Strategies for optimizing plan design
These ten key strategies for improving plan design may help you to avoid common challenges associated with retirement planning and optimize outcomes for your participants.
Impact of plan design on outcomes
The shift away from defined benefit plans to defined contribution plans over the last 30 years has made retirement planning potentially harder for participants. Many participants feel overwhelmed by their options, which may cause inactivity or delayed savings, while other participants feel they simply can’t afford to regularly contribute part of their paycheck to a retirement plan.
As a plan sponsor, how can you combat these challenges? Creating an intelligent plan design is a good start because your plan design can influence participation rates and retirement outcomes.
|10 best practice strategies for building a better plan|
|1. Use automatic enrollment||Enrolling all your eligible employees — not just new hires — automatically into your plan can lead to bigger savings for participants. While auto-enrollment is more expensive for employers, the results may be worth the added cost.|
|2. Increase savings rates automatically||Many plans have an initial default rate that just isn’t high enough to promote adequate retirement savings. Consider automatically increasing the contribution rate by 2% each year until a more suitable level is reached.|
|3. Implement Qualified Default Investment Alternatives||A Qualified Default Investment Alternative (QDIA) with an appropriate risk/reward structure for the participant’s age can relieve the pressure of choosing the proper investments for participants who feel less confident about financial matters. A QDIA may also provide additional fiduciary support for the plan sponsor.|
|4. Limit the number of investment options||Participants can be overwhelmed by too many investment choices. A smaller, thoughtful mix of investment options (grouped by category) may be a better arrangement.|
|5. Offer employer matching contributions||Deferral-only plans, which don’t include an employer match, usually result in much lower participation and average deferral rates. Implementing a “stretch” match formula that requires employees to save more in order to receive the maximum employer match can enhance these rates.|
|6. Add a Roth feature||Enabling participants to take advantage of a Roth account can limit their tax exposure, accelerate their retirement savings power, and promote additional savings.|
|7. Adjust your loan program||Offering multiple loans can encourage participants to access their funds for non-emergency needs. This can lead to a detrimental long-term impact on retirement readiness, especially when participants don’t pay back their loans or stop their contributions during the loan period.|
|8. Evaluate your financial hardship program||Participants are comforted to know they can take hardship distributions in an emergency, and this sense of security can increase participation. To increase participant savings, be sure your plan automatically reinstates salary deferrals after the six-month suspension period.|
|9. Take advantage of automated investment options||Consider using glide path investment options that automatically reallocate investments over time and decrease risk exposure as a participant nears retirement.|
|10. Provide guaranteed income options||Offering annuities or similar options for retirement income may lead to higher participation rates and a more financially satisfying retirement.|