Incorporating best practices into retirement plans just makes sense
Several options are available when it comes to designing a defined-contribution plan. Using the following five strategies can help businesses craft and optimize retirement plans.
Align plan design with company goals and objectives
The best defined-contribution plans can be extremely beneficial to the companies that sponsor them. One way to ensure success is to make sure that the plan's design is in line with the company's goals and philosophy. Once the plan is in place, implementing metrics to measure its success can help companies identify both triumphs and areas in which there is room for improvement.
Successful plans are in sync with a company’s current and future demographics, business objectives and overall philosophy. Plan sponsors should determine the plan’s goals – such as 100-percent participation in the plan, achieving higher-than-average plan balances, increasing the ability to attract and retain top talent, or delivering lower costs for both plan sponsors and participants – and put the metrics in place to measure its success.
Paying attention to the demographics of the workforce is also key. Identifying and segmenting company demographics can help guide plan design, as well as communications strategies and tools.
Opt for automatic features
Designing a smart defined-contribution plan doesn't necessarily mean that employees will take advantage of it. Automatic features can help reluctant employees overcome their timidity.
Many employees need encouragement to invest in their futures, especially younger workers who do not yet understand the tremendous compounding benefits of starting early. Automatic features, such as auto-enrollment into the plan and auto-escalation once they are in the plan, help employees overcome inertia and are now becoming the new norm.
Build an investment menu for success
Developing and maintaining the plan's Investment Policy Statement is absolutely essential. The IPS addresses a variety of important issues, including investment objectives, roles and responsibilities of plan fiduciaries, and guidelines for choosing, monitoring and changing investment options. I recommend offering a suite of asset-allocation funds as your qualified default investment alternative QDIA and fewer core fund options to reduce choice paralysis and the risk of exposure overlap and redundancy in the portfolio.
Engage employees from the outset
It's not enough to just automatically enroll employees in a defined-contribution plan without giving them the tools they need to understand and navigate their investment options. Personalized outreach can make a difference in employee participation.
Once in the plan, participants need guidance. They’re often overwhelmed by the task of choosing and managing their investments, and are struggling to understand the basics of their plan, whether they can afford their goals and how they can save more for retirement. Personalized, targeted communications in various forms can help to better equip participants in this effort.
We are also finding employers are expanding beyond retirement-planning education to the more holistic topic of financial wellness.
Benchmark the plan
A period review of the plan and its progress can provide valuable insight on what's working and what isn't.
Once the plan sponsor and its adviser or consultant have put a plan in place to meet the employer's and employees' needs, it’s critical to periodically benchmark the plan to check progress against the company’s success metrics, as well as against plans of similar size, with similar demographics and within similar industries. Reviewing the plan helps to compare plan structure, investments, costs and participant engagement and savings success against other comparable plans.