When Elaine Swope joined Golden, Colo.-based Jacobs Entertainment as human resources director six years ago, only about 25 percent of employees participated in its 401(k) plan, and the average paycheck deferral rate was just 6.81 percent, including the company match.
Both numbers are up since then, to 33 percent, and 12 percent, respectively. Swope pushed the employees in the right direction by using a little-recognized “best practice” in 401(k) plan design: emotional support. It’s one among a number that will put your company in the top tier of plans.
Among the reasons: corporate responsibility. The demise of pension plans means 401(k)s must become a main support of the American retirement system. The average household retirement plan balance for investors nearing retirement stands at only $120,000—enough to produce only about $500 per month.
Ideas for improving that picture are at a premium. Employers are also seeing the writing on the wall, said Nevin Adams, director of education and external relations at the Washington-based Employee Benefit Research Institute.
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There’s a self-interest angle for employers, too, that goes beyond the basic fiduciary duty of helping workers fund a secure retirement. With an aging workforce, “if people who are working for you don’t have enough to retire on, they might very well want to keep working for you,” Adams said. “That might be a hindrance for your workforce management.”
Only about 55 percent of the American workforce has access to a 401(k) and only about 38 percent participate, according to the Bureau of Labor Statistics.
So if you’re one of the employers offering a plan, pat yourself on the back. And then stop patting yourself on the back and consider that you might not be doing nearly enough to offer a 401(k) that is top tier for retaining talent, helping your employees generate sufficient retirement income and manage your company for the long-term.
Here are some broad principles and actual tools that are critical to the construction of a good 401(k) plan. As companies take a more active approach in designing 401(k)s, remember that one of the underlying goals is to coax employees into taking more responsibility for their own retirement planning.
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Individualized attention and coaching
JEI is a hospitality industry company, which means it starts behind the eight ball when it comes to employee participation and paycheck deferrals into 401(k)s. Industries where the average worker is paid less traditionally have lower participation—workers have a hard time setting money aside for retirement when other nearer-term goals like school tuition or saving for a house feel more pressing.
Some of the latest and most widely adopted 401(k) best practices for encouraging more savings, like auto-enrollment, weren’t a viable fit for the company’s culture, Swope said. “Those strategies felt big-brotherish to employees.”
She found another way. By working with the 401(k) plan sponsor, she improved the plan’s communications and made sure the enrollment process included a one-on-one meeting. “What really works well is empathy and caring for employees, eyeball to eyeball. We have a face-to-face interaction so they can talk about, “‘Yes, I have aging parents’ or, ‘Yes, I went through a nasty divorce.'”
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Auto-enrollment, but with careful intent
The federal government opened the door to allow employers to automatically enroll employees in 401(k)s eight years ago, with the Pension Protection Act. Many plans established the enrollment at a fairly low 3 percent, fearing a big-brother backlash. But the best plans have auto-enrollment at 6 percent or higher. “That 3 percent was one of the travesties of the PPA because it led to a decrease of average savings rates,” said David Blanchett, head of retirement research for Chicago-based Morningstar Investment Management.
The 3 percent essentially set a new voluntary norm, leading employees who might otherwise have saved 5-6 percent to believe that 3 percent was enough. In addition to a fairly high enrollment level, a plan should consider automatically enrolling everyone each year, similar to the open enrollment period for health care, not just new employees, Adams said. It’s a concept that is still the exception to the rule with auto-enrollment, but it is being experimented with by some companies. Another feature is auto escalation, whereby the amount employees contribute increases with their raises.
A well-designed employer match
A big employer match might seem like the biggest deal, and it can make a big difference in totals with which people retire. “People understand it puts money in their pocket,” Adams said.
But not all match schedules are created equal. “For companies that are unable to increase the amount of dollars allocated to making matching contributions, it may make sense to change the match schedule,” Blanchett wrote in a soon-to-be released report on best practices, co-authored by Morningstar’s large market practice leader, Nathan Voris.
For example, instead of matching 100 percent on the first 3 percent of employee deferrals, an employer could match 50 percent on the first 6 percent, or even 25 percent on the first 12 percent. These lower match schedules do a better job getting employees to “share the load” when it comes to funding retirement.
Have a good low-fee target date fund
Employers can’t necessarily become investment experts, but should know enough to judge whether the investment company and advisor are working to give employees a good selection. The plan should guide them toward low-fee, passively managed investments—research has shown they perform the best for most investors over time.
One sign that your investment company is doing a good job: It offers a good target date fund among the investment options and presents it in such a way that employees are encouraged to see it as the basis of their retirement planning.
Target date funds typically use a group of underlying funds, shifting investors’ mix as the investor ages—a shift that’s known as the glide path. Target date funds that use index funds as the underlying investment are likely to be the least expensive, but whatever fund you chose, an employer should have a method for picking them and monitoring them.
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“Target-date funds have layers of consideration, like the glide path and the underlying funds, that make due diligence difficult even for experts,” said Blanchett. Morningstar ranks target date funds. San Diego-based retirement data company BrightScope offers a report, Popping the Hood, that analyzes target date fund families.
The report includes 48 fund families and 425 different funds. The number of funds is one indication of how large the universe of target date funds has grown and how widely they are being adopted by 401(k) plan sponsors. The other is the assets in them: They are projected to reach $2 trillion by 2020, compared with $502 billion in 2012, according to BrightScope.
—By Elizabeth MacBride, Special to CNBC.com.