AUTOMATIC FEATURES TO BOOST PARTICIPATION AND SAVINGS RATES

Posted on by Jerome.Pfeffer

The use of auto features in 401(k) plans has continued to climb in popularity over the past decade. In fact, auto features such as automatic enrollment and auto escalation are considered best practices in 401(k) plan design as ways to help boost participation and employee savings rates.1

The use of auto features in 401(k) plans has continued to climb in popularity over the past decade. In fact, auto features such as automatic enrollment and auto escalation are considered best practices in 401(k) plan design as ways to help boost participation and employee savings rates.1

Many large 401(k) retirement plans offer auto features. However, small business plan sponsors have been slower to adopt them as part of their 401(k) plan design. If your company’s 401(k) plan design doesn’t currently include auto features, and/or if you’re thinking about implementing them, then keep reading.

Small Plans Playing Catch-up

The majority of retirement plans (60%) use automatic enrollment. However, there is a noteworthy disparity between the usage of auto enrollment in large versus small 401(k) plans. Two-thirds (66%) of large plans (those with assets of $200 million or more) use automatic enrollment as compared to 51% of smaller plans (those with assets of less than $200 million).1

Simply stated, auto enrollment occurs when an employee reaches the plan’s edibility requirements and is then automatically enrolled in the company’s retirement plan.

Likewise, the uptake of auto escalation — a plan feature that automatically increases participants’ contributions each year up to a specified limit — is more prevalent in large than in small plans. Fifty-eight percent of large plans use auto escalation versus just 40% of small plans. Among plans with auto escalation, the majority increase participant deferrals by 1% per year.[1]

When an employee starts saving earlier (auto enrollment) and is regularly nudged to save more (auto escalation), these two plan design features can have a substantial impact on that employee’s future retirement savings. Plan sponsors have the power to implement ideas that encourage better retirement savings. 

The Impact of Auto Features

Automatic enrollment can significantly improve plan participation. According to a recent survey from the Defined Contribution Institutional Investment Association (DCIIA), before the implementation of automatic enrollment, only 11% of plans had participation rates over 90%. Post-implementation, the percentage of plans with more than 90% participation increased more than fourfold to 46%.1

In addition, since automatic enrollment increases plan participation, it also improves the likelihood of a plan passing nondiscrimination testing.

What’s more, automatic enrollment improves savings rates, and adding auto escalation further boosts the impact. In plans with neither automatic enrollment or auto escalation, only 44% have savings rates above 10% (includes both employee deferrals and employer matching contributions). In plans that implement automatic enrollment only, the percentage of participants with savings rates above 10% increases to 67%. Where plan sponsors have implemented both automatic enrollment and auto escalation, that percentage rises to 70%!1

Financial experts recommend that workers save between 10-15% of their pay each year to achieve a comfortable retirement.[2] According to DCIIA, a combination of automatic enrollment and auto escalation is helping more 401(k) plan participants hit that goal, thus increasing their chances of being better prepared for retirement.

Getting Smaller Employers on Board

Despite the stated positive impacts of auto features on retirement readiness, some employers have chosen not to adopt them for a variety of reasons. One top concern is the fear of employee pushback, including worries that employees will complain.[3]

However, many real case and research studies have found that these concerns are largely unfounded. Opt-out rates for both automatic enrollment and auto escalation are negligible, suggesting that even if employees have initial concerns about the implementation of these plan design features, they generally do not act (i.e., opt out)[4].

There is no one-size-fits-all retirement plan design. However, if your plan goals include boosting participation, increasing employee deferrals, passing nondiscrimination testing, and improving overall retirement readiness, CONTACT US to learn more about automatic enrollment and auto escalation. The implementation of auto features in your company’s 401(k) plan may be a solution worth exploring.


[1] DCIIA Fourth Biennial Plan Sponsor Survey “Auto Features Continue to Grow in Popularity.” December 2017.

[2] O’Shea, Arielle. “How Much Should You Save for Retirement?” NerdWallet. August 2017.

[3] Goldstein, Justin, AIF. “Adding Automatic Features to your 401(k) Retirement Plan.” Bronfman Rothschild. 2017.

[4] DCIIA Fourth Biennial Plan Sponsor Survey “Auto Features Continue to Grow in Popularity.” December 2017.

