Design Strategies for Plan Participation

10 strategies on retirement plan participation to help create retirement outcomes

About 75 percent of U.S. employees who are currently enrolled in a 401(k) plan think that 401(k) plans are the most important source of a person's retirement income. In a study with Pentegra and Harris Poll the surveys show that 65 percent of adults do not believe that their 401(k) plan will provide enough money for them to be able to retire when they plan to.

With the 401(k) plan becoming the sole retirement strategy for many employees its more important than ever to take a look at your plan design and ensure that it optimizes the participant's retirement income goals.

We will explore 10 vital strategies around improving plan participation which can help create successful retirement outcomes for employee and plan sponsors of Retirement Plans.

1. Make it easy to enroll.

Strong participation rates typically start by making it easy for participants to take advantage of the plan from day one. That means taking a look at the eligibility requirements. Typically, immediate eligibility allows participants to get involved right away. This does not mean that a matching contribution has to be provided right away but at least it gives the plan participant an early entry into saving into the plan. As a bonus, this also helps new hires roll over their contributions into the plan making it an easy way for them to organize and consolidate their assets and keeps them from spending or cashing out their existing retirement plans from previous employers.

Another consideration for this is dual eligibility requirements. Some employers employ a strategy where employees are allowed to enter the plan again at a different eligibility period to benefit from an employer match. For example, immediate entry but also possibly a three, six, nine or twelve months wait until plan employer contributions become effective.

2. Make sure that your vesting schedule is as short as possible.

Typical plans utilize a five and six-year vesting period but an immediate or shorter-term vesting schedule like a two to three-year vesting schedules will make the benefit of an employer match a nice incentive and also help retain your existing employees.

3. Utilize online enrollment.

Online enrollment can be an effective tool, especially for the plan sponsor whereby it allows employees to register and enroll quickly through the use of record-keeping technology. Many record keepers offer a quick enroll feature whereby they can enroll online through their desktop or through their smartphone in less than five minutes. The technology feature also provides great planning and guidance tools to help participants map out a strategy.

According to Pentegra and Harris Poll’s recent study, 47 percent of employers have a 401(k) plan auto-enrollment feature that coordinates with online enrollment. The bottom line is it's critical to help participants get started and start helping themselves.

4. Implement automatic enrollment.

In conjunction with online enrollment, implementing an automatic enrollment feature is also a useful tool to apply. Automatic enrollment basically provides an automatic entry into the plan for eligible participants. The accountability is on the employee to opt out, however many studies show that once employees are auto enrolled into the plan they stay in the plan. (1)

The goal is to get at least 90 percent of workers into a retirement plan through auto enrollment. Different research shows that automatic solutions such as automatic enrollment positively impacts participant behavior and savings rates. According to the 56th Annual Survey Report from Plan Sponsor Council of America, 47 percent of plan sponsors offer auto enrollment and automation becomes standard in many defined contribution plans. Once people are defaulted in the plan they typically stay in.

Not having auto enrollment presents challenges for enrollment participation and also proper deferral percentages into the plan. Often plan sponsors are spending more time trying to motivate participation into the plan which can take much more time to reach optimal participation rates and deferral rates.

5. Offer a 6 percent deferral rate rather than a 3 percent deferral rate.

Most auto enrollment plans will see even better results if they utilize a higher percentage of deferral rate through auto enrollment. Studies show that most employees will actually maintain the 6 percent deferral rate or at very least decrease it at some point(2). Using 6 percent for auto enrollment goes a long way towards increasing savings rates and in proving plan testing and doing so enables senior executives and highly paid employees to save more by improving the nondiscrimination test performance.

Many question whether or not auto enrollment is worth the cost of additional employer matching contributions. The rise in costs will often be modest. Most higher paid employees sign up for 401(k) plan on their own and it would make sense that the population employees that are automatically enrolled tend to have lower salaries. Auto enrollment can make employees feel more secure and in turn improve morale and a company's ability to attract/retain talent. Studies continue show that automatic enrollment can also dramatically increase participation by women, minorities, younger workers, and moderate-income employees which are four groups that are typically most likely to under save. (2)

6. Add an auto escalation feature in addition to auto enrollment.

Utilizing an auto escalation feature by which every year, for example, one percent is automatically added to a participant’s deferral rate. Typically, on an anniversary date like January 1st these auto escalation rates can max out for example at a 10 percent savings rate. This is a great way to help participants add a little additional savings to their 401(k) accounts. It also is much more manageable from a budget standpoint for participants because the extra 1% added annually is much more manageable from a budget standpoint. Partly due to the cost of living increase employees receive annually.

