Key Retirement Vehicles to Drive Employee Success

In today's environment—where employees are looking for a combination of flexibility and security—a defined contribution plan makes good sense for a number of different business models.

Adrian Jones, Senior Director

With the current labor shortages affecting every industry, employee acquisition and retention are more important than ever. Talented workers look for companies that offer both stability and security.

A strong retirement package is one of the most compelling benefits you can offer to attract and keep talented employees. A well-developed retirement plan signals a company that has dedicated time, energy, and resources to offer team members more than simply paychecks. In the new economy, that can make a potent tool not only for recruiting and retaining good workers, but for encouraging them to put extra effort and care into their work. Knowing that the company is providing a savings tool for retirement planning helps them feel invested in what they do.

The kind of retirement plan that suits one business might not be right for another. Every company is unique, and what works for a small company of perhaps a dozen employees isn’t necessarily compatible with a corporation of several hundred employees or more. Companies looking to establish a strong retirement plan for their workers need to understand what kind of plan works best for them.

For example, consider the divergence between a defined benefit plan and a defined contribution plan. While the nuanced differences aren’t always apparent, choosing the wrong one can hinder your intended goal of employee retention.

A defined benefit plan follows an older retirement savings model, essentially a traditional pension or cash balance plan. The employer contributes to a retirement fund, which then pays out to the employee on a periodic basis after retirement. In most cases, the employer alone contributes to the plan. In return, the employee must work for the company for a set period of time to qualify for benefits.
A defined contribution plan, on the other hand, is arranged so the employee contributes a set amount of their paycheck into an account that holds the funds until retirement. Most people know them as a 401(k) or 403(b). In some cases, the business will add matching funds to the account, or even pair the plan with a profit sharing contribution. As with defined benefit plans, there are strict definitions as to when each worker can access funds.

In today’s environment—where employees are looking for a combination of flexibility and security—a defined contribution plan makes good sense for a number of different business models. It’s therefore important to not only offer a comprehensive defined contribution plan, but also employ experienced and reliable fiduciary services to source and service it.

Why Offer a Comprehensive Defined Contribution Plan to Employees?

A defined contribution plan offers considerable benefits, and addresses a number of immediate concerns affecting businesses in every field.

The Labor Shortage Is Real

As the country slowly emerges from the worst of the COVID-19 pandemic, businesses are reeling from a historic labor shortage. The so-called “Great Resignation” is attributable to a number of factors, including ongoing health concerns, a dearth of options for childcare and other important services, and a fundamental restructuring of the business environment into hybrid workplaces. These individual factors have snowballed into a record high number of job openings as the labor market fundamentally attunes itself to the new reality.

The labor shortage is no mirage. According to Reuters, job openings surged to over 10 million in July of 2021—the largest jump since the U.S. Department of Labor first started keeping records in 2000. Of those, four million quit their job voluntarily. In this labor-friendly market, employers seeking to retain skilled and talented team members have to recalibrate their understanding of worker expectations. Competitive businesses need to offer prospective employees more than in the past.

Benefits—including retirement plans—can prove to be an effective means of talent acquisition and retention. Employee benefits recognize the worker’s contribution to the company in a concrete and definable way, while also assuring the security and flexibility so many seek in today’s business environment. This strategy works to the benefit of all involved.

The Benefits Are Tax Deductible

The tax benefits of a defined contribution plan provide a number of advantages for company and worker alike. The IRS offers tax credits and other incentives for businesses to set up such a plan, and employer contributions are 100% tax-deductible. Plus, any assets in the plan grow tax deferred! Ancillary benefits—such as costs saved on training new employees as well as improvements in overall job satisfaction and employee mental health—are also invaluable. This translates into more team members remaining with the company longer, and their experience and expertise remaining within the company accordingly.

Employees receive similar monetary benefits. Payroll deductions make it very easy for workers to contribute, and the interest accrues over time. This means that small, steady contributions can still make a big difference for long-term employees. Investment in a defined contribution plan reduces their overall taxable income, and assets can be transferred or rolled over as needed. This rewards employees—in measurable terms—for loyalty and providing steady value to the company.

