Banking and Financial Services Sections

Saving Graces

Help Employees Help Themselves to a Successful Retirement

Charlie Epstein

Charlie Epstein

It has been my experience that, if you ask the average employee if they would like to retire with enough money to be financially independent with reduced financial anxiety, they will say yes. If you than ask them what are the chances that this will actually happen to them, the response is a scary, “not in my lifetime!”
Does it have to be this way? Not necessarily. One thing is for certain: for the average employee, saving for retirement is a difficult thing to do. Left to their own devices, they will always find other things to do with their money than save for some future date they cannot even imagine.
As an employer who sponsors a 401(k) retirement plan for your employees, let me acknowledge you for offering this valuable benefit to your employees. There is no requirement that you do, and yet … you do.
And as long as you are offering such a valuable benefit, then why not also offer all the automatic features possible that study after study have proven increase the likelihood of your employees saving enough money to achieve that comfortable, and even wonderful, retirement they are dreaming of?
I have written about these features before, but they merit repeating, especially as the year comes to a close. Now is the time to sit down and review your plan document and assess the value of adding these features, for your employee’s benefit and even for yours.

• Automatic enrollment at a 6% level. Make it easy and automatic when your employees enroll in your 401(k) plan. Automatic enrollment does just that. Rather than opting in, your employees have to opt out of the plan. Studies show that 70% or more of the employees that are automatically enrolled into contributing to their 401(k) plan do just that; they contribute and keep on doing so. And while you’re at it, instead of starting them with a measly 3% contribution (which is the ERISA minimum), bump it to 6%.
• Automatic escalation. This feature says that each year you send out a 30-day notice, notifying all your employees that you will be increasing their contribution to the 401(k) plan by 1%, unless they notify you they don’t want to increase. This feature is critical to improving the chances of an employee saving enough money over their lifetime for retirement. As a rule of thumb, the average employee needs to save 10% of their pay each year to accumulate enough money by the time they are age 65. For most employees, saving 10% immediately is very difficult, but if they start at 6% and you increase their savings automatically by 1% a year, they will achieve this 10% savings rate in just four years. Best of all, most won’t miss the 1% each year.
• Automatic enrollment into a target-date, lifestyle, or balanced investment. These are known as qualified deferred investment accounts (QDIA). When auto-enrolling or re-enrolling your employees into the 401(k) plan, it may also make sense to do so into one of these QDIA options. The vast majority of employees participating in a 401(k) plan have little or no investment knowledge or experience. These fund choices manage an employees’ investments based on the level of risk they are willing to assume or actually avoid. A solid target date fund will also reduce the level of equity exposure gradually over time as the employee gets closer to their retirement date. By re-enrolling your employees once a year into a target-date fund, you, as the plan sponsor, receive fiduciary protection. This protection is provided by ERISA, provided you document you have a prudent process for evaluating the QDIA investments in your 401(k) plan.
• The ‘Stretch Match’: I believe a savings goal for employees should be a minimum of 10% of their pay. Unfortunately, employers on average offer a matching contribution of either 50% of employees’ pay up to 5% or 6%, or use a ‘safe-harbor’ matching contribution of dollar for dollar on the first 4%.
The result is that employees are conditioned only to save up to their employers’ match level of 4%, 5%, or 6%. If, however, an employer offered a matching contribution of 50% on the first 5% and 25% on the next 5%, their out-of-pocket cost may be close to their original match, and they will have incentivized their employees to stretch their savings to the full 10% to get the company’s full matching contribution.
Adding these four simple features — automatic enrollment, automatic escalation, automatic enrollment and/or re-enrollment into a QDIA, and the stretch match — to your 401(k) plan in 2014 will go a long way toward impacting your employees’ saving behavior and potential success in achieving an adequate savings rate to create financial independence with reduced financial anxiety.

Charles Epstein is the author of “Paychecks for Life: How to Turn Your 401(k) Into a Paycheck Manufacturing Company.” He consults on company-sponsored retirement plans and has been nominated one of the “Top 100 Most Influential Individuals in the 401(k) Industry” by 401kWire; [email protected]

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