Studies have shown that having access to a workplace retirement plan is one of the most important factors in whether Americans have sufficient financial resources in retirement. In real life, however, employers know that just because workers have access to a retirement plan doesn’t mean they all take the steps necessary to enroll in the plan and start saving. Furthermore, many of those who do enroll are not saving enough to generate meaningful retirement income. When these aspects of human nature are combined with the economic hardships, fear, and uncertainties caused by COVID-19 workers are facing today, employers have an even tougher job engaging employees in saving and planning for their future retirement. Fortunately, there are tools available to plan sponsors designed to help improve their employees’ chances for a secure retirement – even during challenging times – including automatic plan features and creative communication strategies.
Use Auto Plan Features to Enroll Employees in the Plan
Employees who are unengaged or lack the skills to make contribution and investment decisions often do not become plan participants, putting their retirement readiness at risk. One of the simplest ways to increase plan participation rates and make sure employees are saving is to automatically enroll them into the plan. In a traditional 401(k) plan, if an employee fails to complete the steps to enroll in the plan, the employee will not be an active, deferring participant. By contrast, an auto enrollment feature uses the employees’ lack of action to enroll them into the plan at a set deferral rate. Taking no action leads to plan participation. Auto enrollment eliminates the decision-making burden for employees – although they always have the option to stop or change their rate of deferral. To encourage more employers to adopt auto plan features, Congress recently created a new tax credit for small businesses that adopt auto enrollment features.¹
Plan sponsors must designate a default investment for participants who do not make an investment election, which is especially important if a plan uses auto enrollment. Plan sponsors who choose a Qualified Default Investment Alternative (QDIA) will have fiduciary relief for selecting an investment on behalf of participants and assurance that the investment is appropriate for long-term savings. Investment vehicles that can be used as a QDIA include lifecycle or target retirement date funds (TDFs) and professionally managed accounts.
Educate Participants about the Importance of Staying Invested During Volatile Markets
The first quarter of 2020 saw a frightening drop in the U.S. stock market – up to 20% – in a very short time frame.² This swift plunge, combined with the uncertainties of temporarily closing businesses, caused many individuals to fear investing in the stock market. Some participants may have withdrawn money from their investment accounts, and others may have re-allocated their investments to less risky alternatives. However, those who understand that investing comes with some risk and that the market will fall and rise periodically are better able to weather the volatility.
As proof, during second quarter 2020, the markets began to recover, and many participants recovered some of the losses they experienced in the first quarter. Investors who withdrew money from their retirement accounts during first quarter locked in their losses because their assets were no longer invested. Plan sponsors may want to tap into education resources offered by their financial advisor or plan service providers to provide investment education to participants to reinforce the importance of keeping a long-term view and staying invested in the plan.
Some plan participants may have no choice but to withdraw their retirement plan assets given the economic challenges caused by COVID-19. The CARES Act allows plan sponsors to permit early access to retirement savings for participants who have been affected by COVID-19.³ This relief is vital for those that need it, but participants should be educated about the negative effects of withdrawing assets during a volatile market, and the long-term impact that early distributions and lower contributions can have on their savings accumulations and ultimately their standard of living in retirement.
Explore Creative Approaches to Engaging Participants
During turbulent times, many workers are focused on more short-term, immediate financial concerns. Plan sponsors may want to consider some creative communication approaches to help workers focus on the future and their long-term retirement savings.
One key to engaging participants is to make sure the messages sent are meaningful to them, and not overly generic. There are a variety of methods being used in the industry today to personalize both the message and the medium used to deliver retirement savings information to employees.
- Craft messages that cover the topics important to employees at different stages of life. Millennials and Gen Xers may need advice on living within a budget or paying off student loans while saving for retirement. Older participants may be more interested in Social Security claiming strategies and how to turn their account balance into income that will last throughout their retirement.
- Send small but frequent communications, such as emails, to keep retirement savings top of mind. Avoid content that is overwhelming with technical jargon or too much information. Include links to retirement saving calculators or other helpful tools and include new statistics or trivia each time to maintain interest.
- Provide plan and saving information in as many mediums as possible to reach as many individuals’ learning styles as possible, including webinars, videos, website content and print publications.
- Offer one-on-one meetings or small, informal gatherings with a plan representative or investment advisor in lieu of the traditional company-wide enrollment meeting. Most people are more comfortable asking questions in a small group of peers or individual meeting than in a large group.
Newport can run projections using your plan demographics to illustrate the financial and operational impact of various automatic enrollment options. To learn more about how we can help with plan design and participant education, please contact your Newport Representative.
 Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), as part of the Further Consolidated Appropriations Act, 2020, December 20, 2019, https://www.congress.gov/bill/116th-congress/house-bill/1865
² ICI Defined Contribution Plan Recordkeeper Data Show Ongoing Commitment to Retirement Saving During COVID-19 Pandemic, May 14, 2020, https://www.ici.org/pressroom/news/20_recordkeeper_1q20
³ Coronavirus, Aid, Relief and Economic Security Act (CARES Act), March 27, 2020, https://www.congress.gov/bill/116th-congress/house-bill/748
Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services.
Newport Group and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions.