The deadline to comply with the DOL’s 404(a)(5) regulation to disclose all fees associated with 401(k) plans is quickly approaching. Since the legislation was proposed, communication around companies’ 401(k) plans and retirement in general have been top of mind for HR professionals.
Many realized the new disclosures could cause employees to become dissatisfied with their retirement plan and benefits and scrambled to develop communications that mitigated the situation as best as possible in a short period of time. I wrote about best practices for doing this in my last blog.
What’s more important however, is that when it comes to how employers communicate changes concerning employee benefits, a single, one-time and generic event to inform employees about it may be enough to mitigate it temporarily, but it’s not enough to achieve the most important goal of the plan: helping employees achieve retirement readiness.
This is the new mindset: employers are no longer looking at plan participation and deferral rates as metrics for success when it comes to employee retirement preparedness. They are looking deeper at the core of the issue because they have to now—with more financial responsibility on employees to fund their own retirement; employers realize they need to do more to help them do so.
The true metric is now whether employees are actually achieving retirement readiness. Employers are taking their role as fiduciaries more seriously. The new environment requires a well rounded retirement plan and communication strategy that not only educates employees on their benefit, but gets them to use it effectively, which is challenging for many plan sponsors—according to our recent research on employee financial issues, only 18 percent of employees are confident they are on track to replace 80 percent of their income or their goal in retirement.
This means there is a difficult upward climb to be made, but employers who are showing the most positive development in this new trend are institutionalizing three key best practices that are equally important and work together to increase employees’ retirement preparedness:
1) Design an appropriate retirement plan that sets employees up for success. Employers continue to see growing success from auto enrollment and auto escalation in their 401(k) plans and we continue to see more employers implement automatic features as a result. According to a recent study from Schwab Retirement Plan Services, 45 percent of employers are currently employing some sort of automatic feature and 25 percent of employers plan to do so in the future to improve employees’ retirement preparedness. The adoption of these features has boosted plan participation rates—a study from Fidelity finds 82 percent of employees participate in their company’s plan on average as a result of auto-enrollment.
The issue, however, is that many employers are enrolling participants at far too low a deferral rate, typically 3 percent, which doesn’t set employees up to achieve their goals. Automatic features make it easy for participants to make positive decisions about their retirement and even further, help them establish healthy financial habits around making those decisions. If your plan uses automatic features, look at what rate employees are set to save automatically. A participant should be deferring around 10-15 percent in order to retire comfortably these days. Employees cannot reach success with a mere 3 percent.
2) Provide ongoing investment advice from professionals who know your business. Research from Hewitt and Financial Engines shows employees who have access to investment advice at work achieve about 3 percent higher returns than employees who do not. Providing ongoing investment advice and guidance can be risky business and as a result, many plan sponsors have evaded it. But provided by the right financial professional, under the right circumstances, and as an ongoing benefit can play a substantial role in helping employees make better decisions about their retirement.
Professionals that a company decides to work with should have a proven track record and know the company’s specific benefits inside and out. Consider fee-only financial advisors who you can be sure won’t use the workplace as an avenue to sell financial products to your employees.
3) Couple investment advice with ongoing, broad-based financial education. Employers who are most successful in creating a strong plan and communications strategy marry their investment advice efforts with their education efforts. Investment advice provides specific answers to employees’ questions about plan options and investment vehicles, while financial education (provided in a broad based and multi-level format) touches on every key area of financial planning. This combination makes it possible for employers to reach every employee no matter what their financial circumstance or life goals.
With programs proving significant improvements in the way employees manage their finances and plan for their financial goals, this component is a crucial element to employees’ ability to save in the first place. This is why a single event will not be effective if you want to truly improve employee retirement readiness. But with the right combination of investment advice and financial planning guidance, employers can increase plan participation and further, they can increase employees’ knowledge, confidence and preparedness levels, and achieving true retirement readiness.
Regardless of what situation your company faces, whether it be government-mandated for the entire industry or a company-specific issue such as a merger or changes in benefits, following proven best practices can help you not only effectively manage the situation but improve employees’ morale about the situation and even increase plan participation—over time improving their retirement readiness.