Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

Where Are You Saving Your Money?

As an auditor of employee benefit plans, I often talk with clients about their plan’s participation rates and suggest ideas on how to increase participation. As part of my daily routine, I read numerous articles from different financial sources. I came across a CNBC article published on July 29th, 2015 that I found to be rather surprising. The article is titled “More American savers skimp on retirement plans” by Tom Anderson, Personal Finance Writer for CNBC.

Hearts and Wallets is a retirement market researcher and they published a recent news analysis showing that Americans are saving more, but not by the method of their employer sponsored retirement plans. The average annual household savings has increased in percentage over the last two years, based on a survey of 5,500 U.S. households by Hearts and Wallets. The Federal Reserve Bank in St. Louis stated that the personal savings rate in May 2015 was 5.1%. However, the percentage of household savings that went into employer sponsored retirement plans has been decreasing over the last two years according to Hearts and Wallets.

I ask myself… Why would more Americans be saving, but not taking advantage of employer sponsored plans? Would you leave free money on the table? These plans can save you money spent on investment management fees and often employers will match your savings contribution up to a certain amount. If you are going to save and you have the option available to participate in an employer sponsored retirement plan, it doesn’t make sense why you wouldn’t want to do that. Most plans accept rollovers (accounts of new participants from other plans) so once you leave your employer you can join the next employer’s plan.

When I speak with employers about their retirement plans and ask them what their goals for the plan are, I generally hear the same two goals. These are to increase the number of employees that participate in the plan and to increase the amount of deferrals of current participants. It is in the best interest of the employer to have a majority of their workforce saving money for retirement. In order to achieve those two goals, there are numerous avenues that an employer may use. The most obvious would be to offer an employer match. If one is already offered, then increase the amount of the match. A less obvious way would be to add automatic enrollment to the retirement plan.

According to a November 2014 study by Tower Watson, employers with participation rates above 80% in their defined contribution plans increased from 50% in 2010 to 64% in 2014. During this same time period, the share of companies offering automatic enrollment rose from 57% to 68%. There is a proven link between increased participation and retirement plans using automatic enrollment. Employers already using automatic enrollment in their sponsored retirement plans should consider adding automatic escalation to help increase deferral amounts of participants. Automatic escalation typically will increase each participant’s deferral rate a certain percentage annually, unless the participant chooses not to accept the increase. Another avenue to increase participation would be changing the fee structure of the plan so the participant pays less and the employer pays more of the fees.

Regardless of the avenue taken, it is important that employers spend time to send the message and educate their employees of the benefits available by participating in sponsored retirement plans.

By Josh Mitchell, CPA