Getting the Most out of Your Retirement Plan
To offer a successful retirement plan, here are 4 things every company should consider.
Let’s face reality: We all need to save for retirement!
For 2021, the average Social Security benefit is just over $1,500 per month, which means most Americans will need additional savings to come even close to maintaining their lifestyles. Unfortunately, too many people reaching retirement have no financial moat, forcing them to work beyond the normal retirement age or risk living below the federal poverty line.
All the more reason why an employer-sponsored retirement plan is one of the most valuable and highly sought-after employee benefits. Having a 401(k) in place can help recruit quality employees, as well as increase employee satisfaction and retention. But simply offering a plan is just the first step. In order to offer a successful plan, here are some things every company should consider:
1. Select the right plan design.
It’s important to work with a provider who offers you the flexibility to design the right plan for your company—not just today, but also down the road as the business expands or contracts. With or without the help of a financial adviser, plans can be customized to meet the company’s needs and to entice employees to participate.
Options include:
- Matching. Many matching formulas are based on a discretionary employer contribution. If needed, they can be temporarily or permanently discontinued without rewriting the plan documents. To incentivize employees to save more, consider a match structure of 50 percent of the first 8 percent that your employees contribute to their plan. This encourages them to save more, yet the maximum employer commitment is just 4 percent of employees’ salaries.
- Profit sharing. This allows employees to share in the successes of the company, while giving the business flexibility in how much it contributes, since the amount is discretionary and can be changed each year.
- Safe harbor matching. Safe harbor plans are exempt from nondiscrimination testing requirements, an appealing proposition for many small businesses. While a safe harbor plan requires a defined company contribution and immediate vesting, it may avoid penalties and costs associated with testing, making safe harbor matching one of the more popular choices.
- Vesting. Selecting the right vesting schedule can help with employee retention and encourage participants to dive right into saving.
- Auto-enroll and auto-increase. These have become popular means of encouraging saving, so much so that even state plans are beginning to mandate auto-enroll and auto-increase features. Why? Because while many employees neglect to enroll in their company’s benefit plans, it’s often due to lack of education or understanding, or simply because they forget. By contrast, when employees are auto-enrolled, they often fail to notice the small post-tax deduction, despite the large impact it can have on their future. Consider starting auto-enroll at an amount that won’t have a significant impact on your team’s take-home pay, and add the auto-increase feature to bump them up 1 percent per year. Generally, the industry recommends that individuals save 15 percent of their pay to attain a comfortable retirement. Both auto-enroll and auto-escalate have been proven to help them get there.
2. Invest in a successful rollout.
While taking the time to design your retirement plan is important, the way you introduce it to employees is key to its success. Employees often require help understanding their benefits and crave the education and tools to make smart financial choices. Consider an enrollment meeting hosted by your adviser, if you have one, or your recordkeeper, then create the right communication stream to encourage attendance. Talk employees through the benefits of saving, and explain how the company is making it easier for them to do so. Ensure they have ongoing education at their fingertips, as well. Saving starts with enrollment, but it doesn’t end there!
3. Maximize savings for you and your employees.
While the maximum employee contribution is $19,500—or $26,000 including catch-up payments for employees 50 or older—if you set up your plan to maximize employer contributions, employees can put aside as much as $58,000, or $64,500 including catch-up contributions. A 401(k) also helps offset the business’s taxes, as it allows the company to deduct applicable employee and employer matching contributions. Plus, the recently passed SECURE Act adds additional tax incentives for starting a new 401(k) plan and/or adding the auto-enroll feature (up to $16,500 in tax credits over the next three years). As a result, a plan might cost less than you think.
4. Continually evaluate and evolve.
While companies should review retirement plans at least annually to ensure compliance, it’s particularly important to regularly evaluate whether the plan’s design and investments are still the most appropriate for you and your team. Companies grow and contract, new products come to market, and people’s needs change. To truly get the most out of a retirement plan, managers need to ensure it’s meeting the business’s ongoing needs, and amend it as necessary. Most advisers will offer regular readouts that show participation rates, savings rates, fees, and other metrics that can showcase the plan’s success.
Whether you already offer a plan or are looking to start one, setting expectations up front around what constitutes success is important. Once you know what you’re aiming for, it’s easier to take the necessary steps to ensure you and your employees are getting everything out of your plan that you could, and should.
