Since the Pension Protection Act of 2006, automatic enrollment and automatic contribution rate increases have become more common in plan designs as employers have looked for ways to help employees save for retirement. In fact, many surveys indicate that more employers are embracing these features as a way to help drive participation and savings rates.
While automatic features have helped participation and savings rates in plans, the concern is around the fact that low default rates plans started with can result in low savings rates. Another concern is many employers applied the automatic features to only new eligible employees and employers did not embrace the automatic contribution rate increase feature.
The automatic features have all helped participants, but what should employers and committees discuss this year as they plan for future improvements in their plans as a way to seek to improve the retirement outcomes for their participants?
One of the changes employers can make is to automatically enroll all eligible employees. Employees are used to enrolling annually in other benefits, and this is a way to use the same process for the retirement plan. Employers could also periodically enroll any non-participating employees. Both of these options can help drive continued participation and savings rates and reengage the participants in the plan. Having to opt out if they do not want to participate uses the inertia of the process to help employees down the contribution path.
The second topic employers and committees can have discussions around is automatically increasing the deferral rates each year. While employers have been more reluctant to put this feature in plans compared to automatic enrollment, I believe employers are missing a golden opportunity to help their participants. The concept for each of these features is the same as the initial automatic enrollment in that you are asking the participant to opt out of participating instead of opting in to the plan.
Another new technique is called auto-boost. In this approach, deferral rates are automatically increased for current participants. Auto-boosting can help raise contribution rates to the basic default level and may maximize any company matching contribution. While a combination of these features could certainly help participants start to save more for their retirement, they do not come without additional thought. This is why it is never too early to start the discussion about them. One of the consequences of increasing the participation and contribution rates is the increased cost for any employer matching that the employer would have to contribute to the plan.
Here are just a few of the best practices employers and committees should consider as a way to help participants pursue their retirement goals:
- Education on the amount employees need to be saving
- Automatically enrolling all current employees and future new employees in the plan
- Establishing the initial default deferral rate at a minimum of 6%
- Implementing automatic contribution rate increase of at least 1% or 2% and set a maximum of no less than 15%.
There is not one solution that is right for all employers. Committees need to review the makeup of the participants and participation levels in the plan as they look for a way to continue to improve their plans.
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.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Ludwig, ChFC, AIF, CRPS, is an EBA columnist and financial adviser with LHDretirement. Reach him at email@example.com.
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