Q3 2019 NEWS AND INFORMATION FOR EMPLOYERS

Posted on by Jerome.Pfeffer

As we close the first half of 2019, we urge plan sponsors to spend a bit of time reflecting on Measurement and Strategic Planning for your retirement plans. Before you know it, you will be sending annual notices and making plan amendments.  Our quarterly newsletter discusses the three following topics for plan sponsor information:

VIDEO: 5 PLAN DESIGN FEATURES FOR RETIREMENT READINESS

Posted on by Jerome.Pfeffer

Successful financial wellness programs help employees feel in control and on track in their financial lives – and that includes planning for retirement. We’ve outlined five quick ways to help your employees work toward financial wellness when savings for their retirement future!

PARTICIPANT GUIDE: YOUR PAST, PRESENT, AND FUTURE TO FINANCIAL WELLNESS

Posted on by Jerome.Pfeffer

Did you know that 53% of full-time employed American adults felt stressed dealing with their personal financial situations over the past few years?[1]

Financial wellness programs can be beneficial to financially-stressed employees, but there are many stages to financial wellness! Our new participant guide covers the three stages of financial wellness:

Send and share with your employees!

Download the Guide >>


[1] PwC, “Special Report: Financial stress and the bottom line,” September 2017.

HOW TO THINK ABOUT FINANCIAL WELLNESS PROGRAM ROI

Posted on by Jerome.Pfeffer

If you want to sell your C-suite on paying for an employee financial wellness program, you’ll probably hear this question from your CFO: What’s the ROI?

It’s natural for a chief financial officer to ask about the return on investment (ROI) from spending the organization’s money on a program that, at first glance, appears to only help employees with their lives outside work. But research finds a direct connection between employees feeling financially stressed and a decline in work productivity, an increase in health problems, and a rise in job absenteeism—plus, a shortfall in retirement savings.

According to a study by PwC,  53% of full-time employed American adults say they’ve felt stressed dealing with their personal financial situation over the past five years.1 The same study finds that among financially worried Americans:

You can think about financial wellness ROI in a couple of ways:


The Short-Term Return
If your employees don’t feel financially stressed, they’re more productive in their job, miss work less, and have lower health-care expenses. This saves your company money, and the PwC paper offers a hypothetical illustration of how you can quantify that savings, using productivity as the example focus. Based on PwC’s survey, 30% of employees say they get distracted by their finances while at work, while 46% of the distracted employees say they spend three hours or more weekly at work dealing with personal-finance issues.1

Using a 10,000-employee company as an example, the 30% stat means it has 3,000 distracted employees, while the 46% stat means that 1,380 of them spend three or more working hours weekly focused on their personal finances. Those 1,380 employees, losing three hours of productivity weekly and working an average of 46 weeks a year, account for 190,440 total hours of lost productivity annually for their company. Using the $17.24 average skilled worker hourly wage cited by PwC, this translates into a $3.3 million productivity cost impact in just one year for the employer.1

The Long-Term Payoff
You can also look at the financial wellness program ROI by thinking about how much more money it will cost your company if the employees don’t save enough and delay retirement. Prudential pegs the incremental cost of a one-year delay in retirement at more than $50,000 for an individual retirement-age employee, the cost differential between the retiring employee and a newly hired employee. A one-year increase in the workforce’s average retirement age translates into an incremental annual workforce cost of 1.0% to 1.5% for the entire workforce.[2]

Research finds that employees who have gone through a financial wellness program and feel less financially stressed are more apt to increase their deferrals to their retirement plans. A particular Financial Finesse paper gets specific about the increases in contribution rates seen when employees’ financial wellness scores rise.[3] Those higher employee contributions will likely lead to more on-time retirements which, for an employer, means lower salary and benefits costs, among other plusses.

What’s the annual savings? When an organization with 10,000 employees sees overall financial wellness scores improve from 4.0 to 5.0 (on a 10-point scale), the study finds that company saves an estimated $6,570,593 by reducing delayed retirements. And when overall financial wellness scores improve from 4.0 to 6.0, the savings projection jumps to $12,914,642.

Hard numbers like these can get a CFO’s attention. At your next retirement plan committee meeting, present this information and then use your company’s headcount to learn the potential bottom-line impact a financial wellness program could have within your company.


[1] PwC, “Special Report: Financial stress and the bottom line,” September 2017.

[2] Prudential Financial, Inc., “Why Employers Should Care About the Cost of Delayed Retirements,” 2017.

