Practice Management May 1, 2024

Beyond Auto

Impactful plan design innovations that plan sponsors can make to incentivize workers to save.
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Art by Clara San Millán

Automatically enrolling participants has become a key part of retirement savings plans, with nearly 62% of plans of over $5 million in assets implementing auto enrollment, according to PLANSPONSOR’s most recent annual DC Plan Benchmarking Survey. Come 2025, the SECURE 2.0 Act will require all plans started after December 29, 2022, to implement automatic enrollment at a savings rate of between 3% and 10% of pay, unless participants choose a different contribution or opt out.

But as pensions go by the wayside, workers expect to live longer and health care costs continue to rise, experts say smart plan design innovations can take plan sponsors beyond auto-enrollment and auto-escalation to incentivize more workers to save more.

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Re-enrollment Sweeps

Just because an employee opted out of their retirement savings plan when they initially became eligible doesn’t mean they can’t — or won’t — take part later. Annual or one-time re-enrollments enable plans to revert non-participants, and auto sweeps allow them to up the default deferral rate for participants. Providers like Vanguard and T. Rowe Price have long said that this plan design is a key part of getting more people to save. 

One of the biggest challenges that retirement savers face is inertia, says Brian Becker, principal and shareholder of wealth management firm Becker Suffern McLanahan. Most participants aren’t thinking about saving for retirement, so they don’t. They likely won’t change their decision to not contribute on their own.

“If you go ahead and re-enroll a group at a higher percentage, more likely than not they’re going to stick with it,” Beck says.

Re-enrollment sweeps have yet to become a common design feature: Only 10% of plans enroll non-participants automatically each year, according to a survey by the Plan Sponsor Council of America. While re-enrollments are “very effective,” they can be a challenging, heavy lift, Becker says. Clients with his firm, most of which have between 20 and 500 employees, don’t all have a designated human resources benefits specialist who can focus solely on retirement plans, making re-enrollments difficult. 

Still, Becker says if his firm is taking a plan over or changing recordkeepers or providers, they suggest re-enrollment or bumping contribution rates.

Financial Coaching and Education  

One of the biggest reasons workers say they choose not to join a plan is because they don’t know how to invest, says Karen Casillas, a vice president at financial advisory firm CAPTRUST. But when plans have strong financial wellness programs in which participants can learn about how their retirement savings plans fit into their overall financial picture — including concerns like emergency savings and student debt — it can give them the confidence and knowledge to contribute. That education can come in the form of webinars, emails, online tools and a phone number participants can quickly call to get information on everything from the basics of contributing to after-tax contribution options and Roth in-plan conversions.

“Having that trusted resource for them is outrageously impactful,” Casillas says.

As employers look for more ways to help improve their employees’ overall financial wellness, they’re also recognizing that potential financial wellness programs can incentivize workers to save for their futures. In fact, Casillas says that while plan sponsors previously struggled with clients not seeing the return on investment of financial wellness programs, those programs are now often the first thing prospective clients will ask about when meeting with her firm.

Saving Nudges

Even beyond auto-enrollment, re-enrollment and auto-escalation, plans can nudge employees to save more. Recordkeepers could do a better job of getting participants engaged by collecting email information for all participants and periodically sending them links to online savings calculators, says John Barry, registered principal at LPL Financial. These simple calculators, such as one on Charles Schwab’s website, ask users to input information about their income, expected spending in retirement, age and expected retirement age to let them know if they are putting away enough money for their golden years.

“If they play around with the calculators once or twice a year, they’re going to get on track slowly over time,” Barry says. “It’s just getting them engaged that is always the challenge.” 

To make these initiatives effective, participants also need to be able to easily increase their contribution rates. Small plans sometimes only allow those changes semi-annually, but boosting that to quarterly or monthly, can help boost savings, Becker says.

Unsurprisingly, increasing employer matches — and letting participants know of those changes — can also help incentivize savers. That could look like offering any sort of company match if an employer doesn’t already, or if a company is offering 50 cents to the dollar of 6%, increasing that to 50 cents to the dollar of 8% or 10%, for instance.

“Trying to incentivize the participants somehow, some way even if it’s two cents on the dollar up to 6% is better than nothing,” Barry says.

Companies can take creative approaches. For instance, Casillas said she works with one group that is considering removing their match and instead implementing a mandatory nonelective contribution of 6% to give employees the flexibility to contribute more.

Managed Accounts with Participant Interaction

Managed accounts, which are professionally managed accounts that can be customized for participants based on factors like their salary and risk tolerance, can also help increase savings. The managers can take into account a participant’s age, for example, and recommend to the plan sponsor that employees increase their deferral rate based on how much they have currently saved and their timeline to retirement. The sponsor can then implement that change, unless the participants opt out.

“That is very effective,” Becker says, who has clients that offer managed accounts via The Standard, which expanded its managed account offerings earlier this year. “It’s kind of auto-escalating based on what that participant’s plan balance is and where they are from retirement.”

