401Ks have become increasingly important to delivering retirement income. With rising costs, debt, and little if any wage growth, fewer Americans are saving for their own retirement. Instead, many are relying solely on their 401K plan to fund their retirement years. And it’s up to employers to increase plan participation and improve their plans in order to better prepare their employees for retirement.
Employers who help their employees achieve retirement readiness ultimately benefit. They can attract and retain quality employees, which reduces turnover and the associated costs, helps them achieve their business goals, and thus, boosts their bottom line. In addition, helping employees save for retirement can also increase productivity by eliminating stress and distractions and improving morale. And lastly, it can ensure that employees retire on time instead of delaying their last day of work, which means they can reduce payroll costs and health plan expenses as well as bring in fresh talent.
Though employers are not on the hook for ensuring their employees’ financial stability, it pays to make an effort.
By paying attention to these 401K plan trends for 2015, you can help your employees prepare for retirement.
1. Stretching Your Matching Contribution Formula
Traditionally, employers might use a matching contribution formula of 50% of the first 6% to contribute to their employees’ 401K plan. But making a simple plan amendment to change that formula, stretching it to 25% of the first 12%, can give you a low-cost way to incent participants to contribute more to their own plans. In fact, leading employers have been doing just that, and this trend is expected to continue.
2. Re-Enrolling Employees Every Year
Technology has changed the way we do many things in business, leading to greater efficiency and effectiveness. So it’s no surprise that a popular 401K plan trend of 2015 is the use of automation. Employers are using auto enrollment, auto escalation as well as annual re-enrollment into target date funds to boost plan participation. Those who use automation for their 401K plan often see participation rates in the 90% range. Although employees can opt out of re-enrollment, the majority do not do so. Annual re-enrollment will likely become the norm in the next few years.
3. Using Outcomes-Based Employee Education, Advice, and 401K Plan Design
Outcomes-based goals and results for 401K plans are an important new 401K plan trend. It’s a fancy way of saying the 401K committee sets annual retirement readiness goals for the plan and focuses on how employee education and advice work in concert with plan design to create the best retirement outcomes for your employees. Specifically, employee education and advice can help “pull” someone into a plan, while plan design can “push” someone into the plan (by providing incentives to save more). Regular group education meetings can be effective ways to inform your employees, and offering the gold standard—one-on-one retirement planning meetings for all employees—can significantly improve retirement readiness. Examples of plan design include: basic 401K plan design with a safe harbor match or a basic match, or offering a Roth 401K, while more advance examples include auto-enrollment, auto-escalation, a stretch match and new comparability. The most effective 401K plans marry employee education and advice with plan design to improve employee retirement readiness.
4. Adding Roth 401K Features
Converting pre-tax 401K accounts into Roth 401K accounts can help your employees create tax-free retirement income, which is highly desirable and hedges against the prospect of higher tax rates in retirement. More employers are now offering Roth 401K contribution abilities and in-plan conversion features to take advantage of these tax savings. The only costs associated with this plan feature come in the form of a plan amendment and communication materials, making it cost effective.
5. Making Employees Pay More Fees
As costs continue to rise, many employers are scrutinizing every expense item order to continue to offer retirement benefits to their employees without hurting their bottom line. One of the most popular 2015 401K plan trends is the passing on of administrative and record-keeping costs to plan participants. In fact, the majority of employers are now making employees pay these fees as a result of cost pressures, and we only expect this new development to become the norm.