How a More Strategic Eye on Retirement Plan Design Can Alleviate Readiness Issues

Our retirement readiness is a shared concern. More than half of Americans who are now in their 60s are putting retirement off—56%, in fact—a notable rise from the 46% who delayed it 1996.[1] While this group is somewhat more confident about being able to finance their retirement than five years ago, one study[2] shows, they can’t shake the fear of running out of money when the markets are volatile and medical costs continue to climb.

This, in turn, creates concerns for their employers. Costs are one issue, of course—e.g., the wage differential between older and younger workers, and the generally higher health care costs that older employees incur. But employers aren’t confident that their workers’ retirement savings will last as long as it should.

Taking a more strategic approach to retirement plan design, with an eye on improving participation and getting your employees to save more can make a big difference. Many organizations neglect the long view once they have the basics of their retirement plan taken care of—e.g., choosing appropriate funds, making sure they’re competitive from a fee standpoint, and forming and Investment Committee that regularly reviews plan performance.

But a retirement plan isn’t a one-and-done kind of thing. At various stages of the plan’s evolution, there are various features and activities that employers and their plan advisers should consider evaluating and phasing in over time. They will go a long way toward meeting everyone’s needs in preparing for retirement.

They include:

• Automatic Enrollment and Automatic Escalation. These 401k plan design features are quickly becoming the norm. Implementing automation has proven to significantly improve retirement outcomes for those employees who may need a nudge in the right direction. Auto-enrolling new hires and slowly increasing their deferral rates on an annual basis (auto-escalation) may seem a little paternalistic, but the pros of this strategy significantly outweigh the cons. Employees are set in motion early towards meeting their personal retirement goals, and employers avoid having a costly and aging population that would retire if it was a viable option.
• Tech tools and the enhanced employee experience. It’s critical from the outset to give employees access to high-quality tech tools for managing and monitoring their investments. That means fast, easy online access to check on the status of investments and the latest apps for financial planning. Technology is now one of the most important considerations in selecting a retirement plan partner, given its appeal to a younger workforce who prefer a digital experience.
• Education. Equally important is educating employees on how to get the most out of their DC plan—and the message must be consistent and ongoing over time. If your people are not engaging with the educational programs you offer, you need to find out why. You’ll get the best participation when you understand and respond to your workers’ preferences on topics, timing and format—tailoring your education programs to meet their particular needs.
• Plan structure considerations. Look to gain strategic value from your fiduciary partners by requesting guidance. This could be, for instance, asking how to tweak plan design for better results, be it to improve participation or fix issues. One thing to think about is your contribution matching strategy. Matching formulas vary, and some employers put a cap on their match, which can affect participation. That makes match forecasting worth considering as a way to budget what is often the largest expense associated with your plan, but also can spur participation. A match typically isn’t worth doing if it isn’t incentivizing employees to save and to help propel the plan’s growth. Plan committees should also continually look to implement automated features, perhaps add a Roth component, or provide executive benefits such as a deferred compensation plans for certain key employees.

When the retirement plan has been set up and managed strategically over time, everyone’s interests will be served and retirement readiness will be more than just another benefits buzz-term. It will be a reasonable—and achievable—aspiration of your employees.

Jason Smith is vice president of retirement plans at Hub International Investment Services Inc.

[1] https://www.cnbc.com/2018/04/27/delayed-retirement-is-in-the-cards-for-more-than-half-of-60-somethings.html

[2] https://www.aicpa.org/press/pressreleases/2019/going-broke-remains-top-concern-in-retirement.html