Charles Schwab offers participants ongoing professional management of retirement accounts for a fee, and reported that between 2017 and 2022, 60% of participants increased their deferral rate by nearly 4% after an advice consultation.

In Practice May 1, 2024

Plans of the Future

Retirement advisers see a future for these plan design innovations.
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Art by Clara San Millán

Plan design innovations, from employer matching in Roth accounts to student loan retirement matching and in-plan retirement income, are expected to gain more traction among plan sponsors in the coming decade.

But potential is one thing—what do plan advisers think will stick? And what are the stumbling blocks to their implementation?

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Many employers may see these plan innovations as a way to both attract and retain workers, as well as help employees build a bigger nest egg and more smoothly transition into their retirement years.

Roth Friendly

Matthew Hedley, vice president, retirement services at OneDigital, believes more plan sponsors will offer employer matching in Roth accounts in the next several years.

Hedley said that employer matching in Roth accounts can be a “great strategy” for plan participants and sponsors alike.

Under the SECURE 2.0 Act, plan participants can choose to receive employer contributions to a Roth account versus on a pre-tax basis.

“From a tax perspective, the employer will need to have a discussion about what is best for their particular company regarding whatever the tax liability will be,” he continues. Overall, he thinks this plan design “continues to encourage the usage of Roth strategies,” which equates to “positive momentum for savers and retirement plans.”

Craig Stanley, lead partner, retirement plan consulting at Summit Group 401(k) Consulting, an Alera Group Company, also believes that “the Rothification of employer contributions is going to gain traction,” in coming years.

“Roth savings in general is attractive and is going to help savers,” he says. “The utilization has spiked dramatically and will continue to go up as savers understand the difference between pre-tax and Roth savings.”

Stanley believes that education will be a hurdle, however.

“Nobody is there yet, because the industry, the payroll companies and recordkeepers, have not fully figured out how to administer those plans. Once that is out of the way, I think you will see adoption of (employer matching in Roth),” Stanley says.

In-Plan Annuity Potential

Hedley also thinks that the industry will see an uptick of in-plan retirement income plans in the next five to 10 years– essentially providing a guaranteed annuity that would provide retirees with reliable payouts that mimic a steady paycheck.

One hurdle plan sponsors will need to overcome from an education standpoint, however, is misconceptions about annuities.

“People already have these perceptions, which are negative perceptions, of annuities,” he says. “What we are hoping to get across is these are not retail annuities. These are institutional strategies. They are going to be flexible, be more liquid and come at a lower cost.”

“What are we trying to achieve? A consistent paycheck in retirement,” he added.

“You work your whole career and you get a check two times a month, then you get to retirement and you are forced to recreate your paycheck,” he notes. “How in the heck are you going to do that? You’d have to do that with a trusted adviser. But there are a lot of people in this country who do not have the means to have an adviser. Typically, the average employee is going to have a difficult time finding a sophisticated, wealth adviser.”

The industry’s migration from pensions to defined contribution plans in recent decades has also forced workers to try to figure out how they’ll recreate consistent income in retirement, Hedley adds.

Summit Group’s Stanley also sees in-plan retirement income gaining “a lot of traction for two reasons.”

First, he believes there is demand for workers being able to take a “huge pot of money accumulated and turn that into a consistent and predictable stream of income” in their retirement years. 

“Most savers aren’t great at that, and they end up distributing more than they should and end up depleting their assets before they are no longer here,” Stanley says. “There is a big demand to create a solution that can provide that dependable income and manage that longevity risk.”

A second factor that will likely influence the uptake of in-plan options is that product manufacturers have become more involved in the design of these plans for sponsors.

“Our firm and myself—we have taken a conservative approach with in-plan retirement income,” he says. “But we’re all talking about it and thinking about it. I think that will happen (in the future) and the momentum is there.”

Student Loan Matching

Deanna Spivey, a retirement plan consultant at SageView Advisory Group, has seen a number of the firm’s clients express interest in student loan retirement matching, a provision of SECURE 2.0 Act of 2022 that allows employers to make matching retirement account contributions against qualified student loan payments.

“Over the last few years, we’ve seen a shift in employers wanting to provide as much financial resources to their employees as possible,” Spivey says. “And they know that their employees have large student loans,” she continued, adding that employers also see this offering as a way to attract and retain talent.

In fact, Spivey has had one client successfully add student loan matching to their retirement plan offerings.

The plan sponsor is a small employer, and she believes this particular offering may be easier to implement for a small-to-midsize employer unless a third-party company can help them with the administrative needs.

“I think each individual plan sponsor has to look at the need,” Spivey adds. “How many employees would really truly need this and take advantage of this? Also from an administrative standpoint, is this going to require a level of work they can do internally? They would need to track whether employees are making student loan payments, but also that they match that.”

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