Dancing to the beat

Sean Jordan

By Sean Jordan
Sean Jordan is Head of Emerging Client Management for the Workplace Solutions unit of MassMutual.
Posted on Oct 23, 2019

If you’re doing the Shiggy, Flossing, or Milly Rock, you’re in tune with the latest dance moves and trends. Everyone from entertainers and sports figures to TV personalities and teenagers are dancing to the beat.

The retirement savings market dances to beats of its own, with the most current trend being the accelerating adoption of automatic enrollment for 401(k)s and other defined contribution plans. The rate of companies that automatically enroll employees in retirement plans climbed to 61.2 percent in 2018,1 the latest figures available, from 45.9 percent in 2011, according to the Plan Sponsor Council of America (PSCA) .2

Automatic enrollment is part of a number of design changes enacted by retirement plan sponsors that are spurring greater retirement savings, the PSCA reports. Other design improvements include more generous matching contributions, earlier plan eligibility and higher default savings rates.

Automatic enrollment may be considered an investment in making retirement savings plans as effective as they can be. By itself, however, automatic enrollment typically doesn’t go far enough in improving overall savings rates. Additional, complementary tactics are often needed to make automatic enrollment as effective as possible:

1. Start enrolling employees at a higher percentage of pay. One of the criticisms of auto enrollment in the U.S. has been that employers often start employees at a percentage of pay that is unlikely to help them save enough for retirement at any age.

Employers can implement a higher default rate for employee contributions and employees can then decide whether to continue doing so. Default rates are rising with six in 10 employers defaulting to a rate above 3 percent, more than double the number 10 years ago, according to the PSCA.1

Many financial advisors recommend that their clients save between 10 percent and 15 percent of their income towards retirement, so employers may want to consider doubling or even tripling the 3 percent default rate.

2. Complement matching contributions. Not all employers match contributions. Those that do may consider starting automatic contributions at whatever percentage of pay qualifies for full matching contributions. That’s a strategy for employers that literally want to invest in their employees’ retirements.

Employers have been picking up the pace, offering more generous matching formulas, according to the PSCA. Employers that provided dollar-per-dollar matching of more than 3 percent of pay increased to 35.8 percent in 2017, up from 24.1 percent in 2016.3

 

3. Automatically escalate contributions. Among employers that employ auto enrollment, 60 percent automatically escalate participant contributions, according to Willis Towers Watson , a global advisory company.4 The PSCA reports that three out of four plans automatically escalate contributions by 1 percent annually; 8.6 percent auto escalate by 2 percent and 5 percent auto escalate by 3 percent.5

4. Consider the benefits of pre-tax contributions . Saving pre-tax may help employees better afford to save for retirement by reducing their taxable income. If they’re already saving, making pre-tax contributions may help them boost how much they can save. Of course, each employee’s individual tax situation may be different and anyone who makes the decision to save on a pre-tax basis should consult a professional tax advisor before doing do.

5. Implement education and communications initiatives. Employers can do a world of good by regularly promoting their retirement savings plan to employees, reminding them of the plan’s short- and long-term benefits. Communications should be targeted based on demographics such as gender, age, life stage and economic level. The best retirement plan recordkeepers are able to help employers target messages appropriate for different demographics of employees.

Education may play a big role as well in convincing employees to save and even save more for retirement. Employers can help by working with their financial advisors and plan providers to conduct workplace seminars on retirement readiness, investing strategies, the power of compounding and other topics. Many employees want to receive information and guidance on electronic devices, including mobile, tablets and desktop computers. Quiz your provider about its educational capabilities.

Like the latest dance craze, what moves workers to save for retirement can change over time so employers need to keep current. If you’re still dancing to the Mashed Potato, doing the Twist or boogying to the Hustle, it’s time to try out some new moves and get employees to shake a feather for their retirement futures.

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1 Plan Sponsor Council of America (PSCA), “Plan Enhancements Drive Record Retirement Savings Rates,” Jan. 23, 2019.

2 Plan Sponsor Council of America (PSCA), “PSCA Study Shows Steady Increase in Automatic Features,” March 26, 2018.

3 Plan Sponsor Council of America (PSCA), “Plan Enhancements Drive Record Retirement Savings Rates,” Jan. 23, 2019.

4 Willis Towers Watson, “U.S. employers enhancing defined contribution retirement plans to help improve workers’ financial security,” February, 2018.

5 Plan Adviser, “Default Rates for Auto Plan Features Moving Up,” Plan Adviser, Feb. 13, 2018.

The information provided herein is not written or intended as specific tax, investment or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.