Why plan sponsors shouldn’t forget about retirement plans during open enrollment

During open enrollment, employers typically focus on benefits like health care, dental and group life insurance, but there is an overlooked area left out of these discussions and materials: retirement benefit information.

Once an employee elects to contribute to the retirement plan, they do not need to re-elect to be part of the plan moving forward.

However, I would argue that inertia, the tendency to remain unchanged, is a universal problem with retirement accounts, and employers are missing an opportunity to promote their great retirement plan benefits during open enrollment and get the plan top of mind for employees.

There are strategies plan sponsors can use to help promote their retirement benefits during open enrollment to showcase the value they’re bringing to employees, which not only helps with retention, but also arms employees with the information they need to improve retirement outcomes.

Here are a few ways plan sponsors can better promote retirement benefits this time of year:

Highlight employer-matching contributions – Many employers match employee contributions in their defined contributions plans.  Like health insurance, employer’s financial commitment to their employees’ benefits are often overlooked in the total compensation package.

Annual open enrollment is a good time for plan sponsors to illustrate the commitment to their employees. Employee retention is a real issue, especially in the competitive job market that exists within strong economic times, and educating employees about total compensation will benefit employers by helping retain top talent.

Make it easy to maximize contributions – Every year, the IRS annual contribution limits can be adjusted. Many employees are looking to maximize their contributions toward these limits.

Employers should make it as easy as possible for employees to do this. For example, during open enrollment, allow employees to check a box in order to maximize their contributions.

This type of strategy offers employees an easy method to provide equal contribution payments that add up to the most gain.

Employers also benefit, as many employees may otherwise select a contribution rate higher than IRS limit which leaves the employer responsible for returning excess contributions. By removing this challenge, employers are left with less administrative burden and liability.

Explain the difference between pre-tax and Roth contributions – Over a career, federal tax policy and individual tax issues change. For years, the advantages of defined contribution retirement plans have been touted as saving on taxes and allowing retirement assets to grow tax-deferred.

However, the mindset of receiving the immediate tax benefit or pre-tax contribution may not be the best option for every individual, and some may prefer to take the tax hit now.

Employers should make their employees aware of the differences between traditional and Roth structures so they can better select an option to meet their needs.

For example, my son recently started working. His tax liability is near zero, so he would not benefit much from a pre-tax contribution. Conversely, my liability will not decrease during my retirement years, as pointed out by my advisor, and I would benefit most by paying taxes while working.

Employers that allow Roth contributions in the retirement plan should make the differences between pre-tax and Roth contributions known during open enrollment, and allow their employees a simple way to elect which options works best as they work toward their unique goals and objectives.

Implement automatic features – Modern plan design features, such as auto-enrollment and auto-escalation, have helped individuals better save for retirement.

Auto-enrollment is a good way to help employees begin saving for retirement. However, many employers’ auto-enrollment default election is 3 percent, despite many studies showing most employees need to save 10 to 15 percent to be best prepared for retirement.

Employers should consider this information to determine their default election for employees.

The addition of auto-escalation, increasing employee contributions by 1 percent annually until they reach a 10 percent contribution rate, may be another good solution and should be disclosed during open enrollment.

It still takes individuals 7 years to reach contribution levels that will get employees to their retirement goals. Employers that don’t currently have these automatic features incorporated into their plan design would be wise to consider implementing them sooner rather than later.

During open enrollment, employers should point out that auto-enrollment does not guarantee that employees will reach their retirement goals, but both encourage and allow employees to immediately increase contribution to 10 percent.

Plan sponsors should educate employees on the benefits of the automatic features and how they can help them reach their retirement goals.

Most employers are generous and want to do what they can to help their employees, but sometimes worry about liability by providing advice or limiting their direction.

The items outlined above are strategies employers can consider to better showcase and highlight their retirement benefits during open enrollment, which will benefit both the employer and employees.

Troy Dryer is Vice President of Business Development at Investment Provider Xchange (IPX), a single-source end-to-end solution for providers in the 403(b) and 457(b) plan markets. He has more than 25 years of experience in the retirement plan industry, serving in various management, sales, client relationship management and product leadership roles.

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