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The Changing 401(k) Landscape

Stacey Breslin

Times have changed. It is no longer enough for employers to simply offer a retirement plan hoping that 

employees will contribute. Employers must prepare for a world where the key to retirement wellness will come from a strategic plan design and communication strategy. Willingness to throw money at the problem may have worked in the past, but no longer.

Employers must rethink their retirement plan to make certain that employees are saving enough. If not, their employees will not be ready to retire, which will create a new kind of risk for the employer. Therefore, it is worth the effort for employers to provide a well-designed retirement plan and make sure that employees understand the plan’s benefits.

The good news is that the chamber world is recognizing this! “Preparing employees for retirement” was the most commonly identified goal for employers, according to the 2014 ACCE plan sponsor survey. To assist you with this goal, the ACCE’s Benefits Trust has modified its plan design options. In addition, the ACCE benefits team has expanded its free plan design consulting service.

So how does an employer maintain its 401(k) recruitment and reward tool while also driving engagement and retirement wellness for its employees?

Strengthen your plan design

The most effective plan design feature for employers is automatic enrollment of participants at a deferral rate of six percent or higher. Two-thirds of employees in ACCE’s 2014 participant survey said it would be good for their plan to incorporate automatic enrollment. ACCE Benefits Trust has added this as a standard plan provision for all new participants beginning Jan. 1, 2016. For those organizations in the ACCE plan already utilizing this feature, the response has been extremely positive, with only 13 percent of employees changing their auto-enrollment.

Structuring the employer contribution to encourage employee savings is another key to driving employee engagement and advancing account balances. Multiple studies have shown that employees tend to save up to the employer’s match cap. ACCE’s participating employers who have transitioned to the employer match prove that this practice works—even in the nonprofit world where base salaries can be below market rate. What’s more surprising is that employees appreciate a matching contribution even more than a giving contribution, according to the ACCE participant survey. The most likely explanation for this is that employee is more engaged and therefore more aware of the effect the employer contribution has on the employee’s retirement wellness.

Other ways that employers drive employee engagement and retirement wellness include:

  • Shorter service entry requirements: Employees are more inclined to participate when allowed entry into the plan shortly after employment begins. The most common service eligibility requirement is now three months, with monthly entry dates allowing new employees quick entry while reducing administrative burden for the employer.
  • Accelerated vesting schedules: Turnover rates are higher than ever. If your vesting schedule requires an employee to work six years before the employer contribution is vested, then your 401k plan is no longer a recruitment or retention tool. When starting with a new employer, most employees hope to still be there in three years. Therefore, the most common vesting schedule has become the IRS-approved three-year cliff schedule. The chamber world is exceptional in its belief that the 401(k) contribution is part of the total compensation package, so employers in the ACCE 401(k) plan are trending more toward the 100 percent immediate vesting schedule.
  • Communication: Employers must commit to educating employees about the importance of saving for retirement. A key way to do this is to provide them with a retirement wellness report that shows projections of how much monthly income their balance, savings rate, and portfolio holdings will provide in retirement. Fortunately, for those in the ACCE plan, the recent redesign of the Principal Financial Group participant website does exactly that! Employees are more likely to use this new tool if the employer takes advantage of the one-on-one Retire Secure education service provided to all ACCE plans for minimal, or sometimes zero, cost. By shifting the conversation from how much money is in the employee’s account to what the balance means, employers can inspire employees to begin saving sooner, save more, and become engaged with the plan.

In a world where employers are looking for ways to recruit talent and retain employees as a driver of success for the organization, creating a better retirement plan that fits the need of both the employee and the employer is no longer optional. It’s becoming a matter of survival.

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