It’s no secret that that many people contribute to their retirement plans for years without understanding what is really going on with them. It is also no secret that some people use their 401(k)’s as tax-advantaged savings accounts. Some plan participants might feel as if there is a little man behind the curtain, like in the Wizard of OZ, who pulls all the strings and controls the operations of their retirement plan. While this isn’t totally untrue, the little man, or woman, is probably a normal size, and they are more than likely someone you know at your workplace. The ‘Plan Sponsor’ is the industry term for these people and advisors who work on, and for, retirement plans. They also typically work ‘behind the curtain’ to help ensure that best practices are being followed.
Motivating Retirement Plan Participants
How can we, as advisors, act proactively and lift the curtain to show the masses what’s really going on behind the scenes in a way that is easy to comprehend? How can we as fiduciaries help these plan participants to show them how and why we make decisions? What is the best way to encourage someone to enroll in a plan or bump their contributions up? How do we do our best to understand the changing nature of what is wanted and required of retirement plan advisors and do our best to be ahead of the curve?
Every plan is going to be different; every participant won’t be in the same spot financially, mentally, or physically. Some plans will have 1,000 participants and ideas. Decisions will have to be based around the majority. Other plans will have 10 participants, and each of them could have a unique personal situation that requires a little bit more tailoring to best meet their needs. Understanding what participants need and want from their retirement plan on a macro and a micro level allow us to do what is in the best interest of our participants and can lend insights into how to best educate and motivate them to participate in the plan.
Integrating financial components into enrollment meetings to help participants make sense of the often intimidating world of personal finance can help them to better understand what they are trying to archive with their retirement plans and make you as an advisor seem more approachable, likable, and trustworthy. In a 2017 Study by Alliance Bernstein, 90% of plan participants interviewed could not answer eight simple questions about investing. You’re a lot more confident about something when you know what you’re talking about, and taking the time to explain things in an easy-to-understand way can make the difference between an advisor who is a hero or a zero. Plan sponsors often cite this as one of the most important things they look for in advisors as current and prospective employees see it as a huge perk.
Auto and Re-enrollment
Forcing employees to contribute to the plan is a lot easier than you might imagine, starting out with just 1 or 2% of their paycheck and most won’t even know the difference. Most of the focus in this area in recent years has been focused on implementing auto-enrollment into plans. Reenrollment, an arguably much more pressing issue, is where the focus fades. Getting the employees who have stopped contributing to their plan back on track can lead to better performing employees, better performing plans, and higher job satisfaction overall.
Stretch your Match
Traditionally, plans match 50% of inputs up to 5 or 6%, creating a 2.5-3% employee match. Employees growing in their field, or plan participants who are only contributing to their plan for the free employer match, may be much more easily swayed to contribute an extra two or three percent to their savings if the match was stretched out to 25% of inputs up to 10 or 12%. These small increases in an employees’ saving rate may be the deciding factor in retiring on time, or in worst-case scenarios, if they get to retire at all. As an advisor it is our fiduciary duty to do what is in the best interest of the plan participants. That includes making sure they see the value in saving for their retirement in employer sponsored or individual retirement accounts.
Retirement plans are just that, accounts you plan to use for your retirement. Like we talked about earlier, some people have a hard time not treating them like a giant savings account. Fidelity estimated that in 2016 one-third of plan participants took money from their plan before reaching age 59½. Understanding how much value could be potentially lost by taking out a loan or distribution before retirement is something participants don’t often take into consideration. A study by Boston College estimated that those who took out a loan or distribution lost an average of 25% of the value of their retirement account over their working life. Loans and distributions aren’t a bad thing; after all, it is the participant’s money. Successful plan design should take these figures into consideration so that if there is going to be a distribution, it’s for legitimate life events (medical treatment, buying a first home, etc.) and not for that dream trip to Maui.
Vest but Don’t Test
It’s slowly becoming normal in the workplace for employees to almost immediately begin contributing to the company’s sponsored plan. Don’t test your employees by requiring a year of service or by having a minimum age requirement for them to participate! You should use a vesting schedule for company match and profit-sharing contributions still, but if someone wants to participate in their retirement plan, let them!
Know Who You’re Working With
The landscape of the retirement scene is changing. Baby Boomers are slowly starting to dip out of the workforce (or begin to realize they’ll spend a lot more time behind their desk) and the younger, millennial generation integrates into the day-to-day schedule of working life. Understanding who your client is and what their goals are integral to building a strong relationship and well performing plans. Everyone’s needs are different and building a plan that performs well for every demographic within it is the key to success.
Using Plancheckr to better connect Plan Sponsors to the inner-workings of their retirement plans is a game changer for the evolving world of participant interaction. Try your free trial with no commitment today.