Employer objections stand in way of 401(k) plan success

Sometimes employers themselves are the biggest obstacle to helping workers save for retirement at work.

It’s been well established that automatic features, including auto-enrollment and auto-deferral increase, increase the number of employees in a given plan and raise their savings rates. Advisers in the retirement plan space know that a deferral of 3% of pay won’t provide workers with security in their golden years, especially if that 3% holds steady over the course of that person’s career.

If anything, workers in their 30s ought to be squirreling away 15% of pay in order to retire comfortably. Recent data from the Empower Institute shows that individuals who are automatically enrolled in their retirement plans at work are on track to replace 82% of their income in retirement, compared with 73% income replacement rate for those in plans with no auto-enrollment features. With auto-escalation, which automatically increases deferral rates, workers who have these features in their plans are on track to replace 92% of their income, versus a 73% income replacement rate for those who don’t have automatic escalation.

But plan advisers and industry observers note that it can be difficult to get those features into the plan in the first place, as plan sponsors have bucked those suggestions.

Edward F. Murphy, president of Empower Retirement, notes that only about 30% of plans have adopted automatic escalation features, and that figure has leveled off for some time. “We need to do a better job of encouraging plan sponsors,” he said.

Advisers have confronted that opposition head-on when working with prospects, too. “There is a disconnect between what employees say they want and what the plan design is,” Kathleen Kelly, managing partner at Compass Financial Partners, said. She spoke on the issue Tuesday morning at the National Association of Plan Advisors’ annual 401(k) Summit in San Diego.

“That disconnect is a result of the committee and the actions of the company in how they design the plan,” Ms. Kelly added. “Often for us, it’s a challenging position to be in when you are with a committee that says ‘We’ve always done it this way. We’re not paternalistic, and this is how we view auto features.’”

DON’T BACK DOWN

Advisers meeting with plan sponsors shouldn’t allow themselves to be steamrolled by committees that are unwilling to bring their plans up to date. Those suggestions require a delicate touch; you wouldn’t want to scare away a prospective client, either.

“You don’t want to make your new client mad, but you’re there to inspire participants to save more and use the plan effectively,” Ms. Kelly said. “But it has to start at the plan sponsor level in terms of what levers they have available to import change and improve outcomes.”

Sometimes that’s a matter of providing plan committees, which are often made up of employees, with context. Advisers should frame the conversation around changing the plan as an opportunity for leadership, instead of playing up retirement plan jargon.

“Rather than talking about 3(38) and 3(21) services, the real question is, ‘Who is going to lead?’” Don Trone, chief executive of 3ethos and a panelist at the NAPA conference, said. “I would hope you’ll have, for the first time, a number of trustees and board members think, ‘I’ve never thought about this before, but this 401(k) plan is an opportunity to demonstrate my leadership to the company.’”

Ms. Kelly suggested that advisers talk to the plan committees about their motivations behind creating the retirement plan in the first place and ask them what it is they hope to provide.

From this dialogue, you can understand what motivates the committee, she said. “You can turn that into results for retirement plans, which leads to engaged employees and other benefits aside from helping participants retire,” she said.

It should be noted that sometimes employers buck suggestions for improving the retirement plan due to the cost related to doing so, especially if the plan is small. If auto features bring more people into the plan and make more of them eligible for matching contributions, the employer’s costs go up.

Advisers could mitigate those costs and overcome objections by starting employees at a lower default contribution rate and automatically escalate them over time. They can also design a matching formula that will require employees to contribute more of their dollars before qualifying for a match from the employer.

GETTING WORKERS EXCITED

In the best of scenarios, advisers will encounter human resources personnel and employers who are excited about increasing participation in the retirement plan. Ellen Ford, president of People’s Credit Union and a speaker on a panel of employers at the NAPA 401(k) Summit, said that her company adopted a mandatory retirement plan education seminar for employees. The firm also provided financial advice at no additional cost to the workers.

“We had a significant increase in participation,” Ms. Ford said. But she noted that after a year or two of those services, employees felt that they were set. In order to re-engage those workers, the firm is now looking at annual educational seminars on retirement planning for employees in their 50s. This would be a dinner event for workers and their spouses.

Advisers are instrumental in getting those employees on board and ready to retire. “One thing our employees like about their advisers is that they speak at their level,” Ms. Ford said. “It’s important that the person working with the employee makes them feel comfortable. That’s what you want.”