Get Smart . . . To Achieve Retire-ability
August 13, 2018 — We’ve been talking about the way a 401(k) plan can be a great benefit for employers. By building employees’ financial confidence and increasing their ability to retire on time, organizations reduce the workplace distractions that result when employees are financially stressed. They also decrease the future potential for the higher salary and benefits costs that occur when employees work past retirement.
Perhaps the easiest step an employer can take toward retire-ability is to embrace smart plan design in the company 401(k) plan. Two “smart” design features are automatic enrollment and automatic escalation. Their goal: to start employees saving for retirement and then help them reach the level of savings they need to achieve financial security once they leave the workplace.
The “autos” overcome the human tendency to procrastinate. In my experience working with employers, I’ve seen plan participants who “mean” to enroll, fail to do so and end up stressed about their future. With auto enrollment, no action is needed on the part of the employee to begin saving – it’s done for them. The auto enrolled participant can “opt out” but most often doesn’t and begins a journey toward retire-ability, gaining confidence in his or her financial future. Likewise, auto escalation occurs on the anniversary of an employee’s enrollment, escalating his or her contribution by a pre-set percentage.
Periodically, an employer expresses reluctance to “push” employees to save for retirement, even if it’s in the employees’ best interest. Such employers should think hard about what research shows: a recent JP Morgan study showed support among all employee age groups for the “autos.”
As with any smart initiative, there’s an optimum way to implement automatic enrollment and automatic escalation. Considering what’s necessary to achieve retirement readiness, we learn that the annual contribution to each employee’s 401(k) account should reach 15 percent of their salary – with contributions coming from employee and employer.
Given that goal, the optimum formula is a 6 percent auto enrollment and a 2 percent auto escalation until an employee’s savings reach 10 percent of his or her salary.
Again, some employers express reluctance to adopt an initial enrollment rate of 6 percent. In fact, 3 percent is the average rate set for auto enrollment, mostly due to employers fearing employees will opt out if a higher deferral rate is set. Once again, research is enlightening, showing no significantly greater opt out rate for an automatic enrollment of 6 percent versus a 3 percent auto enrollment.
Implementing the “autos” is just one of the four issues you’ll want to raise in workplace discussions on improving the company 401(k) as you speak with your colleagues who join you in making those decisions. Financial education delivered as part of a company 401(k) plan – a topic discussed in my blog last month – can help employees better manage household budgets and plan for the future. Look for future blogs on two other initiatives to reduce financial stress and increase the ability of employees to retire on time: ways to make “proper” investing of 401(k) assets easy for participants and communicating effectively to make financial wellness a priority for all company employees.
Written by Laurie C. Wieder, PPC®, Vice President, Alliant Wealth Advisors Qualified Plans Division
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.