Thanks to tax cuts, employers beef up retirement efforts
Spurred by corporate savings from GOP tax reform — as well as a desire to move the needle on retirement readiness — companies are beefing up retirement efforts by increasing
contributions to employee retirement accounts, adding Roth 401(k) options and expanding health savings accounts to help workers pay for future healthcare costs.
Automotive retailer AutoNation said it would double its 401(k) match for employees who participate in the workplace-sponsored retirement plan. Cigna Corp. announced it was increasing its 401(k) matching contribution by 1% of employee compensation, or $30 million, in 2018. Visa also told employees that it would start matching 200% of an employee’s contributions to the company 401(k) plan up to 5% of the individual’s salary.
According to data collected by Willis Towers Watson, 32% of the S&P 500 companies surveyed plan to enhance retirement programs by improving 401(k) matching terms or making discretionary contributions to pension programs, and 28% said they will take some of those funds and improve workforce well-being or development programs.
“DC plans are the primary retirement vehicle for most plan sponsors and employees. That risk or burden is a shared responsibility between the employee and employer,” says Diane Nowak, senior consultant, benefits advisory and compliance at WTW in Cleveland. That’s why these plans are changing all the time, she adds.
Nowak says that many companies are looking at design changes to help boost employee retirement readiness. One of the features that has gained in popularity is the Roth 401(k) option. More than 70% of companies were offering a Roth 401(k) in 2017 compared with 54% in 2014, but 30% are still not offering a Roth. Their reasons are that there is low demand for this product, it’s confusing to employees, is difficult to communicate or is an administrative burden.
Current market conditions make the Roth 401(k) a great opportunity for employees. Tax reform cut taxes on corporations and individuals but these cuts will sunset in 2026, so Nowak encourages employers and employees to take advantage of the Roth feature now before the tax rates go back up.
“If you expect tax rates to go up, contribute to a Roth feature now. It is really more appealing now putting money into a Roth feature than a 401(k) plan,” she says.
The use of HSAs for retirement savings has increased dramatically since WTW’s last survey in 2014. Eighty percent of employers say they offered an HSA with tax-free contributions and distributions in 2017, compared with 59% in 2014.
HSAs, coupled with 401(k) plans, offer real opportunities for individuals, says Nowak, because contributions go in pre-tax but come out tax free. She encourages individuals to max out their HSA contributions before doing the same in their 401(k) plans because the tax advantages are so much greater and the largest expense for most people in retirement is healthcare.
One in four plan sponsors increased their employer contributions to a workplace retirement plan in the past five years, according to Willis Towers Watson. More than half of employers said they increased their contribution to encourage employee savings and plan engagement. Forty-eight percent wanted to improve their competitive positioning and 44% said they froze or closed their defined benefit plan.
Of those plan sponsors that increased their contributions, three in five increased their employer matching contribution.
“Given the tax situation, a lot of companies are looking at making increased contributions and discretionary contributions as well,” she says.
Auto features are becoming more popular as part of retirement plan design. WTW found that 60% of plans provide an auto-escalation feature in their DC plan, up from 54% in 2014. Half of enrollment programs default the workers up to or above the matching threshold and those that have auto escalation features bring a worker’s contribution to or above the match threshold.
If plan sponsors are worried about the cost of auto escalation, Nowak recommends they auto escalate every other year or rather than ratcheting up the contribution amount by a full percent each year, they could do a half percent instead.
A focus on financial wellness
Shane Bartling, a senior consultant with Willis Towers Watson in San Francisco who focuses on how companies tackle financial wellness, says there has been a limited amount of progress made in this area compared to where companies say they would like to be over the next three years. There are significant barriers to offering financial wellness, including budget, even though he says tax relief created some additional dollars that could be funneled in that direction.
Another barrier is manpower to run such a program. Many companies are too small to dedicate human resources efforts to the project.
Another big challenge is that what employees want and need varies by individual. There are a lot of readymade solutions out there but sometimes a more custom program is warranted based on company demographics.
Bartling says that companies will make greater progress over the next three years if they take an inventory of the solutions they’ve already got in place with an “eye toward higher utilization or engagement and delivering more value for the workforce.”
Big life events, like having a baby or buying a house, are times when employers could potentially step in and connect to that employee’s most immediate financial needs.
Consumer research and analytics is a growing area of the retirement industry. Utilizing consumer research approaches to understand the issues employees are encountering, he says.
“Where in the workforce is financial stress manifesting itself and how can we design solutions that are going to connect and engage the workforce?” Bartling asks.