Studies continue to show a significant gap between how employers perceive the effectiveness of their retirement plans and how employees feel about their own retirement readiness. Recently the Employee Benefit Research Institute 2016 Retirement Confidence Survey found that although worker confidence has grown since 2009, there is still a long way to go before U.S. workers believe they are ready to retire. Only 42% of those surveyed reported being somewhat confident about having enough money for a comfortable retirement. As we discussed in a previous post, employers can help bridge the retirement readiness gap through employee education. But that shouldn’t be the only strategy they use. Employers can also utilize the following tactics to help increase employee participation in retirement plans:
1. Automatic Enrollment. In 2006 the Pension Protection Act was passed allowing employers to automatically enroll all eligible participants in their offered retirement plan. Automatic enrollment means that employees need to effectively opt out of the plan otherwise they will be signed up and a certain percentage of their salary will be contributed to the offered retirement plan. After a very enthusiastic start, the use of automatic enrollment has waned. A recent survey by the Society of Human Resource Management found that less than 40% of employers are now utilizing this design. The most frequent reason we hear is that employers are afraid it will upset employees and they are worried that employees will complain or even sue them for taking money out of their paychecks. However, according to a Transamerica survey, over 71% of workers found the automatic enrollment appealing. The US Government Accountability Office estimated that this simple procedure could lead to employees having their retirement income rise by 5 % overall.
2. Automatic Escalation. In this technique a participant’s contribution to the retirement plan would be automatically increased by a certain percentage or amount over a specified period of time thereby increasing the amount of money they are contributing to the plan. This technique recognizes most employee’s compensation rises as they stay employed, which gives them more money to contribute as they are getting closer to their presumed retirement. Again the 2006 Act permitted this strategy, but it too has seen its use decrease to just under 20%. The same fears that we hear from employers about auto-enrolment are echoed when it comes to auto-escalation. But once again, the Transamerica survey shows that over two-thirds of those surveyed liked the idea because it gave them one less thing to have to do.
3. Automatic Default Investment. In this strategy, the plan sponsor chooses an investment account for the participant if the participant does not choose one. Many employers in the past chose the cash option because the participant would be able to feel assured that they would not lose their investment. However, survey after survey has shown that both bond and equity returns have historically beaten cash. Therefore, more and more sponsors are utilizing a balanced investment account as a default. Some have even looked toward utilizing target date funds matching the participants’ date of birth to their expected date of retirement to choose an appropriate target date option. With the selection of these non-cash investment options, participants have a historically better chance of improving their potential retirement income.
4. Automatic Rebalance. Under such a scenario, a participant’s investments would be rebalanced at a certain period of time – usually annually – to bring his/her investment percentages back to the preselected percentages which the participant set up at the time of choosing this technique. By performing this service, the participant’s accounts would then be automatically reset so that the proceeds from those assets that grew above their intended target percentage would be used to buy assets which have fallen below their target percentage. Although this might initially be counter intuitive, it has the effect of helping participants to avoid the common mistake of following the herd and buying assets when things are going up and selling them when the markets fall. By sticking to a plan, investment percentage participants are more likely to “Buy Low and Sell High.”
By taking these small steps in combination with a renewed education process, we can help employees bridge the retirement readiness gap and plan for a comfortable retirement.
Does your company have a 401k plan or is looking into offering one? Contact us for a consultation.