Getting the most out of your retirement plan -- for you and your employees
To offer a successful retirement plan, here are 4 things every company should consider.
Let’s face reality – we all need to save for retirement! For 2021, the average Social Security benefit is just over $1,500 per month, which means most Americans will need additional savings to come even close to maintaining their lifestyles. Unfortunately, too many people reaching retirement have no financial moat, forcing them to work beyond the normal retirement age or risk living below the federal poverty limits.
All the more reason why an employer sponsored retirement plan is one of the most valuable and highly sought-after employee benefits. Having a 401(k) in place can help recruit quality employees, as well as increase employee satisfaction and retention. But simply offering a plan is just the first step. In order to offer a successful plan, here are some things every company should consider:
1. Select the right plan design
It’s important to work with a provider who offers you the flexibility to design the right plan for your company – not just today, but also down the road as your company may expand (or contract). With or without the help of a financial advisor, your plan can be customized to meet your needs as well as entice employees to participate. Options include:
- Matching: Many matching formulas are based on a discretionary employer contribution and, if needed, can be temporarily or permanently discontinued without rewriting the plan documents. To incentivize employees to save more, you might consider a match structure of 50% of the first 8% of the amount your employees contribute to their plan. This encourages employees to save more, yet the employer commitment is just 4% of your employees’ aggregate contributions.
- Profit-sharing: This allows your employees to share in the successes of the company, while giving owners flexibility in how much they contribute since it is discretionary and can be changed each year.
- Safe harbor matching: Safe harbor plans are exempt from nondiscrimination testing requirements, an appealing proposition for many small businesses. While a safe harbor plan requires a defined company contribution and immediate vesting, it can help you avoid penalties and costs associated with testing, making it one of the more popular choices.
- Vesting: Selecting the right vesting schedule can help with employee retention or encourage participants to dive right into saving.
- Auto-enroll and auto-increase: This has become a popular way to encourage saving, so much so that even state plans are beginning to mandate auto-enroll and auto-increase features. Why? Because while many employees neglect to enroll in their benefits, it’s often due to lack of education or understanding…or simply because they forget! Yet when employees are auto-enrolled, they often fail to notice the small post-tax deduction despite the large impact it can have on their future. Consider starting auto-enroll at an amount that won’t have a significant impact on your team’s take-home pay, and add the auto-increase feature to bump them up one percent per year. Generally, the industry recommends that individuals save 15% of their pay to attain a comfortable retirement and both auto-enroll and auto-escalate have been proven to help them get there.
2. Invest in a successful rollout
While taking the time to design your retirement plan is important, the way you introduce it to your employees is key to a successful plan. Employees often require help understanding their benefits and crave the education and tools to make smart financial choices. Consider an enrollment meeting hosted by your advisor, if you have one, or your recordkeeper, and create the right communication stream to encourage attendance. Talk your employees through the benefits of saving, as well as how you’re making it easier for them to do so. Ensure they have ongoing education at their fingertips as well. Saving starts with enrollment, but it doesn’t end there!
3. Maximize savings for you and your employees
While the maximum employee contribution is $19,500, or $26,000 including catch-up if they are 50 or older, if you set your plan up to maximize owner contributions, they can put aside as much as $58,000 or $64,500 including catch-up contributions. A 401(k) also helps offset your business’ taxes, as it allows you to deduct applicable employee and employer matching contributions. Plus, the recently passed SECURE Act adds additional tax incentives for starting a new 401(k) plan and/or adding the auto-enroll feature (up to $16,500 in tax credits over the next three years). As a result, a plan might cost less than you think.
4. Continually evaluate and evolve
While you should be reviewing your plan at least annually to ensure compliance, it’s particularly important to regularly evaluate whether your plan design and investments are still the most appropriate for you and your team. Companies grow and contract, new products come to market, and people’s needs change. To truly get the most out of your plan, you need to ensure it’s meeting your ongoing needs and amend as necessary. Most advisors will offer regular read-outs where you can review participation rates, savings rates, fees, and other metrics that can showcase the success of your plan.
Whether you already offer a plan or are looking to start one, setting expectations up front around what constitutes success is important. Once you know what you’re aiming for, it’s easier to take the necessary steps to ensure you and your employees are getting everything out of your plan that you could, and should.
