If your workforce tends to have longevity, you absolutely should care about your 401k balance. It can be seen as a proxy for whether or not your employees can retire on their terms. If not, you may be staring down the time bomb of increasing absenteeism and higher health care costs. Addressing their future retirement readiness today, you can help of these probable negatives costs later. Let’s explore the tools at your disposal.
Boosting 401k balances through plan savings design
Setting a default 401k savings.
One of the ways to promote a higher 401k balance is setting a default savings rate. Many employees simply have no clue how much they should be saving. I’ve seen some plans where there is an employee match of 7% when the employee saves 3%. This gets employees to a 10% savings rate. This target rate is extolled in the book, “Save More Tomorrow.” Other plans provide a match of 3% on the first 3% of employee savings and nothing after. The popular advice in the financial press is to get the company free money. If that is the case, the latter match says you should stop at a 6% total. This savings signal is harmful to less sophisticated participants, who represent the majority of employer sponsored plan savers.
You could choose to default new employees into this savings rate. Consider a re-enrollment of current employees into this new savings design. It is important to launch a communication campaign to explain how these changes are focused on surrounding retirement readiness.
Auto escalate 401k savings.
There is a belief by some that many people cannot immediately increase their savings rate from 3% to 7%. If that is your belief, then consider using auto escalate. The auto escalate to be across everyone where you would increase savings by say one percent per year. If you regularly provide salary increases in the 1 to 3%, the new amount can be explained positively. A concept also explained in the book, “Save More Tomorrow.”
Boosting 401k balances through retirement planning advice
The previous methods are more boardroom decisions than they are ones that bring to light the need for employees to take their retirement planning personally. Historically employees like my parents were dependent on their employers to provide a pension. They did not need to know anything about their retirement SAT-
- How much to save?
- What (asset) allocation?
- What time (horizon)?
While people often want to think of themselves as smart, especially men, without CERTIFIED FINANCIAL PLANNER™ professional knowledge, they are sorely deficient in retirement planning knowledge. A survey by Bankers Life highlighted middle income boomers “who do turn to a financial professional generally have more saved for retirement. More than one-quarter (26%) of middle-income Boomers who have a financial professional have investable assets of more than $500,000, compared to less than one in 10 (5%) of those without a professional.”1 Middle-income Americans have an annual household income between $25,000 and $100,000.
One-on-one retirement planning advice can be added as an in plan service. Imagine the recruiting power of telling and new prized employee recruitment that your company has invested in a process to help them make better decisions about what to do with their 401k balances at previous employers. You will be providing them with retirement planning advice focused on helping them retire. The advice is independent of your firm and they can take it with them.
Ready to develop a plan to promote 401k balances?
None of the tools mentioned so far need increase the company’s directs costs. Your current recordkeeping provider likely can help implement the auto features discussed earlier. Know that they are feature providers and don’t necessarily have true expertise or responsibility for promoting savings. Your results should speak to that. The following questions should help you evaluate potential advice providers:
- When evaluating advisors ask them what their capabilities are to help promote your employees 401k balance. Is that even part of their expertise?
- Do they leave that up to the recordkeeper?
- Do they have a call center that can exist with helping employees transition to other employers or into retirement?
- Do they have access to financial wellness assessments?
- Do they provide one-on-one retirement planning advice?
- What kind of reporting tools will be used to help you show an investigator that these capabilities are providing value for the employees that pay for them?
Contact us, if you’d like us to review your situation and provide our feedback.
- Most Middle-Income Boomers Rely on Skilled Professionals, Just Not Those in Financial Services, New Study Says, November 11, 2014: 07:20 AM ET, CNN Money
- This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.