So. You offer a 401(k) or other defined contribution plan to your employees. Not exactly revolutionary nowadays, as more than 644,000 U.S. companies offer retirement plan options (Retirement Research, Inc., April 2014). But with millions of workers relying on their 401(k) plan for retirement, employers have the opportunity to really shine by taking their plans to the next level.
More likely than not, employees from all walks of life are participating in your company's retirement plan, including new and long-tenured employees. Just because employees are hardworking and loyal doesn't automatically mean they are financially astute and do a good job at planning for retirement, nor does it mean newer employees are bad at managing their money. What it does mean is it's critical for your company to offer a plan that maximizes the chance that all your employees will get, and stay, on track for retirement. Chances are, many of your most talented and valuable employees are not on track.
All to often, plans are designed and managed using a "one-size-fits-all" approach - and in many cases, that "one size" presumes employees will educate themselves, actively engage their retirement plan options and aggressively manage their retirement investments on an ongoing basis, specifically as circumstances change.
The retirement industry has made great strides in developing new approaches to retirement plan design, posititively impacting millions of Americans. More specifically, it has greatly improved how to bash through the inertia that stops many of your employees from saving - including those tenured, dedicated employees who may not have the monetary "know-how" of a financial professional.
Let me back up. The other day, some of my colleagues were working with a company that uses our retirement plan services. We recommended the company make some bold changes in the design of its 401(k) plan. While researching, we discovered several tenured, highly-valued, employees with staggeringly low retirement savings--one employee with 40+ years of service only had $17,000 in his 401(k) account! This discovery compelled the company to make substantial changes to its plan offering.
If you want to help guide more of your workforce to a secure retirement, here are three ways to start:
- Focus on Outcomes. These three tips are great starting points for many employees, specifically as they think about where they need to be as they transition into retirement. Employees should: (1) Plan to replace 70-85 percent of their income in retirement, (2) Save at least 10 percent of their own income and (3) Aim to spend down no more than 4 percent of their retirement savings per year while living in retirement. Although these recommendations represent sound research, they may not suit everyone or every situation.
- Plan Design Matters. A Lot. While financial education will always be important, behavior is the biggest culprit for many Americans not saving enough. The good news is that new retirement plan designs make it possible to break through those behavior barriers. Here are four ways your company can help: (1) Auto-enroll all new employees. (2) Sweep in all your existing employees, including those dedicated, long-term workers. (3) Set your default savings rate high -- 6 percent as a minimum. Eight percent is even better! (4) Use auto-increase (or auto-escalate) to enable your employees to work their way up to that magic 10 percent + number from the initial 6 percent or 8 percent.
- Your Matching Formula Sends a Message. Employees value the matching contribution you make to the 401(k) plan a lot. (Did anyone else say that in the voice of Lloyd Christmas from Dumb and Dumber? Just me? ) Many of them also often see the formula as a recommendation that this is the amount they should aim for. The most common matches are 100 percent of the elective deferral contribution up to either 3 percent or 4 percent of pay -- and many employees stop saving once they maximize the match. Not quite to that goal of 10 percent. Want to send the right message and get your employees on track? Stretch your matching formula. Make your 100 percent up to 4 percent formula a 50 percent up to 8 percent formula, or make your 100 percent up to 3 percent a 50 percent up to 6 percent.
Even though these changes may make some of your employees a little grousy, they can have a dramatic and positive effect on your overall workforce. By better understanding the options available and building a healthy retirement plan, both the employee and your company win the duel.