Retirement Readiness: An Employer’s Role

by Jeffrey K. Herr, CPA, PFS, CFP | May 30, 2019

Retirement readiness was discussed in the spring 2019 Pennsylvania CPA Journal, but it focused on the employee’s responsibilities with regard to savings. Here, we look at a different angle. When it comes to retirement planning, employers also have an important role.

Employers, as plan sponsors, can help their employees successfully achieve their retirement goals through plan design and education. An increasing number of employers are designing plans that are paternalistic in structure so more employees participate and maximize the plan’s value. An employer matching contribution is one of the most common incentives, but this option will only help those employees who have chosen to contribute.

Automatic enrollment and auto contribution escalation are plan features that are gaining popularity as more employers recognize that some employees need a push to adopt healthy savings behaviors. A 2017 Deloitte study stated that 67 percent of plans now include an automatic enrollment feature. It is human nature to procrastinate, so plans are now being set up to automatically do for the employee what they should be doing for themselves.

As the name implies, employees are automatically enrolled in the plan after a prescribed period of employment. The delayed effective date from date of hire reduces the enrollment of high-turnover positions, so enrollment is generally provided to those employees who are more likely to stay.

Since employees do not make an active election, a default contribution rate is required. The most common is 3 percent, but an increasing number of plans are starting at 6 percent. This rate, in conjunction with a matching contribution from the employer, helps to get participants closer to what many consider the recommended contribution rate of 12 percent to 15 percent of compensation.

Automatically enrolled plan participants are also given a default investment selection. Target-date funds (based on the age of the participant as it relates to the normal retirement age stated in the plan) are common default selections. The Deloitte study states that an overwhelming 85 percent of plans using automatic enrollment place participants into default target-date funds.

Target-date funds use an allocation of mutual funds that gradually becomes more conservative as the expected retirement year draws closer. However, these funds do not take into account the risk tolerance of the participant. Many plans do offer professional investment advisers to the participants so additional factors such as nonplan assets, alternate retirement dates, estimated retirement expenses, and personal risk tolerance can be factored into the participant’s elections.

It is important to note that employees have the right to override most automatic elections if they pursue a more active election. In fact, they may opt out of the plan completely for a period of time after they are enrolled. On average, less than 5 percent of employees will actually do so, and only 23 percent of auto-enrolling plans experienced an opt-out rate of more than 10 percent. According to Vanguard’s How America Saves 2018: Telling the Retirement Story with Data, participation rates for auto-enrolling plans have reached 92 percent compared with voluntary enrollment plans at 57 percent.

Another plan feature that helps employees reach retirement readiness is auto-escalation. Studies show that 64 percent of plans with auto enrollment also have an auto-escalation feature. This is a provision where each year a participant’s contribution rate is automatically increased by a percentage (such as 1 percent) for each employee whose contribution rate is below a stated percentage (for example, 10 percent). Again, opt-out provisions are available.
An employee education and communication campaign is important to the success of the retirement plan. A financially stressed employee is less efficient and effective than one who has been educated and implements sound financial management strategies.

Holding mandatory financial wellness meetings where the concepts of financial planning are presented is critical to the overall employee benefit package. Providing this education to an employee base also shows that an employer cares about their employees’ overall well-being. Just offering a retirement plan is simply not enough


Jeffrey K. Herr, CPA, PFS, CFP, is a senior vice president at BB&T Retirement and Institutional Services in Allentown. He can be reached at jherr@bbandt.com.

 

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