Tips to Improve Retirement Readiness

A new report from Fidelity Investment, “Defining Excellence: Plan Design and Retirement Readiness in the Not-for-Profit Healthcare Industry,” examined best practices in retirement plan design that can help improve overall retirement readiness of nonprofit health care employees.

“We are continuously leveraging Fidelity’s proprietary plan and participant data to identify trends and develop best practices in retirement plan design,” said John Ragnoni, executive vice president, Tax-Exempt Retirement Services, Fidelity Investments. “Through this analysis, we have enhanced our industry-leading benchmarking capabilities to educate nonprofit health care institutions on plan design changes that can improve employee participation and encourage positive retirement savings outcomes.”

The best practices covered in the report include:

• Increasing plan participation rates by implementing automatic enrollment and employer matching contributions;
• Increasing the employee savings rate by implementing an annual increase program;
• Strengthening employee asset allocation by using a target-date fund as the default investment option;
• Increasing employee engagement in retirement planning by making education and guidance resources available to employees; and
• Determine a metric to measure readiness and communicate this information to employees.

“Using these insights, our benefits team is partnering with Fidelity to review plan design and employee engagement strategies that will improve the competitiveness of our plan and help our employees be better prepared for retirement,” said Patricia O’Neil, vice president and treasurer at Rush University Medical Center in Chicago.

With plan participation rates, the report found that employers can help overcome employee inertia by using plan features such as automatic enrollment and employer matches. Plans with automatic enrollment showed an average participation rate of 80% versus 51% for plans not utilizing this feature. Only 24% of nonprofit health care plans were found to use it, compared with 42% in the corporate sector. Plans with an employer match were found to have an average a 53% higher participation rate than those not offering it.

According to the report, the nonprofit health care industry is currently averaging a 9.4% total savings rate. An annual increase program (AIP) can be used to improve savings by an average of 74%, increasing employee savings deferral rates from an average of 4.2% up to 7.3%. Research revealed, however, that only 39% of plans use AIPs.

Nonprofit health care plan sponsors have increased their utilization of target-date fund default investments from 72% at the end of 2009 to 80% at the end of 2012, according to the report. When plans offer target-date funds as the default investment option, the report found that there is a 73% increase in the number of employees properly exhibiting age-based allocation.

Fidelity’s data also showed that employee guidance is effective at driving positive behaviors. Of the employees receiving guidance, 38% took constructive actions such as increasing their savings rates or adjusting their asset allocation. Overall guidance utilization also increased by 16% from 2011 to 2012.

The report also concluded that employers need to assess the health of their plans by choosing a retirement readiness metric and applying that metric to employees within the plan. However, only 53% of plan sponsors were found to have established a metric to measure the overall health of their retirement plans.

The Fidelity report is based on business data of more than two million employees and 600 nonprofit health care retirement plans, representing approximately 30% of the market. A copy of the report can be downloaded here.