America currently has a retirement crisis on the way. According to the Pew Research Center in 2023, 56 million Americans in the private sector do not have any kind of retirement saving plans. With an emphasis being placed on employee health and benefits in the workforce, it is important employers give employees access to a strong retirement plan.
The points below highlight some plan provisions that may strengthen your company’s retirement plan by adding some muscle to the participant experience, while keeping common sponsor concerns at bay:
- Eligibility with little or no service requirement. Employers may impose a service requirement for participants to be able to make salary deferral contributions. Employers think it will keep administrative costs lower, ease the issues associated with employee turnover, and aid in passing annual discrimination testing. However, there are mechanisms in place to help control these issues. Employers can retain service requirements on profit sharing or matching contributions but allowing participants to defer quickly after hire is a statement that the employer encourages retirement savings; this is an attractive benefit to new employees.
- Roth deferral feature. Allowing Roth deferrals is simple for plan sponsors and gives participants the flexibility to defer some or all of their contributions on an after-tax basis. Consequently, this provides more opportunity for employees to strategize their retirement income, and further enhances your retirement plan program.
- Automatic enrollment. Some employers shy away from automatic enrollment. They fear the backlash of employees who didn’t want to be enrolled but didn’t take the necessary opt out actions. However, with the advent of the Qualified Default Investment Alternative (QDIA), the auto enrollment feature can be an effective means to increase participation, increase plan assets, decrease administrative costs, assist with nondiscrimination testing, and provide plan sponsors with liability protection.
Not all plan provisions are impactful in a positive way. Some provisions may leave plan sponsors feeling as if they’re shouldering dead-weight in their retirement plan as well as opening the potential for unnecessary plan errors:
- Stated matching provisions.A stated match is where the plan sponsor states the full matching formula in the plan document. Why is the stated match a problem? If the business falters or improves, any change to the matching formula will require a plan amendment. A simple resolution is to keep the match language discretionary within the document.
- Payments other than lump sum in cash. Plan distributions to former participants should be kept relatively simple to avoid any administrative headaches. Setting up payments as periodic installments can create the potential for distribution glitches as well as expose the sponsor to increased fees and liabilities. Why expose yourself to potential problems and errors by adding multiple payment options.
While plan sponsors have been forced to concentrate on potential liability issues, it’s important that they never lose sight of the fact that the retirement plan is an employer provided benefit that can help recruit and maintain quality employees. Furthermore, if the employer shows excitement and interest in the plan, it’s likely to spur participant interest as well.