Five Ways Employers Can Improve Their 401ks
401k's and similar plans play a vital role in the American retirement system by helping workers save and invest for retirement. Yet, workers need to save more to achieve a financially secure retirement and a few plan design changes could help them do so.
Transamerica Center for Retirement Studies® (TCRS) recently released a study that identified five ways in which employers, with assistance from their retirement plan advisors and providers, can improve their 401ks and the savings rate of their employees.
1. Adopt Automatic Plan Features to Increase Savings Rates
"Automatic enrollment is a feature that eliminates the decision-making and action steps normally required of employees to enroll and start contributing to a 401k or similar plan," said Catherine Collinson, president of TCRS. "It simply automatically enrolls employees. They need only take action if they choose to opt out and not contribute to the plan."
Plan sponsors should consider defaulting participants at a rate of six percent or more of an employee's annual pay or add an auto-escalation feature.
An auto-escalation feature can help drive up savings rates. Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by one percent of their salary either annually or when they receive a raise.
Learn more about automatic plan features here.
2. Incorporate Professionally Managed Services and Target-Date Funds
Professionally managed services, such as managed accounts and target-date funds, have become staple investment options offered by plan sponsors to their employees.
These options enable plan participants to invest in professionally managed options that are essentially tailored to his/her goals, years to retirement, and/or risk tolerance profile.
Learn more about target-date funds here.
3. Add the Roth 401k Option to Facilitate After-Tax Contributions
Roth 401k can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age. It complements the long-standing ability for participants to contribute to the plan on a tax-deferred basis.
Learn more about the Roth option here.
4. Extend Eligibility to Part-Time Workers to Help Expand Retirement Plan Coverage
Expanding coverage so that all workers have the opportunity to save for retirement in the workplace is a great way to help American workers save more to achieve a financially secure retirement.
"Employers should consider consulting with their retirement plan advisors and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement," said Collinson.
5. Address Any Disconnects Between Employers and Workers Regarding Benefits and Preparations
The TCRS survey reveals some disconnects between employers and workers regarding retirement benefits and preparations. For example: Ninety-five percent of employers that offer a 401k or similar plan agree that their employees are satisfied with the retirement plan that their company offers. Yet only 80 percent of workers who are offered such a plan agree that they are satisfied with their employers' plans.
"Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness," said Collinson.
Plan sponsors are encouraged to consider these enhancements to their 401k as a way to enhance worker retirement savings and satisfaction with their plan.
The full report from Transamerica Center for Retirement Studies can be found here.