5 Best Ways for Companies to Improve 401(k) Plans
Is your 401(k) plan the most important job perk? Retirement once included company pension plans that offered peace of mind to workers, but those days are numbered. More responsibility is being placed on Americans to save for their own retirements. As a result, 401(k) plans are playing a significant role in the recruitment process.
The majority of employers believe their retirement plans are beneficial for the work environment. According to a new report from the Transamerica Center for Retirement Studies (TCRS), 89% of companies that offer a 401(k) or similar retirement plan say it helps attract and retain talent. In fact, 98% of companies with at least 500 employees and 95% of companies with 100 to 499 employees offer retirement plans. Between 2007 and 2014, the percentage of all employers offering 401(k) or similar plans increased from 72% to 79%.
The Great Recession affected these plans, but most participants focused on the future. “Despite the tumultuous economy in recent years, 401(k) plan participants stayed on course with their savings,” said Catherine Collinson, president of TCRS. According to the worker survey, participation rates among workers who are offered a plan have increased from 77% in 2007 to 80% in 2014. Among plan participants, annual salary contribution rates have increased from 7% (median) in 2007 to 8% (median) in 2014, with a slight dip to 6% during the economic downturn.
Although employers are increasingly offering 401(k) plans, more progress is needed. Let’s take a look at five ways companies can improve their retirement plans.
Automate retirement savings
Sometimes incentives alone are not enough produce positive results when it comes to saving money. Faced with a complex choice and unsure what to do, many individuals often take the “no decision” choice. In the case of a voluntary retirement plan, which requires that a participant take action in order to sign up, the “no decision” choice is a decision not to contribute to the plan.
Adopting an automatic enrollment feature takes the action many employees are unwilling to take but still allows them to opt out of the retirement plan if desired. Plan sponsors’ adoption of automatic enrollment is most prevalent at large companies. Fifty-five percent of large companies offer automatic enrollment, compared to just 27% of small non-micro companies and 21% of micro companies. Plan sponsors automatically enroll participants at a default contribution rate of 3% (median) of an employee’s annual pay. That’s probably not nearly enough as you should save, but it’s a step in the right direction.
“Automatic increases can help drive up savings rates: Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by one percent of their salary either annually or when they receive a raise, until such a time when they choose to discontinue the increases,” said Collinson.
Seek professional help
Not every employee is willing to research investment decisions. Professional services such as managed accounts and asset allocations, including target date funds, can help make the retirement planning process less intimidating.
“For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution. However, it is important to emphasize that plan sponsors’ inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks, and fees to their plan participants,” said Collinson.
Overall, 84% of plan sponsors now offer some form of professional help, including 56% that offer target date funds that are designed to change allocation percentages for participants as they approach their target retirement year.
Add a Roth option
While “Roth” is typically associated with individual retirement accounts (IRAs), Roth 401(k)s are becoming more widely available at employers. A Roth 401(k) grows tax-free, meaning you contribute dollars after Uncle Sam takes his cut, but you generally won’t pay taxes on withdrawals as long as you take them after you have reached age 59.5. It complements the longstanding ability for participants to contribute to a traditional 401(k) plan, which is on a tax-deferred basis.
“Roth 401(k) can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age,” said Collinson. Sponsors’ offering of the Roth 401(k) feature has increased from 19% in 2007 to 52% in 2014.
In addition to companies providing 401(k) plans for full-time employees, they should also consider offering plans to part-time employees. To be clear, not every company has the resources to extend benefits to part-time workers, but some companies are leading the way. Starbucks offers a package called “Your Special Blend,” which allows employees working 20 or more hours a week the opportunity to receive 401(k) matching and discounted stock purchase options.
“Expanding coverage so that all workers have the opportunity to save for retirement in the workplace continues to be a topic of public policy dialogue. A tremendous opportunity for increasing coverage is part-time workers,” said Collinson. “Employers should consider consulting with their retirement plan advisors and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement.”
Only 49% of 401(k) or similar plan sponsors say they extend eligibility to part-time workers to save in their plans.
Communicate with employees
Like every relationship, communication is a key component. The report finds that 95% of employers that offer a 401(k) or similar plan agree that their employees are satisfied with the plan. However, only 80% of workers who are offered such a plan say they are satisfied. Just 23% of employers have surveyed their employees on retirement benefits and even fewer workers (11%) have spoken with their supervisor or HR department on the topic in the past year.
“Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness,” said Collinson.
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