Steps to Improve Employee Saving in Your 401(k) Plan
A company’s retirement plan is often the only retirement savings people have.
We aren’t the only ones who feel that way. According to Deloitte’s 2019 Defined Contribution Benchmarking Survey Report, 50% of retirement plan sponsors believe their responsibility includes taking an interest in whether their employees are tracking towards a comfortable retirement, and 33% feel very responsible for preparing employees for retirement, up from 23% in 2015.1
It is fantastic that 83% of surveyed plan sponsors feel some level of responsibility in helping prepare their employees for retirement. They should.
Along these lines, employers have become more generous in contributing to retirement plans. Companies are now contributing an average of 5.1% to 401(k) plans, up from 3.7% in 2008.2
Employees are getting more involved as well it seems. More than 84% of employees are contributing to their 401(k) plans, up 7% from 2010.3
Putting all this together, it would appear that we are on an excellent path to creating happy retirees. Employers feel responsible for helping their employees prepare for retirement.
They are kicking in more money towards their plans while their employees invest in the plans in greater numbers. This should all add up to a feel-good conclusion about the path we are on for creating good retirement outcomes, right?
Sadly, we all know the answer. Just about any survey or analysis out there points to the alarming retirement readiness, or lack there of, in our country. A 2020 TD Ameritrade Survey of adults aged 40-79 with $25,000 in savings found that two-thirds of 40-somethings have less than $100,000 in retirement savings and 28% of the 60-somethings have less than $50,000.4
And that is only for people who already have at least $25,000. Only 42% of employees feel confident in their retirement preparedness, and only 18% of plan sponsors surveyed by Deloitte felt most of their employees would be financially prepared for retirement.5,6
SO WHAT GIVES?
The key to success is to remain a consistent participant in the plan.
Case in point, the Investment Company Institute found that 401(k) balances of consistent participants – those who remained actively invested in the same plan through the analysis – grew from $63,756 in 2010 to $151,694 in 2016, which is remarkable compared to all participants in their database who experienced a more modest growth ($60,329 to $75,358) during the same time period. Participants who stay invested fare better over the long term.7
It is paramount to help employees take that first step to save and keep them invested in their retirement plans. Not every employee can save due to a lack of income or other financial strains. There may be government programs to help.
Here are five recommendations to improve the effectiveness of saving through your 401(k) plan.
According to Deloitte, auto-enrollment is offered in 69% of plans, and Vanguard reports that programs with auto-enrollment on their platform have a 92% participation rate instead of 61% voluntary enrollment plans.8 Put everyone on auto-drive, and don’t just offer auto-enrollment to new employees only. Getting everyone enrolled might drive up company expenses, but it will also drive up better retirement outcomes for employees. Be aggressive with initial deferral rates; 3% is typical but think about 5% or 6% as this will drive more meaningful savings. It turns out that Vanguard noted that plans with this feature have an average saving rate that is 56% higher than plans where enrollment is voluntary.9 We’re not done yet. Add auto-escalation. Two-thirds of plans on Vanguard’s platform that offer auto-enrollment have implemented auto-escalation.
Outside of auto-enrollment, company matching is seen as the #1 reason employees enroll in their company’s retirement plan. It’s very attractive to current employees and acts as a powerful retention tool. Seventy-five percent of new hires at a company offering a 401(k) say the retirement plan provides a compelling reason to stay.10 A company match is also appealing to future employees, and your recruiters will be grateful as attracting talent just got that much easier. If you don’t offer a match and your competitor does, you might lose that highly valued employee or recruit, costing you much more in recruiting costs in the long run. But if attracting and retaining talent isn’t enough of a reason to offer a match, employers can also deduct company contributions on federal tax returns.
Companies need to get more creative about communicating about retirement saving and plan features. Bland, generic messaging doesn’t move the inert. Determine the best demographics formula for your company and start sharing with them about what’s interesting to each cohort. If you used a generational demographic approach you would probably send Millennials a different message about your retirement plan (“use our retirement calculator to determine retirement readiness”) than you would a Gen X (“are you taking advantage of the catch up provision?”). If you have a significant Spanish-speaking employee base, think about writing materials in Spanish using images depicting Hispanics. Also, think about texting updates and alerts as emails can feel so 2005. Also, make sure plan information and updates are prominently displayed on your benefits homepage. We also encourage employers to have a calendar of communications for their employees regarding their 401(k) plan, so all the communication doesn’t happen around enrollment.
Offering investment and retirement readiness education through the plan’s financial advisor or through the recordkeeper’s website, is vital. Most people are not investing experts, so it is generally seen as a best practice to provide employees tools to understand the basics. If employees are not asking for education, they are either indifferent or likely do not know that they should. Turn employees into inquisitive investors who care about saving for their retirement. Your plan advisor should be willing and available to provide education regularly for employees. If they’re not or very reluctant to do so, you may need another advisor.
Simplify investments: There may be thousands of mutual funds outthere, but they don’t all need to be in your plan’s investment menu. Just like walking down the shopping aisle looking to buy a bar of soap and the shelves are stocked full of hundreds of brands that you’ve never heard of, it becomes much harder to make a purchasing decision. The same applies to directing deferrals into investment elections in a retirement plan. Employees might get stuck with “analysis paralysis” and end up not doing anything or, worse, allocate their deferrals into unsuitable selections. Further, you don’t want to have so many options that some of your staff turns into day traders in their 401(k) account. There are other places to do that, and their retirement account is not one of them. Nor do you want to encourage that behavior when they’re on the job. We also know how the average investor fares by trying to time the market, and it will generally not lead to optimal retirement savings outcomes: Source: Dalbar. Represents average annually compounded returns of equity indices vs. equity mutual fund investors; based on the length of time shareholders actually remain invested in a fund and the historic performance of the fund’s appropriate index. Past performance is no guarantee of future results. Investors cannot invest directly in an index.
A general working principle is to offer investment options somewhere between the mid- teens to low twenties, assuming your target date or target-risk suite is counted as one option.
Polaris Wealth Advisory Group is passionate about helping create better financial futures for our clients. Building wealth and retirement savings start with the first step. Like Martin Luther King Jr. said, “You don’t have to see the whole staircase, just take the first step.” Let’s help employees take that first step so that they are on their way to climbing the retirement savings staircase.
Call Polaris Wealth Advisory Group to get a second opinion about your retirement plan. We are so confident that we can add value that we provide our second opinion free of cost or obligation to work with us.