How can you, as an employer, improve your 401(k) plan for your employees? It’s a question that is asked often. We will focus on helping employees save for the future through the 401(k) plan. There are several items that you can consider implementing into your plan to help them with their retirement savings. We know that only about 30% of employees feel that they are making adequate savings for retirement.
Selecting retirement options and the associated investment choices can be difficult for most employees and they put it off for the future. This can be very costly for employee’s retirement planning. Consider adding the items below to your 401(k) plan to help them in their quest for adequate retirement savings.
- Auto-enrollment – with this plan design, once an employee meets the eligibility requirements for the plan, they are “automatically enrolled,” unless they affirmatively decline. Studies have shown that plans that add this design experience only around 7% of opt-outs from employees. This means that most employees are taking advantage of the retirement savings option even though it may be done passively. The Pension Protection Act of 2006 encouraged employers to consider this option.
- Deferral Rate Options – most plans use a default savings rate of 3-4% even though financial planners indicate that most people need to save between 12-15% of their compensation to have a secure retirement. In addition, as employees experience higher compensation through raises, cost of living adjustments, and especially bonuses and commission payments, they often do not have 401(k) deferrals withheld on this compensation. Consider raising the default deferral rate if you use auto-enroll. Also, consider adding an auto-escalation provision that raises the deferral rate by 1 or 2% each year, up to a maximum deferral amount. A gradual increase in the rate can usually be tolerated by most employees if it is explained to them and the impact on their savings is shown.
- Consider adding Target Date Funds – these investment types have a strategy of diversified portfolios that are “targeted” to the anticipated retirement date of the individual. Those with dates further out will invest more in equity selections while individuals nearing retirement will have the investments in more conservative choices. This makes it easier for employees to make the investment selections for their account. It takes the guess-work out of signing up for the plan. These funds can also be used as the Qualified Default Investment Alternative option under an auto-enroll feature.
- Other options
- Consider re-enrollment for participants that opt-out of a plan once they have initially enrolled. The reason for the opt-out may change due to personal circumstances, a job change or a pay increase. It is a good idea to reach out to employees in this situation to remind them of the benefit of the plan to their retirement savings.
- Target under-savers – Reach out to those with low deferral percentages and show them the value of saving now for retirement. Also, review your plan’s education programs and beef up areas that could help better explain the advantages of the plan to help save for retirement.
If you don’t have any of these options in your plan, consider adding them. Your employees will appreciate the improvements. It’s also a good idea to keep your plan features current.
Here at Summit CPA, we know that plan administration can be a huge burden to companies, especially with all the complexities added due to the pandemic. However, don’t let your guard down regarding your 401(k) plan. It’s an important responsibility of the plan fiduciaries to ensure compliance at all times. A review of current compliance and administration now will help make the start of 2021 a little less stressful. For more information on how we can help, contact our office at (866) 497-9761.