Retirement Plan Design Deserves Plansponsor Attention
Retirement plan design is a key determinant of benefit plan success. If a company has not given much thought to your organization’s retirement plan design lately, it may be time to consider an analysis and follow-up changes. Perhaps you’d like to increase employee participation or savings rates, or both. Or help participants choose portfolio allocations that are more appropriate for their specific age and stages of life. There is no such thing as one-size-fits-all plan design. There are many different types and configurations, depending on a wide variety of factors, such as company size, employee demographics, industry, etc. However, checking in with your goals for the plan and participants is a good place to start when considering adjustments to retirement plan design.
Plan fiduciaries might also draw retirement plan design inspiration from a recent article in Forbes, which highlights a recent study of “Best in Class” plans conducted by PlanSponsor magazine. All of the high-performing plans in the survey had several key plan design characteristics in common:
High participation rates: 95% vs. less than 80% for other plans
Intuitive investment options: Nearly all of the “Best in Class” retirement plan designs offer low-cost index funds, managed accounts, and Roth options. Across the industry, there are three options that have received recognition in recent years for not only helping participants to avoid high investment fees but also helping to improve retirement readiness across the board.
Automatic enrollment and auto-escalation: These two auto features go hand-in-hand to boost participation and savings rates. As plan design features, they have made quite an impact in the past decade-plus since the passage of the Pension Protection Act over a decade ago. Auto-enrollment and auto-escalation are not only best practices for 401(k) plan design, they are a gold standard. All of the “Best in Class” plans auto-enroll employees, increase their contributions when they get raises and offer eligibility to new hires within three months of their start date.
Offer financial education: While we recognize the importance of financial education in retirement plans, we also know that on its own, it is not a panacea. More than 80% of employers now offer financial wellness programs as part of their plan design, however, only a third of employees use workplace financial wellness benefits. Nonetheless, for employees who do tap into financial wellness, it can be impactful, boosting participation and retirement readiness across the board. Employees want — and need — financial advice, and they often look to their employers to provide it. Among “Best in Class” plans, 88-94% of those surveyed offer educations on investing basics and saving/budgeting skills. In addition, more than half the plans provided advice on college savings and credit and debt management.
If you’re reading this list and feel like your plan design could use some improvements, consider these action steps offered by Forbes:
- Enlist the help of a low-cost provider. A majority of the top fund providers offer a wide variety of services to help you build features into your retirement plan design that mirror those of the “Best in Class.”
- Review and evaluate your plan’s investments vis a vis their fees. As a plan fiduciary, you have a responsibility to monitor the fees and performance of the investment funds in the plan’s line-up, and ensure that the fees being paid for those funds and any related investment advice are “reasonable and necessary.” As such, it is important to review your plan’s investment line-up periodically, and at a minimum at least annually, to ensure that performance and fees are still in line with the criteria set forth in your plan’s Investment Policy Statement (IPS).
- Ask for help. You don’t have to update your retirement plan design alone. Get input from your service providers and your retirement plan’s financial advisor (if you partner with one) on plan design features and other offerings that can help your plan and participants to thrive.
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