[3] Financial Finesse, Inc., “2018 Special Report: The ROI of Improving Employee Retirement Preparedness,” October 2018.

PLAN SPONSOR GUIDE: 90-10-90 RULE

Posted on by Jerome.Pfeffer

If you, your plan or your participants suffer from poor participation, low deferral rates or shortsighted investment decisions, you would not be alone. These are three major obstacles that sponsors need to overcome to produce better participant outcomes.  The 90-10-90 rule is a great benchmark for plan sponsors to aim for!

Download our most recent guide on the breakdown of the 90-10-90 rule!

Download the Guide >>

SHOULD YOU INCLUDE ESG FUNDS? MAYBE, MAYBE NOT.

Posted on by Jerome.Pfeffer

ESG, or environmental, social and governance funds, can be appealing to many investors, including millennials. These funds may be viewed as a proactive way to encourage reluctant and under-prepared millennials to save for retirement.  But is it a good idea to include ESG funds in your plan’s investment menu to entice investment do-gooders to boost their retirement savings? The short answer is, “it depends.”

ESG =Environmental, Social and Governance
SRIs = socially responsible investments

What are ESG funds?

Ethics-driven investment vehicles have existed since the 1970s. Initially, they sought to weed out companies that conflicted with investors’ values, including tobacco, liquor and gambling stocks.

ESG investing has come a long way since then. Today, it is used to describe “socially conscious” investments— think companies purposefully using water more efficiently in their plants, firms with eco-friendly missions, or businesses setting up shop in underserved locations. And don’t forget corporate governance, an often-overlooked feature of ESG funds that includes practices like ethical behavior, fair executive pay and forthright financial reporting.

Evaluating ESG funds for your plan

Now that you know a bit about how ESG funds work, you may be wondering how to evaluate them effectively in the context of your investment selection process. Your plan’s financial advisor can likely offer insights on specific funds and performance data. In addition, there are third parties who rate the underlying companies in ESG funds based on their sustainability or ESG practices. Even investment information and data provider, Morningstar, offers a dedicated ESG data and research platform, which rates 20,000 funds worldwide.[1] 

How about investment performance? There is a widespread perception that ESG factors may negatively impact performance.[2] However, some industry observers argue that incorporating ESG factors results in enhanced risk-adjusted returns, because companies with sustainable practices tend to be stronger, better prepared for the future, and more appealing to consumers.[3]

ESG Funds: Yay or Nay?

Thus far, the Department of Labor (DOL) has not looked favorably on the use of ESG funds in retirement plans. Although they have not ruled against using ESG options, the DOL has cautioned plan fiduciaries not to put too much emphasis on the funds’ socially responsible mission as part of the investment selection and decision-making process. [4]

Due in part to the DOL’s cautionary guidance, the uptake of ESG funds in retirement plans has been minimal — just 2%, offered as an option as of 2016.[5] That said, if you are considering adding ESG options to your plan, make sure to do the following as part of your fiduciary responsibilities:

ESG funds may benefit the world given that they seek to invest in companies with socially-conscious missions. However, whether they are beneficial for your plan and participants is, ultimately, up to your plan’s fiduciaries to decide. Choose wisely.


[1] Morningstar. “Sustainable Investing: Surfacing ESG Data and Research.” 2018.

[2] Barney, Lee. PlanSponsor magazine. “GAO Explores Why Few Retirement Plans Embrace ESG Investing.” August 2018.

[3] Hartnett, Judy Faust and Moore, Rebecca. Plan Adviser magazine. “What Would Encourage More ERISA Plans to Use ESG Investments?” November 2018.

[4] DOL. ESG Investment Considerations. April 2018.

[5] Barney, Lee. PlanSponsor magazine. “GAO Explores Why Few Retirement Plans Embrace ESG Investing.” August 2018.

IS IT TIME TO CONSIDER NEW PLAN DESIGN?

Posted on by Jerome.Pfeffer

You may have heard about a “cash balance plan” and wondered whether it would be something advantageous for your business.  A cash balance plan operates differently from other types of traditional retirement plans in that it combines features of both defined benefit and defined contribution plans.

Technically, a cash balance plan is classified as a defined benefit plan, which means it is subject to minimum funding requirements.  Likewise, the investment of cash balance plan assets are managed by the employer or an investment manager appointed by the employer.  Since cash balance plans are a “benefit,” increases and decreases in the value of the actual plan’s investments do not directly affect the amount promised to employees. 

