Can One-Size Fit All in Company Retirement Plans?
Workplace retirement plans play a leading role in helping Americans reach retirement goals. But you don’t have to look far to find reports on the “retirement savings gap.” In fact, to close the gap, legislation is being discussed requiring employers with as few as 10 employees to sponsor a plan. Access to a plan, though, is just a starting point.
Closing the “Gap”
Putting a plan in place is a great start. Next is nudging employees to save, save, and save some more. Fortunately, retirement plan automatic features are an effective way to boost savings rates. Auto enrollment is rising and only 10 percent of employees choose to opt-out. Even better? After implementation of auto enrollment, the vast majority of plan participants (up to 85 percent) stay enrolled. Finally, auto-enroll reduces savings disparity among minority populations as we see no significant difference in opt-out rates among racial and gender groups.
What’s in it for me?
And there are real advantages for employers, too. Streamlined and standardized onboarding process for new employees: By reducing paper-based workflows, employers can efficiently onboard new employees. Simplified selection of appropriate investments, particularly target-date fund investments: This simplification often fulfills qualified default investment alternative (QDIA) objectives, providing safe harbor fiduciary protections for employers. Encouragement for employees on the road to retirement: When employees can afford to retire, it’s good for them and the business’s financial resources. Encouraging employees to save helps foster a culture of loyalty, morale, and productivity. Potential to qualify for a tax credit of up to $500 for three years: courtesy of a provision in the SECURE Act. Perhaps most obviously, auto provisions Increase participation and contribution rates which can benefit a sponsor’s nondiscrimination test results. This allows owners and highly compensated employees to contribute more to their retirement savings plan.
Another “Savings Gap”
Another, less discussed, “retirement savings gap” exists. Can a “one-size fits all” retirement plan meet the needs of an entire workforce? Thanks to increasing adoption of automatic features, the savings gap among employees most likely to miss out to due inertia is shrinking. But, another part of your employee population faces a different version of the same problem. Highly-compensated employees might be limited in their ability to contribute to the plan due to nondiscrimination testing. But even if the plan has a Safe Harbor provision or passes testing, the annual IRS savings limit may have higher earners coming up short in their savings rate. An employee earning more than $150,000 annually and making the maximum allowable 401k contribution ($20,500 in 2022) is only saving at a rate of 13.6% which falls short of the often recommended 15% savings rate. If that person spent their early years plowing financial resources into mortgages and college tuition, saving 13.6% in the later part of their career isn’t likely to get them across the retirement finish line.
Deferred Compensation Plans Can Help
There is more than one type of retirement benefit plan. For example, consider adding a deferred compensation plan, to provide an additional savings opportunity for key employees. While these plans are complex, with the help of an engaged advisor, this savings opportunity can impact the “other” retirement savings gap like the positive effects of auto provisions for less engaged savers.
If you’d like to talk more about how to go beyond the “one-size fits all” retirement benefit plan design, call the Align team. We can create plans and strategies to move employees across the entire financial spectrum closer to their personal definition of financial freedom.