Boosting 401(k) Retirement Readiness

Transcription

1 Boosting 401(k) Retirement Readiness With retirement savings taking a back seat to more immediate financial concerns, and the percentage of workers confident that they ll have enough money for a comfortable retirement at low levels 1, it s more important than ever for plan sponsors to consider retirement readiness as a key if not the key issue their employees are facing. Plan sponsors are in the unique position to help their employees become more retirement ready by considering plan design changes, as well as consistent, effective employee education. As retirement tools, products, and legislation constantly evolve, plan sponsors should regularly look at their plan design to evaluate whether it s meeting the needs of the employee demographic. Often, a plan provider offers features that, if taken advantage of, could help employees become better prepared financially for retirement. The following chart provides eight tools or concepts that can help to improve retirement readiness for your employees. How many is your plan using today? Does Your Plan Automatic Enrollment Typically increases plan participation rates Generally very few participants opt out 2 Can be a powerful retirement readiness tool, especially when offered with a Qualified Default Investment Alternative (QDIA) May improve nondiscrimination test results May be more costly for plans that offer an employer match There are ways to couple changes in the matching formula with auto enrollment to help reduce additional cost 55% of plans offer an Automatic Enrollment feature 2 1 Ruth Helman, Nevin Adams, Craig Copeland, and Jack VanDerhei, The 2014 Retirement Confidence Survey: Confidence Rebounds for Those With Retirement Plans, EBRI Issue Brief, no. 397, March

2 Automatic Escalation It is generally understood that deferral percentages of 3% through auto enrollment won t get plan participants to their desired retirement savings goal Automatic contribution rate increases (also called step-up contributions ) can help participants reach their retirement goals 1% step-up contributions are most common, and it s nearly an even split whether step-up contributions are offered as opt in or opt out 3 Like automatic enrollment, there can be additional expense associated with auto escalation for those employers who offer a match There are ways to restructure the match to offset or help reduce the impact for the employer 46% of plans offer an Automatic Escalation feature 3 Target-Date Funds Inertia is one of the greatest detriments to employee investing Target-date funds are an asset to most plans, since many employees often don t want to or know how to make ongoing asset allocation decisions Target-date funds make the investment responsibility easier for the plan participant Plan sponsors should consider the funds glide paths and whether to or through target-date funds are more appropriate for their employee demographic Employers will want to educate participants about investing in just one target-date fund at a time instead of many Participants should still be encouraged to monitor 64.5% of plans offer a target-date fund PSCA s 56 th Annual Survey of Profit Sharing and 401(k) Plans.

3 because they choose a fund with a date closest to their retirement date, and the asset allocation is automatically adjusted over time as the retirement date approaches their retirement plan accounts and not take a set it and forget it approach Annual Education Campaign Taking time to evaluate your plan participants specific needs and to design targeted education campaigns can help participants avoid behaviors that may potentially derail their retirement (taking loans, if offered, or inappropriate asset allocation, for example) Do you have a documented campaign? How do you judge success of education? How do you measure that success? Plan fiduciaries should consider adopting effective, easy-tounderstand participant communications on all important aspects of the plan that educate participants about the plan, the importance of contributing for retirement, and the basics of investing. Web-based tools that take into account both retirement needs and other financial needs Retirement is not an employee s only financial concern Debt and investing for other needs may be equally or, for some employees, more critical than retirement savings Recognizing and assisting employees with these additional financial needs can Are you or your retirement plan provider able to offer employees online tools and calculators to explore ways to help reduce debt or increase nonretirement savings? Does your employee education include topics beyond retirement? A sizable percentage of workers report they have virtually no savings and investments. Cost of living and day-to-day expenses head the list of reasons why workers do not save (or save more) for retirement, with 53 percent of workers citing this factor. 5 5 Ruth Helman, Nevin Adams, Craig Copeland, and Jack VanDerhei, The 2014 Retirement Confidence Survey: Confidence Rebounds for Those With Retirement Plans, EBRI Issue Brief, no. 397, March 2014.

4 help to improve their retirement readiness. Access to Participant Advice or Managed Accounts Appropriate asset allocation is one of the best tools to help achieve retirement goals, but many employees lack the time, knowledge or interest to make their own investment decisions Easily accessible plan participant advice could help satisfy those employees who have asked for help choosing investments, a common question for most plan sponsors Employees can use third-party resources to help make informed decisions about asset allocation based on their risk tolerance and time horizon to help them manage their retirement accounts and help them achieve their goals What is the cost for plan participant advice? Is there a way to offer do it myself and do it for me advice at different prices? If we offer employees advice, is it unbiased? For those plan sponsors who offer individual financial counseling or advice, more than half provide it through their recordkeeper/investment manager (56%) 6 Matching formula that encourages contributions Consider stretching the employer match to encourage higher employee contributions Couple any change in the matching formula with education that encourages employees to take full advantage of the match The most common matching formula is a 50% employer match on 6

5 100% employer match on employee s 3% contribution or 50% employer match on employee s 6% contribution both result in a 3% employer contribution The stretch match of 50% on 6% encourages employees to contribute more in order to receive the full match Consider providing personalized communications that illustrate to employees the effect that getting the full match can have on the growth of their balances over time 6% of employee contributions 7 Roth 401(k) Allows employees to invest on an after-tax basis, creating a taxdiversified income base for retirement Employees who expect to be in a higher tax bracket in retirement may find the Roth feature attractive Because future tax rates cannot be assumed with certainty, some employees may find the concept confusing; employee education can help More than half of plans that permit plan participant contributions are now allowing them; 19.5% of participants made Roth contributions when offered the opportunity 7 The material presented in this paper is of a general nature and for informational purposes only. Nothing herein constitutes the provision by PNC of investment, legal, tax or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. The PNC Financial Services Group, Inc. ( PNC ) uses the marketing names PNC Retirement Solutions SM and Vested Interest for nondiscretionary defined contribution plan services and investment options provided through its subsidiary, PNC Bank, National Association ( PNC Bank ), which is a Member FDIC. PNC Bank also provides custody, escrow, and directed trustee services; FDIC-insured banking products and services; and lending of funds. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC does not provide services in any jurisdiction in which it is not authorized to conduct business. PNC does not provide investment advice to PNC Retirement Solutions and Vested Interest plan sponsors or participants. PNC Retirement Solutions is a service mark and Vested Interest is a registered trademark of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value The PNC Financial Services Group, Inc. All rights reserved. 7 PSCA s 56 th Annual Survey of Profit Sharing and 401(k) Plans.