Written by Scott Emering
Setting up a retirement plan for your organization was no small task. Your goal of creating a savings culture is measured by how many employees participate in your plan. Unfortunately just because you have provided the plan, that doesn’t mean your employees will participate in it. For your plan to succeed, here are 4 tips and tools you can use to help increase your plan participation.
• Auto Enrollment
• SECURE Act Tax Credits
• Auto Increase
• Company Match
There are many tried and true ways to increase plan participation: providing an employer contribution/match, educating participants on the benefits of saving, offering a variety of passive and active investment options, benchmarking plan features and fees, and hiring licensed professionals who can actually provide advice to participants. While these are all important and will certainly move the needle, there is nothing quite as effective as auto enrollment and auto increase when it comes to improving participation and retirement readiness.
Simply put, auto enrollment flips the participation decision on its head. Instead of having to make a complex and emotional financial decision to take action and get started, you have to do something to not get started, or “opt out”. Simple? Yes. Effective? Definitely. According to a recent Vanguard study, plans that use Auto Enrollment have an average participation of 88% compared to non-auto enrollment plans that average 58%. And the industry and regulators have taken notice.
The Secure Act, which passed at the end of 2019, provided small business with tax credits of $500/year for the first 3 years to offset costs related to the implementation of Automatic Enrollment. And, the Secure Act 2.0, which has only passed the House so far, intends to make Automatic Enrollment the default option for all new retirement plans. Check out this quick summary of the SECURE Act, past and pending.
While auto enrollment will increase the number of participants, savings rates matter and initial enrollments at 3% (most common) and even up to 6% are not enough to build a sufficient nest egg. Pairing auto enrollment with auto increase can help. Auto Increase typically works be increasing the auto enrollment group’s deferral rate by 1% each year up to a maximum ceiling. For example, a 1%/year deferral rate increase up to maximum of 10% of pay.
Auto enrollment and auto increase can be even more powerful when paired with a company match. Let’s say you are using auto enrollment at 6% and auto increase by 1%/year up to 10% and you combine that with a match of 50% of the first 10% of deferrals. In year 1 the auto enrolled participant saves 9% – 6% auto enroll (plus the 3% match). But in year 5, they’ll be saving 10% with a 5% company match or 15% total. In addition to increasing savings rates, having the match synched with the plan’s auto enrollment and increase scheme provides additional incentive for participants to stick with it.
If you’re considering auto enrollment and increase features in your Plan, talk to RSG. We’re here to help.