7. Get creative with your matching contribution.

Some examples of utilizing employer match include increasing the amount that a participant would have to defer in order to get the max match. This strategy can also provide and yield positive results. For example, rather than matching 100 percent up to the first 3 percent, employers could impose a half a percent up to 6 percent which would yield the same match percentage at the end of the day. Most participants will typically default towards the maximum percentage of deferral percentage in order to get the maximum match. Why not include or require a higher deferral percentage for participants in exchange for receiving their maximum contribution from the employer?

Keep in mind this is also a wonderful way to keep your employer match consistent. You can always adjust it if conditions change due to changing economic or business conditions.

8. Adopt a safe harbor matching formula.

Safe harbor formulas provide alternative, simplified methods of meeting the nondiscrimination requirements by offering certain minimum employer contribution formulas for retirement plans. For example, a non-elective safe harbor matching plan provides an automatic 3 percent contribution to employees regardless of whether or not they contribute or not. The other method, which is a 4 percent safe harbor match, incentivizes participants to contribute a maximum of 5 percent in order to get the 4 percent employer contribution.

The benefit to the employee is that it is a very valuable matching contribution. It is 100 percent vested from day one. For plan sponsors, the benefit is the ability to be exempt from discrimination testing which allows HCE's (highly compensated employees) to maximize their contributions and ensure that plan provides all employees with a base of retirement savings.

9. Add a Roth feature and potentially an in-plan Roth conversion feature.

A Roth 401(k) 403(b) option combines the features of a traditional retirement account with a Roth IRA, providing employees with a source of tax free retirement income. The differences between a traditional contribution and Roth contribution center around the tax status of both contributions and withdrawals. Unlike a traditional contribution, Roth contributions are made as an after-tax basis. Traditional contributions reduce a participant's income for federal and usually state tax purposes at the time. Also, in a Retirement plan like a 401(k) and 403(b) can allow an individual to save more than they can in a typical IRA or Roth IRA( IRA - $5,500 vs $ 18,000 if under 50)( 50 and over allows for an additional 1,000 in an IRA or 6,000 in a Retirement plan like a 401(k) or 403(b).

Contributions are made, the contributions grow tax deferred, and at distribution the pretax contributions when withdrawn are distributed and treated as ordinary income for tax purposes. Roth contributions on the other hand are tax free upon withdrawal as long as the employers maintain the Roth for an account for at least five years and has a reached the age of 591/2. The Roth conversion offers advantages to those who are currently in a low tax bracket but who expect to be in a higher tax bracket later on.

Another benefit of the tax-free withdrawals is that it can help highly paid workers better manage their tax situation at retirement. For most people, the main reason to contribute to Roth is to let the money grow tax free as long as possible. No one is sure about tax rates in the future so it might be beneficial to hedge the taxable strategy or taxable salary to deferrals and earnings in a traditional retirement plan with earnings in a Roth that can be withdrawn tax free.

10. Limit plan leakage and the ability to take withdrawals or loans.

Early distributions from a retirement plan for uses other than retirement income is more commonly known as plan leakage. Most plans allow participants to access their account using in-service withdraws, hardships and loan provisions. Approximately 90 percent of these plans allow these types of provisions. Using these withdraw features can some sometimes limit the efficiency of growing your retirement savings over time.

Potentially limiting these features will help individuals better save for retirement and help them utilize other income sources or saving sources to pay for expenses that they would otherwise use through a loan, or a plan hardship.

By reviewing these strategies with your record keeper, your third-party administrator or your advisor, you can begin to explore the different strategies and assess them as to whether or not they would be effective for your current plan. We recommend reviewing your plan health reports on an annual basis. These are reports that your third-party administrator, your advisor and your record keeper can provide to you and can provide some insightful ideas in order to implement effectively.

As a plan sponsor, you can begin utilizing a few of these strategies today that provide beneficial features that will help plan participants prepare for a successful retirement.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Footnotes:

1. *The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors
2.  How America Saves 2017 – Vanguard