Whether your employees are young or more mature in age, chances are they have thought about retirement. But, thinking about it and planning for it are two different things. As an employer, you have the power to help employees plan for retirement to feel more prepared for it and provide the knowledge they need to take the right steps.
The evidence is clear: employers who take an active role in helping their employees plan for retirement have happier, more productive, and more loyal employees.Today’s employees face many challenges to success in retirement, and many are not doing enough to financially prepare for the future. Providing guidance, support, and financial education for your employees is a low-cost way to help satisfy your fiduciary obligations, increase employee participation, and improve retirement outcomes for your employees.
Even if you can’t offer employees a defined benefit pension plan today, you can still deliver some of the advantages of those plans by modifying your 401(k) plan’s design and services in the following four ways in order to help employees attain a 60 to 80 percent income replacement ratio at retirement.
1. Automatic Deferral Escalation
Defined benefit pension plans are designed for employers to contribute enough each year to ensure an adequate savings amount is set aside for employees. To promote similar results, automatic deferral escalation for 401(k) plans increases participant contribution percentages each year.
For example, an employee’s deferral rate can automatically increase 1 percent each year until it reaches a maximum percentage of their pay, typically 10 percent.
To minimize the effect of reduced take-home pay from automatic escalation, time the increases to coincide with annual pay increases, when possible.
2. Use automatic enrollment to boost participation rates
Automatically enrolling new hires in retirement savings plans has been shown to substantially increase participation in and contributions to 401(k) and other types of defined contribution plans.
Defined benefit pension plans don’t allow participants to choose how much is contributed nor how it is invested. The positive side of this is that participants can’t choose not to participate.
Create a version of this advantage by setting up automatic enrollment on your 401(k) with a default deferral rate. Your participants have the flexibility to opt out and not participate—or to contribute more and actively manage their investments. But if they take no action, they’re still benefiting from a retirement savings plan.
3. Provide sound financial information and counseling to employees
Make professional guidance available to your 401(k) participants in ways they can easily understand and access. Do your plan participants know what their current projected replacement percentage is? If the gap between their working income and retirement income is larger than 60 to 80 percent, do they understand what it will take to close that gap?
To help your employees understand the retirement savings gap and other basic retirement savings concepts, consider giving them access to a combination of three reliable information sources:
- Personal advice from a qualified retirement savings counselor: This person should be able to tailor information to the employee’s age, retirement goals, risk tolerance and family circumstances.
- Online tools: Increase employee engagement with a provider that makes its account and educational information accessible on various devices, including desktop and mobile devices.
- On-site group education events: On-site workshops can be an effective way to educate your employees all at once.
4. Target Date Funds
A pension plan’s asset portfolio is managed by the employer and its advisers to help create a diversified investment portfolio customized to the plan’s specific needs. For 401(k) participants, target date funds can fulfill that role.
Target date funds (usually a type of mutual fund) provide a professionally managed mix of stocks and bonds that are customized to the participant’s retirement age. Participants do not need to worry about which funds to select and how much money to put in each. A target date fund will evolve as a participant ages to ensure the portfolio’s diversification is appropriate.
It’s important to remember that employees don’t have to use any of these four pension-like features. In a 401(k), they can opt out of automatic features. They can choose not to take advantage of counseling or online tools in their plan for retirement.
But for employees who otherwise might not save enough for their retirement, a 401(k) with some key advantages of a defined benefits pension can provide them a comfortable and timely retirement.
Bottom Line
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