Timothy A. Brady, The Daily Record Newswire
The transition from pension plans to defined contribution plans has effectively transferred the investment and longevity risk in retirement from employers to individuals. Defined contribution plans, like the 401(k), are flexible and often give participants full power over the investment selection and rebalancing process. Premature distributions, both qualified and unqualified, are also allowed.
Unfortunately, many employees lack financial planning knowledge and habits and fail to save adequately for retirement. The Bipartisan Policy Center recently revealed that 27 percent of households nearing retirement (age 55 to 64) have neither assets in retirement accounts nor a defined benefit pension. For those with retirement accounts, the median average in savings is $100,000, enough for an annual income of $4,000 (assuming the 4 percent withdrawal rule of thumb).
While a number of factors contribute to the savings crisis – employees perceive an inability to contribute, raid retirement funds prematurely, make poor investment decisions or just fail to enroll – employers can institute some simple and efficient practices to ensure that eligible staff members are using this benefit fully.
1) Start Fast – From the start, a new employee enrolling in a retirement plan should experience a process that reflects the long-term value of the plan to the firm and to employees’ financial health. If a plan adviser is available, arrange for him or her to meet with new enrollees and generate enthusiasm with interesting and useful educational materials. The power of compounding, budgeting for a savings goal and asset allocation are all important topics that can provide motivation.
Boise-based Agri Beef uses a multifaceted 401(k) enrollment approach to promote early and active engagement. The plan provider offers new employees a personalized workbook that first asks, “How much will you need in retirement?” Enrollees are given access to interactive tools that calculate estimated future retirement income with recommended contribution levels and age-appropriate guidance on investment choices.
Although the initial enrollment process takes time, Agri Beef sees fewer questions later on, and new employees develop effective savings habits from the beginning.
2) Automatically Enroll – The U.S. Department of Labor says about 30 percent of eligible employees do not participate in their company-sponsored 401(k) plan. Auto-enrollment could reduce this number to 15 percent. Most people exhibit a behavioral predisposition called status quo bias – or the desire to do nothing when faced with uncertainty or complexity. Companies can play into this cognitive behavioral bias by auto-enrolling participants after the one-year waiting period but giving an “opt-out” option.
At Agri Beef, human resources director Sonja Totland says, “Auto-enroll has had a much more dramatic effect on participation than any other strategy we have used to increase enrollment numbers.” She estimates that new enrollment has jumped 15 percent since the company implemented the practice. Participation certainly benefits employees, but employers also gain from spreading costs over a larger participant and asset base.
3) Use What You Pay For – A plan adviser’s services can free business owners to focus on business operations while providing valuable support to participants. Effective plan providers offer useful resources – such as online savings calculators, retirement income estimators and educational materials – along with assistance to encourage their use. Advisers can also help by providing occasional emails or newsletters highlighting budgeting tips or timely retirement topics to spur greater engagement. Agri Beef posts a bimonthly wellness communication, which periodically addresses positive financial habits and practices as part of the company’s focus on comprehensive employee well-being. Be sure to maximize the value of services and resources available through your plan to regularly inform and engage your workforce, which should increase employee satisfaction with the retirement plan.
Business owners should expect their retirement plan advisers to serve as partners to their companies and their employees, helping both to achieve their goals. By taking advantage of readily available services and features, employers can pave the way to increased plan participation and help alleviate the retirement savings crisis.
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Timothy Brady is a financial adviser and portfolio manager at D.A. Davidson in Boise.
