at a prior company.
Rather than putting new employees into auto-deferral, allow employees with other retirement savings to enroll at their prior savings rate. The employees can continue the savings path they started without taking a default step back as a result of moving jobs.
5. Investment and annuity options
As retirement plan legislation continues to evolve, consideration in offering different investment options, including annuity options, may benefit employees and their ultimate retirement health. Employees should not have to roll over their plan assets into an IRA or outside annuity in order to annuitize part of their savings. Instead, options may exist to offer part of their 401(k) to be annuitized for spending needs in retirement. While there are very limited quality options available currently, keep an eye out for these options in the very near future.
Annuities are a complex retirement option and they are not appropriate for all employees. Combining annuity options with an advisor acting as a fiduciary in providing advice and professional services seeks to prevent employees from making inappropriate decisions and who would not benefit from selecting an annuity option.
Offering simple investment options for drawing down plan assets, including annuitizing some plan options, allow participants the opportunity to meet cash flow needs that can occur in retirement.
An important aspect of any DC plan is communication with employees. For a successful DC plan, it’s important to have an HR person assigned to help guide employees, but also an advisor who is a fiduciary to point them in the right direction for their concerns and retirement needs. Providing an approachable point of contact, enforcing automatic enrollment, including an advisor providing advice and professional services and Roth options, should create well-received and healthy savings habits for employees.
This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation.
Brian Menickella is a co-founder and managing partner of The Beacon Group of Companies, a broad-based financial services firm based in King of Prussia, Pa.