In Some States, It’s The Law

Some U.S. states have made retirement plans a requirement and taken steps to enforce these mandates. California, for instance, has been slowly transitioning businesses into phased retirement plans, beginning with the largest and moving down to smaller employers. Those with 5 to 50 employees have until June 30th, 2022 to establish a viable retirement plan for their workers. Qualifying California businesses must offer some form of retirement plan by then, or enroll their employees in CalSavers: a payroll deduction IRA set up by the state.

California is far from the only state to adopt such policy. Twelve others have similar laws on the books, and more than 30 in total have considered such measures. The list may grow as legislatures continue to take up new proposals.

Colorado

The state passed the Colorado Secure Savings Program—a publicly funded retirement plan—with state-facilitated automatic enrollment similar to that of California’s. The plan is tentatively scheduled to begin implementation in late 2021 or early 2022.

Connecticut

Connecticut passed Public Act 16-29, intended to provide a program for private-sector workers to utilize a public retirement fund if they don’t have one through their employer, in 2016. The state also established the Connecticut Retirement Security Authority to evaluate and implement this program. As of October 2021, there is no schedule for implementation.

Illinois

Illinois Secure Choice began implementation in 2018. Like others on this list, this program provides a public option for workers without other retirement choices. Once companies register, an automatic payroll deduction is made from employee salaries into a Roth IRA. The default setting is 5% of gross pay, and employees may opt out of the program at any time if they wish.

Maryland

The Maryland Small Business Retirement Savings Program was signed into law in 2016, and implementation is expected to begin in 2022. The program allows small businesses to offer retirement options to their workers. It is a voluntary program, with no legal deadline for companies to sign up.

Massachusetts

The state-sponsored CORE Plan aims to provide employees of nonprofit organizations a post-tax 401k savings plan as a retirement fund. All nonprofits with 20 employees or fewer are eligible for the plan.

New Jersey

The New Jersey Secure Choice Savings Program became law in 2019. This program requires companies with 25 or more employees to provide a public retirement plan option for its workers. Enrolled workers take a deduction from their paycheck, which is placed in the account. These employees also have the option to retain the account in the event they change employers. The anticipated start date for this program is March 2022.

New Mexico

The New Mexico Work and Save Act is expected to go into effect in 2022. The act provides a Roth IRA for employees who lack other retirement plan options. Like similar programs in other states, it functions via automated payroll deductions from enrolled employees. The program is 100% optional for both companies and their workers.

New York

The state legislature has submitted Bill Number A8332F, intended to create an IRA for individual employees lacking company-funded options. This proposition would also be funded by automatic payroll deductions over time. The legislature has yet to vote on this bill.

Oregon

OregonSaves closely resembles the California program. All companies in the state with five or more employees are required to register. Companies with four or fewer employees will have to begin registering sometime in 2022 as well. The program assists employers who can’t provide a private retirement plan of their own. Employees can access the funds placed in their individual IRA at any time, and can similarly opt out at any time.

Virginia

HP2174, currently up for debate in the Virginia State Legislature, introduces a state-facilitated Roth IRA account similar to those in other states. As the bill currently stands, it will offer the IRA to employees of any company with 25 or more workers that does not currently have a private retirement plan. Employee participation in the program is voluntary, though the bill’s contents may change as the legislative process continues.

Vermont

The Green Mountain Secure Retirement Plan was passed in 2017 and implementation was supposed to begin in 2019. However the plan has been delayed over clarification of certain pertinent federal laws. It is a voluntary public retirement plan, scheduled to roll out in waves. Additional details have yet to be refined, with a stated 2021 rollout likely delayed until 2022.

Washington

Washington’s Small Business Retirement Marketplace partners with private financial providers to facilitate an affordable retirement option for workers without access to employer-sponsored retirement plans. The program is free and voluntary, and enrollees may choose from a number of verified low-cost plans.

Employing Fiduciary Services to Source and Service Retirement Plans

For businesses that might not have the personnel resources, a reliable fiduciary service is an excellent resource for planning and implementing retirement programs. Most services tend to fall into one of two categories: 3(21) and 3(28).

