Stacking Up: Who Offers the Best Retirement Plans?

“If we have a portion of our employees who don’t retire at retirement age, what are the implications for us as an organization?” More and more plan sponsors are asking themselves this question, says Brodie Wood, senior vice president in not-for-profit markets at Transamerica Retirement Solutions.

Benefits packages seem to be improving across the board, and Wood finds that “a lot of the same structural shifts that we’ve seen in the corporate space are bleeding over to the not-for-profit space.”

“I think retirement plans are in an evolutionary phase,” agrees Kathleen Kelly, managing partner at Compass Financial Partners. “Our clients are constantly looking at them, evaluating whether changes that have been made have had the desired outcome and, if not, what needs to be tweaked and improved to get participants to a place where they can retire with dignity. This is not a ‘one and done’ program; it is always being looked at, and plan sponsors and advisers are focused on constant improvement.”

What that means for specific benefit programs can depend on the industry or “even regions of the country,” says Margaret McKenna, EVP of Workplace Investing’s Relationship Management team at Fidelity Investments. “We definitely see differences, no question about that,” she says, “but it goes beyond industry.”

The culture of companies in different parts of the country will affect how benefits are organized. “Silicon Valley has a very different mindset around benefits than the East Coast,” McKenna says. Tech firms are generally more focused on including equity compensation; more traditional benefits programs likely still offer a defined benefit (DB) plan. “Companies like utilities have more traditional benefit plans—a 401(k), a pension and a large amount of health and welfare benefits—those are the more traditional benefit offerings,” she notes.

“The most competitive benefits we see most often are from industries that have very heated competition for human capital. Their benefits programs are truly a way to recruit, retain and ultimately reward employees,” Kelly says. “In technology, for example, a lot of clients are vying for top talent in areas that are very saturated with top employers, and they have to put in broad and rich benefits programs, not just retirement benefits.”

In general, Kelly says, “higher education—colleges and universities—tends to have very strong benefits; tech has very strong benefits; and financial services typically have very strong benefits as a whole.”

“As we look at our client base, it’s all over the board in terms of drivers for plan design. The benefits package often depends on the size and scale of the organization,” says Kelly. “If it’s privately owned, single family or multigenerational, we often see very paternalistic approaches to benefits. Those owners may see their employees around town and tend to have long-tenured employees. This is very geographically based, if you’re the only employer in town, that may impact the generosity of benefits offered.

“The degree of plan design that’s implemented also varies,” Kelly adds. “The companies that are the most generous are looking at company contributions and what dollars are going to the sole benefit of the participants, but also are reviewing their vesting schedules and eligibility periods, and may reduce those to attract employees and talent across the board.”

“When we look at who’s participating in plans,” McKenna says, “we see the highest participation rate in utilities, followed very closely by financial services, insurance and also manufacturing companies, as opposed to food service and accommodation or hotel services.”

This is likely due to the nature of the work. “Utilities jobs are very physical,” McKenna says. “These companies need to be certain that people are retiring at reasonable ages, and they want to make sure there’s a steady inflow of new talent.” She advises employers to understand the longevity of the average worker when designing the benefit program. “Do people come in and stay with us, or are these short-stint employment opportunities?”

“At the other end of the spectrum,” Kelly says, “some of our clients set up a program to keep aging employees employed. They build out the benefits program to adapt to a work force that maintains so much intellectual capital that they want those people to stay. The flip side to that discussion, however, is how plan sponsors improve outcomes for the aging work force. The reality for many people is that when they reach the typical retirement age, if they do not have the financial wherewithal to retire, they don’t, but that segment of the population can be more expensive for the employer. Better programs help people to save and generate an income replacement that is satisfactory.” Sponsors have to ask themselves: “Does the program align with our intention to have workers be able to retire with dignity, if they take full advantage of the program offering?”

Teaching positions can have a little more leeway when it comes to faculty fitness. Still, “in higher education, there’s a disproportionate number of faculty members who don’t retire at normal retirement age,” says Wood. “Professors generally start saving later because they’re in school for so long, and people who gravitate toward teaching or not-for-profit work are generally more risk-averse. That translates into a more conservative approach to investing,” which he says can really drag on where they end up.

Nonprofit organizations are often guilty of paternalism, he finds. “They might hand-hold their employees a bit more; they may view it as their responsibility to take care of workers, and that might translate to more generous benefits,” he says.

“In many cases, not-for-profit organizations are more generous with their defined contribution plan, whether they’re sponsoring a 403(b) or 401(k). In those cases where they are, I sense the following drives a lot of it: Not-for-profits generally pay a little less versus corporate peers, and often it’s the benefit package that makes up for a lot of difference in compensation.” For example, he says, “In higher education, statistics show that there are larger than average employer contributions to the retirement programs.”

