Saving for retirement can be a stressful endeavor, but it doesn’t have to be. If your business offers a company-sponsored retirement plan, or is interested in offering one for the first time, there are a number of features you can add to your plan that help take the stress out of saving. In this article, we’ll be reviewing the plan features that can make saving easier for your employees, encourage a higher participation rate, and help you recruit and retain top talent.
Auto-enrollment is a plan feature that automatically registers an employee for their company-sponsored plan when they become eligible to participate. Put in other words, auto-enrollment makes a retirement plan “opt-out” rather than “opt-in” by default. According to research published in the Journal of Economic Behavior and Organization, auto-enrollment’s primary effect is to increase savings for those with low levels of financial literacy. Further research from FINRA and George Washington University shows that this group is among the most likely to experience financial anxiety, and is less likely to plan for retirement than those with high financial literacy.
Implementing auto-enrollment into your business’s plan can help the employees most likely to experience financial stress develop a respectable nest egg for retirement. However, for some employees, decreasing their take-home pay by a small percentage can lead to financial difficulties, so businesses should consider discussing this change with their team.
Auto-escalation is similar to auto-enrollment, and the two are often paired together. Under an auto-escalation plan, the percentage of their paycheck an employee contributes to their plan will increase at a set interval, typically at the beginning of each year. As an example, an employee might be auto-enrolled into their company-sponsored 401(k) and begin by contributing 5% of their salary. After a year, their contributions would automatically increase to 6% of their salary, 7% after another year, and so on. Eventually, the employee would reach their plan’s auto-escalation cap, which is typically anywhere from 10% - 15%, and no more increases would apply. As an example, with a 10% auto-escalation cap, this looks like:
|Year of Participation||1||2||3||4||5||6||7||8|
|% of Salary Contributed||5%||6%||7%||8%||9%||10%||10%||10%|
Much like auto-enrollment, auto-escalation policies help employees build their retirement savings without having to keep diligent tabs on the particulars of their plan. Nevertheless, businesses should consider the needs of their workforce before implementing any plan changes.
Goals-based saving, what Vestwell calls its managed accounts feature, can help employees direct their contributions into the investments that meet their particular retirement goals. Employees may answer a short series of questions regarding their current salary, planned retirement age, retirement income goal, and risk tolerance. From there, the goals-based saving plan allocates their contributions into a unique mix of investments tailored to meet their goals, based on the information they’ve provided. The goals-based saving plan also automatically updates the mix of investments based on any changes the employee provides, or in response to shifting market conditions. Historically, managed account features were reserved only for those who could provide a substantial up-front contribution. However, improvements in technology have allowed certain retirement vendors such as Vestwell to offer goals-based saving to plans with significantly fewer assets.
Goals-based saving allows employees to rest easy with the knowledge that their individual retirement goals are being attended to. Of course, managed accounts often carry an additional fee compared to their passive counterparts, to compensate for the custom services provided. One should carefully consider their financial needs and expectations before opting into goals-based saving.
A “company match” is money an employer contributes to their employee’s retirement account, usually based on the employee's contributions and capped at a certain percentage of their income. These are among the most popular retirement plan features, and for good reason, too. If an employee contributes 6% of their salary to their 401(k), and their company matches 50% of that contribution, then an employee will effectively add 9% of each paycheck to their savings account, a major increase in savings.
However, different plan types have different rules regarding employer contributions, with some requiring “matches” from employers and others requiring contributions. Be sure to consult with your business’s financial advisor or accountant when considering a change to your retirement plan.
In Vestwell’s 2023 Retirement Trends Report, 76% of employees reported some level of stress regarding their financial situation. Stress is a cognitively draining emotion, and research has shown it can have a measurable impact on employee performance. Further, additional research has shown that retirement plans can have an impact on employee retention, helping small businesses compete in a labor market with the lowest unemployment rate since 1969. If you're looking for a way to improve employee wellness and retention, offering a retirement benefit is a good way to get started.
Even better, some benefits may also come with sizable tax credits for the businesses offering them. If you are an employer interested in setting up a 401(k) account for your business, you can contact Vestwell to determine if you are eligible to receive substantial tax credits, which can help cancel out administration costs. Interested? Learn more here.