Some plan sponsors are concerned that adding automated features could come with additional organization costs. But waiting may cost participants more in potential savings. It’s possible to support these features strategically within the plan’s existing funding structure without compromising the balance sheet. Watch for Part II in our series, where we'll explore additional funding strategies that look beyond the retirement plan.
Automated features like automatic (auto) enrollment and auto-increase in defined contribution plans to help boost employee retirement savings aren’t new. Yet as the chart below shows, there’s still room for many plan sponsors to adopt. For those who haven’t, a common reason is concern about the potential added organization costs. But it’s also important to consider the cost to employees. Without these features, many might start saving too late or not take advantage of opportunities to build long-term financial security.
Principal has established these plan design best practices:
- Auto-enrollment using a default contribution of 6% or higher, with
- Auto-increase of 1-2% annually up to a 15% cap, and
- Annual re-enrollment to help under-saving or nonparticipating employees
The encouraging thing is that it’s possible to implement these features in a budget-friendly way. The cost of sponsoring a retirement plan is simply one portion of the budget. It’s one piece in a much larger ecosystem of employee benefits and total compensation. Sometimes moving dollars from one area to another can result in meaningful improvements for both employees and employers.
Rethink the structure of matching contributions.
Employer matching contributions can be a significant expense in retirement plans. Adjusting the match structure can provide funding for auto-enrollment while still incentivizing participation. Consider:
- Adjusting the match: Instead of matching 100% of the first 3% of employee contributions for example, an organization could shift to 50% of the first 6%. Overall costs are reduced as the employer pays 3% only if the employee defers 6% or more of eligible pay, making funds available to implement automated features. This move encourages higher employee contributions to get the match while maintaining the total match contribution in dollars.
- Capping the match: Set a maximum dollar amount or percentage of salary for matching contributions. This reallocates a portion of match from highly compensated employees (those most likely to hit the cap), which can then be used to help fund auto-enrollment and auto-increase for the broader workforce.
The example below shows how capping the match at 6% helped the employer keep costs of adding auto-enrollment and auto-increase nearly neutral. *
For illustrative purposes only. Snapshot of first year costs only and does not consider employee turnover and/or existing participation rates. Actual plan demographics such as salaries, participation, deferral rates, turnover, etc. will have varying outcomes.
- Tiered match: Match contributions can be adjusted based on other considerations and goals of the organization such as tenure. A tenure-based match would reward employees with more service while lowering employer contributions for employees with less service. Since typically there are more employees at the lower service tiers, small adjustments to their match can fund increases to employees with more tenure and help offset the cost of adding auto features. As such, building a tiered match structure can be cost-neutral.
Example of a tiered match structure based on tenure:
Here the plan went from a match of 3% for all employees, to a tiered formula based on tenure.
Redesign employer-provided non-elective contributions (NEC) or profit-sharing (PS) allocations that are tied to company performance.
Similarly to rethinking matching contributions, an employer can reallocate a portion of alternative retirement contributions to help pay for the cost of automated features.
Example: The first scenario below (left bar), the employer offers a 3% match and a 3% NEC, resulting in a higher employer cost but lower overall savings for employees. In the second scenario (right bar), the employer eliminates the NEC and redirects those funds to enhance the match (up to 4.5%) and help support automated features. As such, the strategy can be cost-neutral for the employer, while employees save more with auto-enrollment starting at 6% and auto-increasing deferrals up to 15% of eligible pay.
Funding auto-enrollment and auto-increase in a retirement plan requires a strategic approach that balances cost management with employee benefits. By implementing such features, employers can help their employees save for a secure financial future. Doing so might also help plan sponsor pass non-discrimination testing and provide the flexibility needed to implement more custom plan designs.
As businesses evaluate these options, it’s important to work with a retirement service provider who understands and has the expertise to consult on these moves. If you’re looking for help implementing automated features in the plan, reach out to your Principal® representative. They’ll consult on creating a tailored retirement plan that aligns workforce needs using these powerful features. A plan that works with the budget and helps drive participation and improves savings behavior with the goal to facilitate timely retirements.
Get more data-driven insights on automated features: The power of automated 401(k) plan features.
