Employers are trying to encourage their employees to save more for retirement, but the numbers aren’t in plan sponsors’ favor. According to the U.S. Census Bureau’s 2010 census, 73 percent of our population will struggle financially during retirement.
Why are employers so interested in employee plan participation? Discrimination testing plan sponsors must go through has encouraged the drive to make sure participation is adequate for non-highly compensated employees. If participation and deferral percentages are low for non-highly compensated employees, highly compensated employees can’t defer the maximum contribution amount, which leads to refunds at the end of the year.
“To make a plan financially healthy for all employees, good participation is needed across the board,” says Linda A. Cahill, a principal at Benefits Resource Group.
Smart Business spoke with Cahill about ensuring you have adequate participation in your retirement plan to maximize its impact for all employees.
How does discrimination testing affect employer plan participation levels?
Although individual situations can vary, the general rule of thumb for discrimination testing is that highly compensated employees (HCE) are only able to contribute about 2 percent more than the average of the non-highly compensated employees (NHCE). For instance, if a company’s average HCE is deferring 7 percent and the NHCEs were only deferring 4 percent, it’s possible that the company could fail the discrimination test and the HCEs would be given refunds. These refunds can end up costing HCEs thousands in potential retirement savings, so it’s important for a company to encourage plan participation among all employees.
How can employers boost plan participation?
Employers are adding plan design features such as automatic enrollment to boost engagement. Survey data shows that about 47 percent of all plans have an automatic enrollment feature, and 89 percent of those employers use auto enrollment for new hires. This automatic enrollment is also being used to bring in nonparticipants, allowing employers to ‘refresh’ enrollment.
Many plans have increased their automatic enrollment amount from 3 to 6 percent. In 2010, 7 percent of all plans used 6 percent contribution. Now it’s 10 percent. That’s the direction things are headed.
What aren’t more employees participating in or saving enough for retirement?
It’s a lack of education and communication regarding the importance of saving and starting early. Fortunately, there’s been an increase in communication to employees regarding retirement plans. More than half of plan sponsors surveyed indicated they’ve increased their employee communication. This takes the form of group and one-on-one sessions. Some are integrating a retirement income calculator in these sessions to project if an employee is on track to meet his or her retirement goals.
Technology is the key to driving participation, but it’s underused because of a lack of communication and education. There are tools that can dial-up deferral or contribution levels and determine the outcome, but participants must be made aware of these in order for them to be useful.
How can employers help employees know if they’ll meet their retirement goals?
Employees should sign up on the Social Security Administration’s My Social Security (www.ssa.gov) site to determine their estimated benefits and double-check salary data. Using that information with current account balances and a retirement income calculator gives a pretty good estimate of what income a person has for retirement.
It’s good to have an annual review with the plan sponsor to determine if employees are participating, if they’re invested appropriately or if they are paying attention to details, because with a 401(k), participants are responsible for their own retirement outcome. They need to look to make sure it’s doing what they want it to accomplish.
People spend hours planning their vacations, but don’t spend the same amount of time planning their retirement, which is potentially the longest vacation one will ever take. Get people to think about these things today rather than allowing them to continue to delay planning until it’s too late. ●
Linda A. Cahill is a principal at Benefits Resource Group. Reach her at (216) 393-1812 or [email protected].
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