Taylor Guitars

While Taylor Guitars, in El Cajon, California, employs many young manufacturing workers, most are already on track to save enough for retirement. Eighty-one percent of those age 34 and under are projected to replace at least 70% of their income in retirement, compared with a 25% benchmark average for all of the defined contribution (DC) plan clients of its recordkeeper, Principal Financial Group.

Vice President of Finance Bryan Bear largely attributes that group’s comparatively strong retirement readiness to the 401(k) plan’s 100% on 5% match and other plan-design changes implemented by the six-member plan committee. “We’ve put in place a lot of things to overcome human behavior,” he says.

Overall, Principal Financial data show that 61% of employees at Taylor, a maker of high-end acoustic guitars, are likely to replace at least 70% of pre-retirement income, vs. a 15% benchmark, again for all of Principal’s defined contribution plans. About 470 of Taylor’s 1,100 employees worldwide work in the United States and are eligible for the company’s U.S. 401(k) plan.

The Role of Plan Design

Taylor Guitars workers have an average age of 35, and most are not well-versed in finance. The plan started to automatically enroll new hires at 5% five years ago and added 1% automatic escalation up to 10% a year later.

Despite the high cost of living, as a result of being just 20 minutes from downtown San Diego, only about 2% of Taylor Guitars’ employees have opted out of auto-enrollment. “People don’t seem to notice it because it is automatically deducted from their paycheck starting after their 60th day of employment with us,” Bear says. “It’s all about human behavior: We put this in place, and people don’t get around to changing it.”

Payroll/Benefits Manager Teresa Piccolo meets with each U.S. employee as his 401(k) eligibility date nears, to talk about the plan.

“We want them to understand that getting into the plan is very beneficial to them in the long run, but also that the impact to their paycheck is much less than people expect it to be,” says Shaun Paluczak, the company’s vice president of human resources (HR).

In addition to the plan sponsor matching 100% on the first 5% deferred, it makes a discretionary profit-sharing contribution to eligible employees’ 401(k) accounts. The annual contribution—split among about 300 employees based on a safe-harbor Social Security integration formula—has averaged $400,000 and last year totaled $600,000.

The company also does a true-up match at year-end that it calls a “look-back match.” It ensures that participants who start the year deferring at a lower rate, then raise it during the year, get the match they deserve for the full year. For example, if a participant suspends his contribution in the year’s first half but then adjusts it to 10% for the second half, he will get the full 5% match for the year.

A look-back match feature helps participants maximize their contributions’ value, Bear says, and he adds that Taylor Guitars does not shy away from the additional match cost involved. “These employees may have had to adjust their contributions during the year due to a financial hardship. As a result, they were not able to contribute at a consistent level all year long. We are allowing an employee to ‘look back’ and recover lost opportunities to get the match.”

Streamlining Investments and Fees

As Taylor Guitars made plan-design changes five years ago, it also shifted to a more cost-effective approach to its investments and streamlined administrative fees. “We did many things all at once,” Bear recalls. “RBG [Retirement Benefits Group] has been with us for a while as our adviser, and they talked to us, over time, about all of the best practices they were seeing. So in 2014, we started doing a bunch of them.”

Today, the plan’s 17 investments have an average expense ratio of 34 basis points (bps). The company says this compares with an average expense ratio of 101 basis points for plans in its asset range—i.e., $25 million through $49.9 million—according to benchmarking data from “401k Averages Book.” Bear points to RBG’s help in putting together the current investment menu’s mix of low-cost index funds and actively managed funds in cost-efficient share classes. Using an open-architecture recordkeeping platform also helps, he adds.

For its default investment, the plan utilizes RetireView asset-allocation models, which have a hybrid approach that takes into account both age and risk. Participants are defaulted into a moderate fund for their target retirement date, and if they want to change it they can talk with RBG about their risk profile. The asset-allocation models automatically rebalance for participants every 90 days, unless they opt out of rebalancing.

To eliminate the impact of revenue sharing, the plan utilizes fee levelization, which it also implemented in 2014. Four of the plan’s 17 investments still use revenue sharing, and the amount paid gets pooled and used to offset participants’ administrative fee. “We felt it was more appropriate in terms of cost-sharing of the investments utilized by participants,” Bear says of the change. Participants pay a fee of 5 basis points that covers recordkeeping and custodial costs.

Targeted Education

An adviser from Retirement Benefits Group comes on-site for two days at least twice a year for one-on-one meetings with participants. “Our employees are able to discuss the retirement plan and broader financial issues with RBG: They can talk about things such as saving for a child’s college education, getting out of debt and budgeting,” Bear notes. “It’s all paid for by Taylor. We see it as giving them an opportunity to sit down and talk with an unbiased financial planner, who has no other incentive than to help them.”

In terms of other age groups of Taylor Guitars employees, Principal benchmarking data shows that those 55 and older are in the most danger of not achieving their retirement goals, Bear says. Thirty-seven percent are on track to replace 70% or more of their income—which at least considerably exceeds the 9% benchmark for that age group in other Principal defined contribution plans.

Taylor Guitars has a targeted education campaign in the works, aimed at encouraging those employees to roll previous plan balances into its 401(k) plan for purposes of consolidation.

Bear says, “I suspect that part of the issue with the older age group is they did not start out working here at Taylor and, therefore, saved a much smaller retirement balance to begin with. Also, some of them have not moved over their balances from their previous employers’ plans to our plan,” he says. “We will target those employees with education on the simple process of doing this and walk them through how they can transfer over their funds.”

—Judy Ward