Data from the 2014 PLANSPONSOR DC Survey confirms what Wood, Kelly and McKenna are saying.

Higher education and not-for-profit health care are the industries most likely to offer immediate eligibility for their retirement plans, at 71.2% and 71.3%, respectively. Higher education is also the most likely to have 100% immediate vesting (62.7%) and the most likely to provide an employer match contribution that equals more than 6% of a participant’s salary (58.3%).

Utilities—in which work is physically demanding and employers want to encourage retirement at reasonable ages—is one of the industries most likely to use automatic enrollment, according to the DC Survey. The industries most likely to have this plan feature are Fortune 1000 (66.5%); utilities (60.3%); and automotive manufacturing and parts (59.6%).

“When clients offer auto-enrollment into a 401(k), they dramatically impact participation in those plans,” McKenna notes. “On a case-by-case basis, you can see companies taking different tactics in terms of their plan design to encourage participation. Auto-enrollment has become a very important feature, especially in 401(k) plans. We have seen wide adoption in a number of industries,” she says, the exception being industries that experience a high rate of turnover among workers.

Utilities are also among the industries most likely to have default deferral rates of 6% or higher—pharmaceutical (50%) and utilities (41.5%). The industries most likely to use automatic deferral increases are Fortune 1000 (56.8%); utilities (40.3%); and oil, gas, energy and mining (39.5%).           

McKenna finds the ability to make Roth after-tax deferrals is predominant in the professional services industries—law firms, consulting firms, medical practices, engineering firms, etc. “We also see it in professional services fields, such as pharma, engineering and legal firms, as opposed to the construction industry, where the numbers are significantly less.” And it’s not just for new employees, she says, but longer-tenured workers as well.           

The PLANSPONSOR DC Survey confirms her experience: The industries most likely to offer Roth deferrals are: financial services (76.7%); accounting/certified public accountant (CPA)/financial planning (75%); consulting (72.7%); and law firms (69.8%).

The generosity of financial services firms is also seen in the fact that industries in which the company is most likely to pay all plan administrative and recordkeeping fees are accounting/CPA/financial planning (43.1%), banking (47.6%), and financial services (50.4%).

Industries most likely to provide managed accounts include accounting/CPA/financial planning (47.1%) and for-profit health care (44.7%).

“To build out a best in class retirement plan, capitalize on automatic features,” Kelly suggests. “We think auto-enrolling at a higher default percentage makes a lot of sense. This works for attracting new talent, but people coming from another company were likely saving at a higher rate at their old company as well. Auto-increase also is very important, otherwise participants think the default rate is the advisable rate. Today, we’re seeing more clients auto-escalate by 2%, to get participants up to a 10% or 12% deferral rate faster. There’s so little opting out happening that capitalizing on participant inertia and getting them there faster is very beneficial. Offering a managed account program we think is also a best in class option.”

When it comes to extended benefits, Wood says, “a lot of nonprofits invest in in-person education, more so than in the corporate market, which can be a huge benefit for the staff who are not saving enough and don’t have a financial background.”

Kelly agrees that the rise of financial wellness programs can be a major differentiator for employers, no matter what the industry. “Providing a resource that’s very much needed by employees helps them manage other concerns—budget, debt, possible impediments, etc. Even if you have the best-designed plan with auto-enrollment and -escalation and a great match, it’s hard [for participants] to get the most out of it if you don’t have a good handle on personal concerns.”                        

“People today come into the work force not thinking about saving for retirement,” McKenna adds. Rather, they are more focused on immediate concerns: paying off student loan debt, buying a home and saving to for their own children’s tuition costs, among others. Plan sponsors and employers are becoming more aware of how workers’ outside assets, or lack thereof, can have a direct impact on performance and productivity.

“[Financial wellness] offerings lead to more satisfied, engaged and loyal employees,” Kelly says, as well as greater productivity, “because people aren’t worrying about financial concerns during the day. Better benefits lead to lower turnover, higher tenure and employees having a sense of their employer’s loyalty to them.

More firms are also looking at improving the quality of life and work/life balance of their employees. For example, McKenna says, companies are offering maternity and paternity leave to employees for an extended period of time, much more than what’s required by law. “We also see widespread adoption of clients looking at their health and insurance benefits and taking a wellness focus to help people get healthy. Those benefits are becoming more of a focal point.”

“The tighter the job market and competition is for that human capital,” Kelly concludes, “the more the benefits become a differentiator. Recognize that there’s room for improvement—always.”