For example, if Jane is promised through a cash balance plan a $10,000 account value, then she is entitled to a $10,000 payment, whereas, the actual value of Jane’s account could be $8,000.  The employer is responsible for making Jane’s account whole.  Or, vice versa, her account could be worth $12,000, yet she is only eligible to claim the $10,000 that is her accrued benefit.[1]

Typically, however, an employee benefit is expressed as a hypothetical account balance, giving it a defined contribution “feel.”  A participant’s account is credited each year with a “pay credit,” usually a percentage of pay, and also with an “interest credit,” either a fixed or variable rate that is tied to an index.  When a participant is eligible to receive benefits under a cash balance plan, the plan is treated as if it were a defined contribution plan with distributions available at termination of employment in the form of an annuity or a lump sum that can be rolled over into an IRA.

Who are cash balance plans best suited for?

Cash balance plans are especially suited for self-employed or small business owners with high incomes, since these plans allow high-earning business owners to save more than the $56,000 currently allowed for profit sharing/401(k) plans.  Cash balance plans have generous contribution limits – upwards of $200,000 in annual wage deferral.

These plans allow for large annual tax deductions because the limitation is on the annual distribution that the plan participant may receive at retirement ($225,000 for 2019), not on the annual contribution to the plan as is the case with profit sharing or 401(k) plans.  Employer contributions to a cash balance plan could potentially be three to four times their profit sharing/401(k) contributions and will vary depending on age, income, employee payroll and how much is currently invested in the plan.

Most cash balance plans are designed for the primary benefit of owners or executives of a company. Some candidates include professional practices (doctors, lawyers, accountants, architects, agencies, family owned businesses, to name a few examples) who would like to minimize taxes by putting away their hard-earned dollars into tax-deferred accounts.  Additionally, cash balance plans can be appropriate when the owner or executive-level employees are several years older than most of the non-highly compensated employees. For more specifics, it’s best to speak with a retirement plan advisor and third-party administrator for a sample plan design proposal.

This sounds too good to be true, so what’s the catch?

Downsides to sponsoring a cash balance plan include the need to commit to annual minimum funding levels, annual administration fees, investment management fees, and actuarial fees associated with the annual certification requirement showing that the plan is properly funded.  Typically, the tax savings are advantageous and outweigh many of the disadvantages.

Interested, but should I be concerned about cash flow fluctuations?

Businesses that may not want to make the commitment to a cash balance plan or that are not good candidates for it, but would nonetheless like to optimize retirement benefits for executive and other highly compensated employees, may want to consider a profit-sharing plan with an allocation method known as “new comparability” or “cross-testing.” 

With the new comparability plan, profit sharing contributions are allocated using the time value of money as a basis to allocate larger contributions to participants closer to retirement age.   Depending on the demographic make-up of a company’s work force, the new comparability allocation method can be an effective means of targeting contributions to certain senior highly-compensated employees without committing to funding a defined benefit plan.

What should I do next?

Plan design is largely dependent on the demographics of a business as well as the level of contributions with which the business is most comfortable.  For these reasons, consulting with a third-party administrator is highly recommended.  This third-party administrator will create customized illustrations using your company’s particular demographics to provide alternative plan designs for review and consideration. 

Proper retirement plan design can help you fulfill your company’s retirement plan objectives, such as maximizing benefits to key employees, tax deferral and efficient ways to minimize cost to the company.


1 This example is a hypothetical illustration. It is not representative of any specific situation and your results will vary.

Q2 2019 LIFT RETIREMENT

Posted on by Jerome.Pfeffer

Financial wellness has many components that can affect and benefit your workplace. This quarter, our newsletter highlights three engaging topics with insights on the many ways you can incorporate financial wellness into your workplace with the goal of improving retirement outcomes!

Quarterly Retirement Newsletter

VIDEO: WHAT’S IN YOUR FIDUCIARY FILE?

Posted on by Jerome.Pfeffer

Ever wonder what documents should be in your retirement plan committee fiduciary file?

If the Department of Labor were to ever knock on your door, we want you to be prepared! Applying the essential requirements and best practice ideas on how to safely store fiduciary documents could help to lessen the possibility of litigation.

Watch this 90 second video to learn more about:

What’s in Your Fiduciary File?

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