like New Year’s resolutions to commit to exercise or diet, plan sponsors must
consider the health of their retirement plan. With more and more companies
relying on defined contribution plans as their sole retirement plan, it’s
important to ensure that plans are designed as effectively as possible to help
participants achieve higher levels of retirement readiness and success.
Progressive redesign of the plan is a win-win for plan sponsors as well as for
are five New Year’s resolutions that can help sponsors get their plans on the
right track in 2014:
- If you don’t already have an auto enrollment feature,
add it now. Auto enrollment at 6% of pay,
rather than the more widely used 3% deferral rate, encourages participants
to save at a level which is much more likely to result in meeting their
long-term goal of attaining an adequate level of retirement readiness. The
tax savings alone offered by a defined contribution plan is something
employees cannot pass up. And, any matching contribution is essentially
free money. Adding auto enrollment and escalation features helps employees
realize the benefits of the plan immediately.
- Implement an auto escalation feature of at least 1% per
year, and if you have one, change it to 2%. Only cap it at 10% if you are using a qualified automatic
contribution arrangement (QACA), but if there is no QACA, don’t cap it at
all. Most of us receive salary increases at the end of the calendar year;
that is the perfect time to take some of that increase and put it directly
into a retirement savings plan. An auto escalation feature does this
for participants automatically—and helps ensure savings rates are
automatically increased by at least 1% to 2% annually.”
- Recognize that a participant’s retirement investment
strategy is just as important as his/her savings strategy. Participant investment direction and asset allocation
play a key role in determining a participant’s eventual nest egg. Review
asset allocation not just at the plan level, but at the participant level
to determine if participants are appropriately diversified.
Encourage the use online planning tools that are part of your plan’s
education tools, and enlist the help of financial professionals to help
participants achieve proper diversification and asset allocation.
- Limit plan loans to no more than one loan outstanding
at any time (or at most two loans). Limiting
the number of outstanding loans for each participant will have a positive
impact in terms of limiting defined contribution asset outflows due to the
perpetual use of plan assets to meet day-to-day spending needs.
Reducing leakage is critical to successful long term participant outcomes.
- Re-enroll all existing plan participants periodically. Many participants are managing what is most likely
their first or second largest asset under the “set it and forget it”
mantra. Re-enrolling current plan participants on an annual basis enables
your participants to take a fresh look at how they are saving and
investing their existing contributions, and reminds them of the importance
of the plan in building financial security. The majority of plan
participants need and want help managing this asset—periodic re-enrollment
provides them with the opportunity to realign their investment accounts in
a manner which will lead to long term successful retirement outcomes.
Rich Rausser, senior vice
president of Client Services at Pentegra Retirement Services
Services is a provider of retirement plan solutions to organizations
nationwide. Founded by the Federal Home Loan Bank System in 1943, Pentegra
offers a full range of retirement programs, including 401(k) plans, defined benefit
pension plans, cash balance plans, 412(e)(3) fully insured defined benefit
plans, split funded defined benefit plans, KSOPs, ESOPs, profit sharing plans, age-weighted
plans, new comparability plans, 457(b) and 457(f) plans, 403(b) plans, 401(a)
plans, Section 79 plans, non-qualified executive benefit and director plans,
benefits financing solutions using BOLI and a broad array of TPA services. For
more information, go to www.pentegra.com.
NOTE: This feature is to
provide general information only, does not constitute legal advice, and cannot
be used or substituted for legal or tax advice.