Corporate America has a generation of older employees who do not have enough money saved for retirement. The result is that the Baby Boomers are either not retiring or they are retiring into financial hardship. Corporate America and Washington are starting to recognize the shortfall and understand the source of the problem.
I stand up in front of enrollment groups weekly and tell participants that they have a great 401(k) plan with highly ranked, style-specific, low-expense-ratio investment choices. We explain that their plan is with an outstanding, low-cost, recordkeeper that offers the best in enrollment and educational materials. We reinforce the message that their plan sponsor is doing their part by paying the administrative fees and matching the participants’ contributions. Unfortunately, if the participant doesn’t contribute enough, all our efforts are wasted. How do we get the average participant to contribute more?
We have seen the benefits of cutting fees. We have seen the success of automatic enrollment and automatic deferral increase. And, we have seen the success of using qualified default investment alternatives (QDIAs) and custom portfolios so participants benefit from a diversified portfolio and are more confident in their investment decisions. Now we have to address the lack of savings. Too many participants start too late and contribute too little.We need to reexamine how American companies match the participant contributions and ask Washington to recognize that all participants don’t start saving at the same time.
Typically, matches are structured to match the first few percent of the participant’s contribution. Employer matching contributions are pitched as “free money” and a “raise” from their employer and are promoted as incentives to save. The current safe harbor match is dollar for dollar up to the first 3% and fifty cents on the dollar for the next 2% of the participant’s contribution for a total deferral of 9%. Participants’ deferral rates are often identical to the limits on the match and unfortunately become the limit of the deferral. The participant has no incentive match to contribute more. Many of the matches lead to the same total deferral rate of 9%. Regardless of age and regardless of when the participant started to save, the wrong message is being sent. A 9% savings rate is not enough.
The general consensus now is that the participant saving rate should be 15%. How do we get the participant to a 15% savings rate? The answer is: stretch the company match to encourage higher contribution rates. For example, match 25% of the first 12% of participant savings and the end result is the targeted saving rate of 15%. The 25% match on 12% gets us to our goal but the match might not be a big enough incentive. Another example and one that provides more incentive is to have a 50% match up to a participant contribution level of 10% so that the participant gets to the targeted 15% saving rate.
Safe harbor matches were set up years ago and should be modified to reflect the realistic savings rate goal of 15%.
The Kieckhefer Group is recommending that the Department of Labor (DOL) offer a new safe harbor matching option and make it 0.5% of the first 10% of participant contributions, so we can potentially get every participant to a 15% deferral level and a better retirement.