Improving Retirement Readiness Through Plan Design: Examples From Plan Sponsors
A primary focus of many of not-for-profit plan sponsors is increasing voluntary participation and savings rates in an effort to better ensure employee retirement readiness. Many not-for-profit retirement plan sponsors, particularly colleges and universities, offer generous employer contributions which are not matches and, therefore, do not require employees to contribute to the plan to receive the employer contribution. Oftentimes, this leads to low voluntary participation rates and precludes many employees from reaching the prescribed 15% savings rate (which includes both employee and employer contributions). After extensive communication and education efforts have fallen short in addressing retirement readiness, plan sponsors are looking to use plan design to drive better outcomes.
Below is the process retirement plan fiduciary committees have followed to improve retirement readiness as well as some recent examples.
The process entails initially benchmarking employee success measures and plan provisions. The benchmarking compares plan data to peers of similar size. It may also include benchmarking against specifically-identified peer organizations.
Employee success measures include the following:
- Voluntary participation
- Savings rates
- Appropriate asset allocation
Plan design provisions include the following:
- Eligibility (age and service requirements, as well as entry dates)
- Employer contribution formula
- Roth availability
- Qualified default investment alternative (QDIA)
After reviewing and discussing the analysis with the retirement plan committee, additional analysis, based upon the committee’s preferences, is conducted to better understand the financial impact of the potential plan design changes. This allows the decision makers to understand the options available to them, as well as the cost, so that they can make thoughtful decisions.
There are two recent examples of plan design-related changes that not-for-profit organizations made to help meet their objectives.
The first organization (which offers a 10% employer contribution) implemented automatic enrollment at 1% (for all participants not deferring salary to the plan as well as new hires) and annual auto-escalation of 1%, until a participant savings rate of 5% is met, to reach an overall savings rate (employee and employer contributions) of 15%. To allow participants to join the plan more quickly, entry dates were changed from twice per year to monthly.
The plan sponsor, who has two recordkeepers, chose a lead recordkeeper to simplify the employee experience and improve communications, selected a qualified default investment alternative (“QDIA”), and completed a plan document restatement (utilizing a volume submitter pre-approved by the IRS).
Early results are very encouraging, with less than 2% of the participants auto-enrolled opting out of contributing and fewer than 15% opting out of annual auto-escalation. The client was also able to lower recordkeeping and administrative fees in the process.
The second organization changed their employer contribution eligibility age requirement to 21 (from 26) and changed their employer contribution eligibility service requirement to immediate (from 1 year) in order to allow participants to start saving earlier for their retirement. Additionally, automatic enrollment was implemented for new hires at a 1% deferral rate along with automatic escalation of 1% annually to a maximum deferral of 5%.
In an effort to improve participation, the plan sponsor revamped their employer contribution criteria. Previously, in order to receive the 9% employer contribution, the employee would have to defer a minimum of 5%, which precluded some employees, particularly lower wage earners, from joining the plan. The employer match formula was changed to 180% of the first 5% of an employee’s contribution to allow participants to defer less than the previously-required 5% in order to receive an employer contribution.
The plan sponsor also selected a new QDIA, permitted rollovers from IRAs, allowed for Roth 403(b) contributions, and updated vesting from immediate to 3-year cliff vesting. Additionally, the plan implemented a small balance cash-out provision.
The change in eligibility, along with auto-enrollment/auto-escalation and the new employer contribution formula has already begun to improve participation and savings rates. In fact, over 40% of participants who were auto-enrolled took action to increase their deferral rate. Additionally, the plan sponsor was able to lower their recordkeeping and administrative fees as part of the process.
The examples of plan design change initiatives shared demonstrate the influence plan sponsors can have on improving retirement readiness by better understanding what is precluding participants from fully taking advantage of the retirement plan benefit and making plan design changes to help employees better prepare for retirement.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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