Improvement projects for your firm's retirement plan

Una Morabito

By Una Morabito
Una Morabito is Head of Client Management for the Workplace Solutions unit of MassMutual.
Posted on Oct 14, 2020

Americans are busy redesigning and redoing their living space during the Covid-19 pandemic as big box home improvement stores report surging sales of building supplies for do-it-yourself (DIY) projects.1 Money that would have been spent on now cancelled vacations and travel is being redirected to lumber, sheetrock and hardware.

While the pandemic has laid the foundation for home improvement projects, it’s also opened the door for businesses to rethink and make improvements to their 401(k) retirement plans. Doing so can help companies address a wide range of different business environments, from reduced revenues and slumping profits to surging sales and a burgeoning bottom line.

No matter the situation, some tweaks might be in order for your retirement plan to accomplish a variety of short-term and long-term goals. Firms should pause to measure the performance of their plan in terms of participation, fees and costs, savings rate, retirement readiness, and other goals and objectives. Improvements can entail a relatively small project such as reshuffling investment funds to a full-blown redesign to boost employees’ retirement readiness.

But unlike the home improvement DIYers, retirement plan sponsors need not go it alone. Sponsors can lean on their financial professional, third party administrator, and their MassMutual relationship manager to help determine the path forward. Any discussion could involve a number of plan design updates that would need to be included in the plan document:

Automatic enrollment

Many plan sponsors experienced reduced contributions as employees struggled with layoffs, furloughs, reduced hours and a challenging economy. If your company is relatively healthy and back to business as usual, it may be time to consider automatically enrolling employees in their 401(k). Employees always have the ability to opt out of the plan but experience tells us that once enrolled, employees overwhelmingly remain so. And we know that the sooner employees begin contributing to their retirement plan, the better their chances of retiring on their own terms.

Conversely, if your firm and its employees are struggling, it may be time to suspend automatic enrollment and reevaluate sometime in the future. Keep in mind that any plan change must be communicated to employees at least 30 days before taking effect.

Automatic escalation

Plans that automatically enroll employees typically start contributions at a relatively low rate that is unlikely to enable employees achieve their retirement goals. Automatic escalation allows sponsors to bump up the contribution rate at 1 percent a year up to 10 percent annually or the plan participation opts out of future increases. And the Secure Act passed earlier this year allows sponsors to start automatic contributions at a higher rate and continue up to 15 percent of pay. Like building an addition on your house, it pays to think bigger rather than add on again later.

But if the pandemic has pinched employees, sponsors can consider suspending future escalations but only after amending their plan document and notifying participants. If escalations are suspended, they can be restarted again down the road.

Matching contributions

Many sponsors match participant contributions as a way to boost plan participation, increase savings rates and emphasize the importance of retirement savings. But starting, stopping or suspending matches is a company-specific question.

If you’re a big box store that is experiencing record revenues and profits, it could be a good time to start matching or boost existing matches to retain and attract top employees. Then again, if you’re a hotel or airline company that has seen its revenues and profits eviscerated in the pandemic, you might need to suspend any match as part of efforts just to keep your doors open.

Another tactic some employers have adopted is to “stretch the match” by increasing the threshold for participant contributions that qualify for the match. The goal is to boost savings by requiring employees to climb a little higher on the ladder to qualify for a full match.

Say your firm now matches participant contributions up to 5 percent of pay. Stretching the match would boost the necessary threshold to say 10 percent of participant contributions, contributing 5 percent of pay if participants saved 10 percent of their salary. Firms that are incorporating a match for the first time should think about a stretch formula.

Tweaking matches can be complicated, especially if your firm’s plan is a Safe Harbor for Actual Contribution Percentage (ACP) and Actual Deferral Percentage (ADP) testing. Reducing or eliminating a match could remove the plan’s Safe Harbor designation so work closely with your retirement plan professionals before moving forward.

Investment choices

Given the volatility of the financial markets coupled with record low interest rates, sponsors may want to reevaluate the investment options with their retirement plan. All sponsors should periodically review their investment lineups with their financial professional to ensure they are getting the performance they expect.

But there may be new or different considerations related to participants’ short- and long-term investment goals. Are participants looking for new ways to preserve savings such as a stable value fund? Would investments that stress dividends make sense? Do younger employees have the growth options they need for long-term success? Does your plan have an income option?

Employers that opt for automatic enrollment need to incorporate a Qualified Default Investment Alternative (QDIA). A QDIA automatically directs participant contributions to a specified investment option when participants have not made an investment election. Your financial professional and relationship manager can help establish an appropriate QDIA with your input and consent.

The hammering and sawing you hear in your neighborhood reflects the energy the pandemic has infused in the DIY crowd. New decks, remodeled kitchens and other improvement projects are all the rage.

Directing that same energy and enthusiasm towards your firm’s retirement plan can yield improvements too and help you manage the latest business environment, good, bad or otherwise.

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1DIY projects ramp up in pandemic, and so do sales at Lowe’s, Associated Press, Aug. 19, 2020.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.