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Resolution season is upon us. January through March are the peak motivation months. That special time of the year when people are eager to make positive strides toward physical, financial, professional, or personal goals. On average, 42% of Americans make money-related resolutions. However, in less than 6 months, half of the once dedicated forget about their goals.[1] But, as we all know, it takes longer than 6 months to reach a meaningful savings goal.
So, how can you, as a plan sponsor, use the resolution momentum to inspire your employees to save for retirement? This article we will discuss holistic ways to promote financial wellness among your employees as well as plan design tips aimed at increasing participation and savings rates.
We’ve all heard the saying, “if you don’t know where you’re going, any road will get you there.” However, without a financial goal, many are left unprepared and money has a way of slipping away when there is no clear savings path.
As a retirement plan advisor, my job would be so much easier if every one of your employees were focused on saving for retirement; but the reality is, if they are financially stressed, retirement is the last thing on their minds. Depending on the age and financial situation of your workforce, top concerns may range from meeting monthly expenses, to paying off debt or saving for college, to caring for aging parents. It’s important to understand that saving is a journey and even though each of your employees may be in a different spot, however, the act of saving needs to be constant.
TIP: Encourage your employees to maintain an active list of financial goals. This will help them set a savings path and may help you to determine a more focused financial wellness program or specific education topics.
The term savings bucket is not new to you as a plan sponsor, as you may have regular conversations with your recordkeeper about them. However, it may be a brand-new concept for your employees. The three-bucket principal is a way of simplifying the art of saving. First you fill bucket #1 and once it is full, savings begin pouring into bucket #2, then it is on to the final bucket. Each bucket holds savings for a specific goal: Bucket #1 is reserved for Emergency Funds; Bucket #2: The Middle Bucket; Bucket #3: Retirement Bucket.
Beyond the holistic efforts of financial wellness that address the financial hurdles your employees face, there are steps you can take from a plan level that can motivate positive savings habits. Automatic features such as auto-enrollment and auto-escalation are two plan design features that can help you pursue goals of increasing participation and deferral rates.
Auto-enrollment is an excellent plan design feature to help get new hires saving from the get-go. In fact, Vanguard research shows that plans with auto-enrollment boast participation rates reaching 90% whereas plans with voluntary enrollment fall short at 63% participation.[2] You may also consider adding features that enroll #_ftn1#_ftnref2(or backsweep) workers who may not have been previously enrolled in your 401(k) plan.
Participating in the plan is great, but you want your employees to be saving at the highest possible rate. One way to help is by implementing an auto-escalation feature. Consider enrolling (or re-enrolling) employees into the plan at a modest 5% savings rate, then increase the deferral by a set percentage each year until a more meaningful rate is reached. Optional formulas:
| Deferral GOAL | Starting Deferral | Annual Increase | Years to Accomplish |
|---|---|---|---|
| 10% | 5% | 1% | 5 years |
| 10% | 5% | 2% | 2.5 years |
| 15% | 5% | 2% | 5 years |
Creating a culture for your employees to save begins with a dialog; we are happy to help with that conversation. At Retirement Impact, we feel that employee education and empowerment starts with the plan sponsor. Thus, we aim to provide resources and tools that help you help your employees move toward their savings goals.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.
As a plan sponsor, your employees rely heavily on your guidance; after all, you manage the plan that may offer their best shot at a successful retirement. When the 401(k) plan was introduced in the mid-80s, it was not intended as a standalone solution. However, as time evolved, defined contribution (DC) plans became the primary savings vehicle for Americans, while originally, they were intended to be a part of a three-pillar system including defined benefit (DB) and social security. Saving for retirement now rests predominately on your employees and they look to you for guidance.
It may not come as a surprise that 81% of Americans say they don’t know how much money they’ll need in retirement.[1] But let’s be honest, most people’s minds begin to drift when you start talking large numbers and percentages. So, let’s break it down in a way that may actually make an impact on your employees!
| Average American income = $55,775 | ||
| Annual | Monthly | Weekly |
| $55,775 | $4,647 | $1,161 |
| Average Retirement account balance = $95,776 ÷ Average years in retirement (18) | ||
| Annual | Monthly | Weekly |
| $5,320 | $443 | $110 |
The short answer: many industry experts suggest putting away 10 percent annually or more for a meaningful retirement, but the average deferral rate is only 4%.[1] So where is the disconnect? Often plan sponsors fear push back from employees when it comes to making plan adjustments that may decrease their weekly paychecks. However, surveys reveal that participants look to their employers for nudges to save.[2]
A helpful way to encourage more savings without adding a large cost to the plan is through effective plan design. In a previous article, we discussed six plan design basics to help you build a custom plan. In this article, we challenge you to explore a few advanced plan design features. You may consider stretching the company match, implementing auto-escalation, or offering a cash balance plan.
It’s been long accepted that you should “contribute to the employer match.” As an employer, why not act on this popular belief? If your plan utilizes a typical match formula of dollar for dollar up to 3% of pay, you may consider a stretch option. For example, you could match fifty cents on the dollar up to 6% of pay. This simple scenario would keep employer contributions at 3% of pay; and with the stretched formula, employees would be incentivized to save more.
If you were to announce to your employees that their next paycheck would reflect a 10% deferral into their 401k, you may have a small revolt on your hands. And rightly so. 76% of Americans live paycheck to paycheck (including 30% of people who earn more than $100,000 a year)[3]
You may consider a more subtle approach that would enroll your employees at 4% and automatically increase each year by 1% until they reach that a target rate of 10%. Your employees may even thank you. Based on a survey by American Century, seven in ten participants showed interest in a regular, incremental automatic deferral increase.[4]
A cash balance plan may induce a bit of nostalgia from the yesteryears of the traditional pension plan, but with a 401(k)-style twist: they combine the higher benefit limits of a DB plan with some of the flexibility and portability of a 401(k) or profit sharing plan. This unique plan design option may help business owners with a significant tax deduction for employee contributions, plus generous tax-deferred retirement contributions for themselves.
Inspiring your employees to save may seem daunting at times, especially if you fear push back on implementing new strategies. But, a significant point of offering a retirement plan is to help your employees get closer to their retirement goals. Exploring options such as those in this article may help you reach organizational goals such as recruiting and retaining valuable employees while helping them to pursue their goal of a successful retirement.
For information or help in implementing these plan design features, feel free to contact us to setup a conversation.
[1] Age Wave/Merrill Lynch, “Finances in Retirement: New Challenges, New Solutions,” 2017
[2] American Century Investments. “Fourth Annual Plan Participant Study Results.” Aug. 2016
[3] Johnson, Angela. “76% of Americans are living paycheck-to-paycheck.” CNN Money. June 2013.
[4] American Century Investments. “Fourth Annual Plan Participant Study Results.” Aug. 2016.
Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC and Retirement Impact, LLC are separate and unaffiliated
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