Are there strategies that could improve participation and savings numbers?
What are the trends with regards to plan design?
A trend that has been gaining momentum in plan design is using auto features, such as auto-enrollment and auto-escalation. These features automatically enroll the employee into the retirement plan at a certain percentage, unless they opt out. We have seen through the years that many employees tend to keep their contribution rate at the same percentage, so one way to help employees save is through using an auto escalation feature. This automatically increases the employee’s savings rate each year until it hits a certain percentage, for example 10%. These auto features are not only increasing participation and savings rates, but make a measurable improvement to retirement readiness.
In addition, we have seen many of our new plans and existing plans remove the loan provision in their plan. The challenge with having the loan feature on the plan is that employees sometimes tend to use their 401k plan much like a savings account; withdrawing funds whenever an expense comes up. It can be an added burden for payroll and HR departments and and it negatively effects an an employees their retirement goals. So, as an added conversation with employees, financial planning needs to be integrated to where they are using savings accounts for short term expenses.
The final trend that I will mention is using a “stretch” match for employers. One of the more common employer match formulas historically has been 50% or 100% up to 3% of the employee’s compensation. However, the employee tends to stay locked in at 3% contributions, which typically isn’t enough to retire on. We are now helping our clients take the same amount of employer money and using a match formula like 50% up to 6% of the employee’s compensation. We have even started using a formula like 25% up to 12%. We know that most employees will contribute up to the maximum amount that the employer is willing to match, so by using the “stretch” formulas, we can make a real difference to employee’s retirement readiness.