TOTAL PLAN ASSETS/PARTICIPANTS: $8.1 million/191
PARTICIPATION RATE: 87%
AVERAGE DEFERRAL RATE: 6.5%
DEFAULT DEFERRAL RATE: 4%
EMPLOYER CONTRIBUTION: 25% on 6%
Many lower-paid employees of Thomas Automotive Family—the owner of five auto dealerships, with headquarters in Bedford, Pennsylvania—once saved little or nothing in the company 401(k) plan.
“We had many employees who didn’t contribute, or who would go in at 1% or 2% and then never change their contribution,” recalls Human Resources (HR) Director Peggy Zembower. “But I know that to retire at the standard of living you’re used to, you have to be at much higher than 1% or 2% savings.”
She realized the implications of workers’ poor retirement outlook. “If we have a 70-year-old employee or even 80-year-old employee who is still working here because he wants to, great,” she says. “But if that employee is still working here because he isn’t able to retire, then shame on us, plain and simple.”
The savings dilemma also had affected the plan’s nondiscrimination testing. “We had [highly compensated] employees who wanted to max out their 401(k) contribution, but we had many other employees who were either not participating or participating at very low levels,” Zembower says. “So then we would fail nondiscrimination testing and have to refund some contributions” to employees seeking to maximize their deferrals.
That changed when the 401(k) plan implemented automatic enrollment in 2014, utilizing a 4% initial deferral and 1% automatic escalation up to a 15% ceiling. The employer now matches 25% of up to 6% of pay, an increase from the original 25% of up to 4%.
Presently, the $8.1 million plan has 191 participants and an 87% participation rate, with an average deferral of 6.5%. In 2015, the plan passed testing for the first time.
Plan Design Changes
In 2013, Thomas Automotive officials approached the plan’s adviser, L.R. Webber Associates Inc., about the participation and testing issues. At that time, Thomas P. Muldoon III, L.R. Webber’s director of retirement services, brought up the possibility of implementing auto-enrollment.
Asked what started the momentum for change, Muldoon says it began with Thomas Automotive realizing that its plan could be working more effectively. “That’s when we felt comfortable saying, ‘Here are the conversations we’re having with other sponsors,’” Muldoon says.
The dealer had no particular reasons for not having adopted auto-enrollment, he says. “They weren’t afraid to adopt it. They weren’t saying, ‘We don’t want to be paternalistic.’ It was simply, ‘We have never heard of this before.’”
While Thomas Automotive CEO Mark Thomas had been unaware of the practice, he liked the sound of it when explained to him. “We weren’t really tuned in to what the trends were,” he recalls. “But the more we looked into it, the more it made sense.”
The company has long sought to make its benefits package a differentiator to employees, Thomas notes. “We’ve always tried to improve employee retention with strong benefits.” That helps the business because, “when customers come in and they see familiar faces, it gives them a lot of confidence in us,” he says. “They get more comfortable with us, and that’s definitely better for our company.”
The employer cannot yet quantify the results of the plan-design change for it as a company. “It’s more of a long-term thing,” Thomas says. “But we feel good that more employees are saving for their retirement. We don’t want employees to work here their whole career and then not be able to continue their lifestyle after they retire.”
Personalized ‘Report (k)ards’
A personalized-education approach also encourages Thomas Automotive employees to save more. The plan’s 1% auto-escalation takes place every April 1, so, in March, L.R. Webber conducts group meetings. “We go to all five locations, and we get there at 7:30 in the morning, before any customers come in,” Muldoon says. Having utilized the employees’ deferral and investment-allocation data, L.R. Webber developed and now distributes a personalized “Report (k)ard” to each attendee, grading him from A to F on both his deferral rate and investment diversification.
“That was very instrumental in helping our employees see where they stand,” Zembower says. “[They] love the Report (k)ard, and when we talk to them, they want to know when they’re going to get their next Report (k)ard.”
In addition to the group meetings, about once a quarter Zembower and Muldoon do a walk-around at the company’s locations, talking informally with individual employees about their retirement savings. Sometimes, employees say they feel like they are unable to save more, Zembower says.
“So right then I say, ‘Let’s just see what that 1% more is going to mean for your paycheck.’” At the employee’s workstation, she helps the person access his account information along with a calculator tool from the plan’s recordkeeper, MassMutual Financial Group.
“I go in and add 1% to the contribution, and I tell the employee, ‘This is exactly what that will cost you from your paycheck,’” she says. “Probably eight out of 10 times, when I show employees how little it will cost, they decide to do it right then.”
Further, Zembower talks about the trade-offs in saving 1% more—or not. “I ask them, ‘Do you really want to work into your 70s or 80s?’ Nobody does. And I tell people, ‘It’s the difference between you eating an occasional PB&J sandwich now or eating PB&J every day when you retire.’ I say, ‘Let’s face it, there’s probably no way you can do 15% now. But if you do a 1% increase each year, it’s not that much money—and, before you know it, you’re going to be set to retire.’”
With the auto-enrollment program now in its third year, many participants have improved their retirement outlook. Currently, 73% are on track to retire at age 67 with at least 75% of their pre-retirement income, between their 401(k) and Social Security, Muldoon says. The plan’s 87% participation rate benchmarks against a 67% average among automotive dealerships of similar plan size, he says. The 6.5% average deferral percentage also benchmarks as 23% higher than the average for peer plans.
Zembower intends to keep chatting with individual employees and winning them over to saving for retirement, one by one. “I will not quit until I have 100% participation, —every employee who is not at retirement age already,” she says.
Muldoon has no doubt that Zembower’s personal touch will continue to encourage saving. “Peggy really puts it over the top, with all of her one-on-one conversations with employees, and the trust they have in her,” he says. “She really cares about each employee—and that is the difference between a typical plan sponsor who puts in good plan design and a great plan sponsor.” —Judy Ward
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