Here we look beyond the retirement plan budget to uncover broader funding strategies. Delaying automated features may cost participants potential savings. From rethinking total rewards to leveraging tax incentives, organizations can find ways to implement these plan features without significantly increasing overall costs.
Automated features like automatic (auto) enrollment and auto-increase have consistently proven to boost participation and saving rates in retirement plans, such as:
Yet despite the upside, some employers hesitate to implement automated features because of the perceived costs. But there’s also a potential cost to employees when these features aren’t available. Without a nudge to start saving or increase contributions, some may delay taking action, which can ultimately affect their ability to retire on time.
Paying for these powerful features doesn’t have to come solely from the retirement plan budget. By taking a more holistic view—one that includes total rewards, compensation strategies, and even government incentives—plan sponsors might be able to find creative ways to support automated features without increasing overall spend.
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
In part I of our series, Smart ideas to help fund automated features—looking within the retirement plan, we explore how employers can fund automated features by reallocating dollars to be used within the retirement plan. This includes using strategies such as adjusting matching contributions or redesigning non-elective and profit-sharing allocations. Now, we turn our attention beyond the retirement plan to uncover additional funding opportunities that may exist across the broader total rewards budget.
Reallocate alternative portions of total compensation. To help finance automated features, take a broad look at the budget items that make up the total compensation. Improving one part of the package doesn’t always mean cutting from the same area to pay for it.
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Reshape bonus structure: Review the configuration of bonuses and possibly redirect funds toward the cost of adding automated features.
For example, one employer we recently worked with was already auto-enrolling employees at a 2% contribution rate but wanted to enhance the plan by adding auto-increase. To help fund the higher employer match that would result, they reallocated $8 million from their annual bonus budget. This strategic move not only covered the additional cost of adding auto-increase, but it was projected to increase employee contributions by $42 million over three years. In total, that $8 million investment could generate an additional $50 million in combined employer and employee retirement contributions annually, helping transform short-term bonus dollars into possibly long-term financial security for their workforce. - Trim low-use programs: Scale back on less-utilized perks, such as free lunches, gym memberships, etc., and consider redirecting those dollars. It’s not about taking something away but about aligning resources with what has the opportunity to support employees’ futures most effectively.
Use tax credits and other incentives. The U.S. government offers tax incentives that can help offset the costs of adopting automatic enrollment:
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Retirement plan startup costs tax credit: Under the SECURE 2.0 Act of 2022 new retirement plans (401(k) and 403(b)) are required to have auto-enrollment. Small businesses (with up to 100 employees) can claim a tax credit of up to $500 per year for three years to cover plan startup costs, including automatic enrollment implementation. An additional credit of up to $5,000 per year is available for new plans based on employer contributions.
Find more details about the tax credits, including a worksheet to help calculate the possible tax credits. It’s always wise to consult with your tax advisor for all the details. -
Saver’s credit awareness: This credit helps low and moderate income taxpayers who defer income into a retirement plan by offsetting their tax liability up to $1,000 (or up to $2,000 if married) depending on income level. While this credit applies to employees, and not the plan sponsor, educating participants about it could help increase engagement and participation rates.
Consider the cost of not adding automated features. When evaluating the cost of adding automated features, it’s important to also consider the hidden and long-term costs of not implementing them. Without these features, employees may not start saving early enough or save too little over the course of their career. Ultimately, employees may need to delay retirements, an outcome few want and one that can carry associated costs to employers.
The chart below intentionally omits age markers because the timing of each stage can vary widely based on the job, industry, company, and individual. However, most people take time to reach full productivity when starting a new role as they learn new systems, build relationships, and get acclimated. As their experience grows, so does their productivity, often resulting in greater value returned to the employer.
For illustrative purposes only.
Every employee will eventually reach a point when they are physically, mentally, and/or emotionally ready to retire. But if they are financially incapable of doing so because they didn’t save enough for retirement, productivity can drop. At the same time, total compensation typically continues to grow, outpacing productivity and creating a cost of delayed retirement.
Automated features can help employees start saving earlier and increase their contributions over time. This supports timely retirements, helping employees to retire when they choose, and may also lead to meaningful savings for the employer.
Supporting automated features like auto-enrollment and auto-increase doesn’t always require stretching the retirement plan budget. By taking a broader view, whether through reallocating compensation dollars, adjusting underused perks, or tapping into tax incentives, employers can take practical steps to make automated features possible. And when they do, employees are more likely to build savings early and retire on their own terms, benefiting both the employees and the business.
As businesses explore these opportunities, it helps to partner with a retirement service provider that can offer data-driven insights and design expertise tailored to your workforce and goals. If you’re looking for help implementing automated features, reach out to your Principal® representative.
Get more data-driven insights: The power of automated 401(k) plan features.
