How to improve the health of your company retirement plan
How healthy is your retirement plan?
It’s likely no surprise that people are behind on their retirement savings. With only 36% of working Americans feeling on track, your company retirement plan can be one of the best tools for your employees to put money away for their future. Not to mention it benefits your business in the tax deductions on employer contributions.
So, what information can help determine whether your employees are taking full advantage of this company benefit? Let’s look at retirement plan metrics, how to use these metrics and how to improve them.
What retirement plan metrics should you be tracking?
The three most common metrics your organization should be regularly reviewing and benchmarking are:
- Participation rate: How many eligible employees are contributing to the plan.
- Deferral rate: The average amount employees are contributing to the retirement plan.
- Average balance: The average account balance of all your participants.
Your service providers (e.g., recordkeeper, investment advisor) can provide you with this information — along with industry benchmarks — on a regular basis so that you can analyze these metrics.
How should you use this information?
What your organization should be satisfied with in regard to these metrics depends on a number of factors, from plan design to industry averages.
For example, if you don’t auto-enroll employees in the retirement plan — requiring them to specifically take action to opt in — you may be satisfied with a participation rate above 70%. If you do have auto-enrollment, you may strive for 90% or above.
If you’re a company with a large number of highly paid employees, you may want to see deferral rates at 10-12%. But an organization in an industry with a high turnover rate and lower average salaries may set a goal of reaching a 5-8% average deferral rate.
Maybe your plan was set up in the last five years, so the average balance may not be as important, but a more mature plan will want to track and benchmark this and determine if lower-than-average balances require action to ensure employees are on track to retire.
Ultimately, by tracking these metrics and comparing them to industry averages, you will know how well your plan is doing, which can lead to questions as to why. Are participation and deferral rates suffering from a lack of employee education? Is your employer match formula contributing to a high participation rate but a lower-than-expected deferral rate? Is the employee experience impacting participation and contributions?
There are many factors that go into why your metrics are what they are, but that also means you have several options for improving them.
How can you improve your retirement plan metrics?
Plan design is the single most effective way to influence participant behavior and improve your plans metrics. There are multiple levers you can pull based on which metrics you’re looking to improve.
One option to improve your participation rate is by implementing auto-enrollment. Studies have shown employers that use opt-out features in their retirement plan maintain around 91% of those auto-enrolled. If you’re in danger of failing annual compliance testing, this is an effective way to immediately boost deferral rates and improve your testing outcomes.
However, just because you have a high participation rate doesn’t necessarily mean that you’ll have high deferral rates. If employees are auto-enrolled at 3%, they may stay at that rate for years, even though they should be increasing their savings as their salary increases.
To help combat this, you can implement an annual auto-escalation. For example, each year when your organization pays out bonuses or increases pay, you can set employees’ deferral rates to automatically increase by 1% up to a maximum percentage of 10-15%. Timing this right helps reduce the impact to employee paychecks while enabling them to save more for retirement.
Make sure you take a look at your employer match, too. If you offer a 3% match, many employees will set their deferral rate at 3% and never increase their contribution above that amount. So, consider a change to your matching from 100% of the first 3% to 50% of the first 6%. This means your organization is contributing the same amount of money as it was before, but now employees must contribute 6% in order to receive the full match.
While auto-enrollment and a matching contribution will get employees into the plan, it won’t necessarily help them make the best decisions for their personal situation, so combining these with the right education is critical.
Take steps as necessary to improve employee education. Engage an advisor willing to meet with employees to hold an honest conversation about their retirement goals. Additionally, make sure that your employees are able to meet with the advisor beyond their initial enrollment so that they can continuously review their progress and make adjustments as they get closer to retirement.
When is the best time of the year to make changes?
The optimal time to make changes to your retirement plan depends on your organization. The best time could be year-end (open-enrollment), when you do annual pay increases, or at the beginning of the year when other changes to benefits are likely going into effect. The most important step that you can take now is to review your plan metrics, which will lead to a conversation about whether your organization should make changes and what changes to make.
And don’t forget about communication once you do make final decisions. You’ll see much greater adoption and satisfaction if you communicate to employees about why a change is happening and how it impacts them, well before rolling the change out.
How Wipfli can help
Creating — and keeping — a roster of high-performing, passionate people is far from simple. Learn more about how we can help on our human capital management services page.