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Enhancing the Participant Experience

How can you improve employee involvement in your company’s retirement plan? What can we do to shape participant behavior, if at all? Assuming we are united in a genuine desire to help employees experience successful retirement outcomes, what can we, as employers and plan fiduciaries, do right now?

In the retirement plan industry, we have traditionally focused on tactical solutions. We have been reluctant to legislate morality as it were, and to foist strategic solutions on plan participants that are in their best interests, however, reduce or in some cases eliminate participant choice and flexibility.

To boost plan participation and enhance opportunities for participants to save for retirement, employers should focus on their plan design, investment choices and total plan costs. Among some ideas to achieve these goals include the following:

  1. Offer a matching contribution that provides employees with an incentive to participate in the plan. The average employer match is 50 percent of the first 4 percent of employee pay – a matching contribution equal to 2 percent of pay. Matching decisions should be considered as part of a company’s overall compensation planning.
  1. Adopt automatic enrollment with a meaningful default deferral percentage of 5 percent to 7 percent. This means employees will be automatically enrolled in the plan and contribute a certain amount of their pay to their 401(k) plan. To opt out, employees simply need to notify their employer of their intention not to participate. Automatic enrollment helps employees start saving for retirement as early as possible in their careers, making it possible for them to build adequate retirement next eggs without changing their standard of living in the process.
  1. Offer group and individual investment education meetings for all plan participants. For companies with many locations, Web-based meetings work well. Equipping participants with the knowledge they need to make wise choices is critical.
  1. Add lifestyle investment options that provide asset allocation models for various life stages and retirement horizons. They help participants who might be overwhelmed by the prospect of choosing their own investments to make wise choices based on simple information, such as their age or projected retirement date.
  1. Offer annual, automatic salary deferral enhancement that increases employee deferral percentages by 1 percent per year to a stated plan maximum. This helps employees automatically increase their savings as their earnings increase over time.
  1. Evaluate the plan’s current investment menu and select 10 to 12 funds from different asset classes. The selection should include quantitative analysis other than past return. For example, it’s very important to consider risk/return, style, and peer group rankings.
  1. Benchmark the plan’s current total plan costs against other leading service providers offering similar services, including all investment-related fees, asset charges, 12(b)1 fees, administrative expenses, and other charges. This ensures that plan costs are reasonable and provide participants with the best opportunity to save for the long term.
  1. Remove the loan provision. Research shows that plans with no loan provision actually have higher participation than plans with a loan provision. Why? Because many of the participants who take a loan cannot afford to pay the loan back and make 401(k) salary deferral contributions at the same time.

It is my contention, shared by many thought leaders in the Defined Contribution Industry, that what 401(k) participants really want is to optimize and amass the highest possible 401(k) account balance without having to significantly compromise their current standard of living, and with a degree of risk that is not likely to significantly erode their account balance over a prolonged period of time. The key words and phrases are: Optimize; Highest possible account balance; No change to current standard of living and; Limited risk.

While as an industry we haven’t yet developed the ability to horizontally segment all participant wants and desires, we do know what decisions participants must make to achieve the above objectives, i.e., optimize their long-term 401(k) accumulation. Generally, the answer is just about the opposite of everything they have been doing.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Neither NFP Advisor Services nor its affiliates offer tax or legal advice.