As a CEO, business owner or other responsible plan fiduciary, you have good reason to help your employees with retirement readiness. In a white paper1, Attorney Marcia Wagner says that plan sponsors who improve the retirement readiness of their plan participants can avoid unnecessary risk, potential liability and can enjoy significant economic benefits from enhance workplace productivity. She says you should consider implementing the following best practices to promote retirement readiness:
- Evaluate Retirement Readiness at Plan-Level
- Implement Retirement Readiness Communication and Education Program.
- Integrate Readiness Assessment into Education Program.
- Adopting Plan Design Changes to Promote Retirement Readiness.
Implement Retirement Readiness Communication and Education Program
Does your 401(k) advisor or retirement plan provider provide education to your employees on an ongoing basis? What is their curriculum based on? What is the measure of success? These are just a few of the questions to evaluate any plan that you have or intend to implement. I believe that the education program should be based on the financial literacy of your employees. That can be ascertained either by survey or by implementing a one-on-one advice program where you would receive feedback from the advisors delivering the advice.
Integrate Readiness Assessment into Education Program
I believe that it’s important to help people, calculate how much they need to save, for how many paychecks and at what rate of return to reach their desired retirement paycheck. There are many assumptions built into these three interrelated questions. Many people take their savings cue from the company match, rather than a calculation based on their future retirement income need.
Behavioral finance teaches that humans are rarely just rational in their approach to money. A retirement planning advisor should have retirement planning credentials and act as a behavioral coach. This retirement support can be provided annually or I believe better yet, on a semi-annual basis. Research shows that savings has more to do with retirement success than an investment performance. There are many distractions that can get your employees to save less or take pre-mature 401(k) withdrawals that will harm their retirement planning.
Adopting Plan Design Changes to Promote Retirement Readiness
There are several plan design changes that can promote retirement readiness, such as automatic enrollment, qualified default investment alternative (QDIA), and auto escalate. Some feel that automatic enrollment is a no-brain or feature. Your employees can uncheck the box if they choose. I believe that the QDIA should be coordinated with the investment education (advice) program. Auto escalate its best supported with the advice program as there has been evidence of employees opting in an later opting out of the program when their financial literacy and wellness was not enhanced.
Decreasing your 401(k) plan risk
Your employees trust that you are offering the 401(k) to benefit them. Increasingly class-action attorneys and the Department of Labor are testing whether or not you can prove you are working in your employee’s best interest. Increasingly it is complaints by employees that is the catalyst for a captive DOL investigation. Employees, confident in their retirement security are less likely to lodge a formal complaint with DOL.
1. Plan Sponsor’s Fiduciary Calling to Improve the Retirement Readiness of Participants
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