Just 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 participants.
Here 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
Pentegra Retirement 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.
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