A 3(21) service tends to act as an advisor to the business in question. They provide suggestions and guidelines for 401K funds, and employers can act on that advice as they deem appropriate. Any final decision is the company’s to make, not the advisor’s. This gives the company substantial leeway in fund management, while still retaining the expertise of a professional fiduciary advisor. However, it does add an additional layer of responsibility, as well as duties that team members may not possess the requisite time and expertise to handle. The company also assumes more financial risk, with an attendant increase in liability should a given investment not pan out. The bulk of retirement plan specialists—over 80%—fall into this category.

A 3(38) service plays a more direct role in the management of the funds. The advisor can make financial decisions directly, and takes on the fiduciary risks accordingly. The company monitors fund development, but the work required to grow and maintain it falls to the advisor. This frees the business up to attend to other matters, while providing the skills and experience necessary to reliably manage such important funds. 3(38) services have increased in popularity lately, doubling from just 10% of all fiduciary services to almost 20% in just a few years.

One reason for that spike is the complexity of planning and implementing a strong defined contribution plan. Many employers do not have the expertise required to do this. Even those with strong financial skills may not have the specific knowledge required to fully develop a good retirement plan. A professional advisor can tailor investment packages to match a given company’s unique model and the needs of its employees. This provides a solid return on investment without an attendant loss of time and resources within the company itself.

What Can a Professional Advisor Do for You?

In order to build the best possible plan, a financial advisor may start with a full-house consultation. This entails assessing the needs of the company’s specific plans and meeting with the company and workers to determine overall goals. Every retirement plan has to meet the needs of those who invest in it. A one-size-fits-all approach doesn’t serve any financial planning process very well. Once the parameters have been established, the advisor can chart a course to ensure that the retirement plan reaches its goals in a timely fashion. Doing so in the planning stages can ensure a smooth development for the defined contribution plan itself.

Once the plan is in place, it is then your advisor’s job to monitor and make ongoing adjustments as needed. It can be difficult to select the right range of solid investments to deliver on the fund’s stated goals without professional experience. Even with a reliable investment menu, it takes time and effort to monitor the funds, trim expenses, and adjust the overall portfolio as needed.

Most company employees, whatever their level, have too much work on their hands to perform such duties effectively. A professional advisor can not only establish and develop a strong plan, but work with clients to analyze fund development and make adjustments. They can also establish a transparent review process, ensuring the appropriate parties have regular access to performance and expense reports.

Tending to a retirement fund is an ongoing process. It requires countless adjustments and oversight in the face of changing conditions. After all, no investment takes place in a vacuum. The challenges of sustaining growth over a long period requires constant attention and care. A fiduciary advisor can take on those responsibilities, allowing their clients to focus on running their business.

Most importantly, the right partner can provide advice and support for the companies they work with. This may include clarifying the fiduciary responsibilities of their partner company, as well as providing resources to understand and manage these responsibilities effectively.

Prep for Future Labor Market With a Company Retirement Plan Today

According to a recent report from Forbes, over half of all workers intend to seek a new job in 2021. The cost of knowledge and experience lost to turnover—to say nothing of hiring and training new employees—can be considerable. Some estimates hold that the brain drain will cost U.S. companies over $400 billion in the next fiscal year alone.

Conversely, companies that retain employees through benefits can avoid those hits, and the time is now for companies to score top talent for the long term. But in order to do so, you must offer strong and viable defined contribution plans—not only to prospective team members, but existing ones as well.

More states are developing legislation to provide viable retirement funds, and ongoing legislation is expected to impact many businesses in the near future. A company seeking to get in front of the issue can benefit from a partnership with a reliable fiduciary advisor. An advisor can assess conditions and provide the best options for a company’s particular needs, ahead of a coming legal crunch.

A good advisory service provides sound advice on the rules governing these funds, such as nondiscrimination rules and tax laws. They also work with their partners on the specifics, to ensure that the retirement plan correctly suits their needs. That includes considerations such as:

Matching contributions from the company, and the comparative percentage of those contributions.
Funding and means of implementation, such as automatic deductions from an employee’s paycheck.
Employee vesting, or tracking how many years a given employee must work before the retirement funds kick in.

Polaris Wealth Advisory Group has the skills and experience to provide retirement planning and implementation for both small businesses and large companies. If your company wants to attract and retain skilled employees—and needs a partner in crafting a robust retirement plan to do so—book a consultation with Polaris today. Polaris Wealth advisors will review your options and find the retirement plan that best suits the needs of you and your workforce!

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