Your 401(k) plan can be a powerful tool to attract employees and retain those you’ve already invested in. But if your employees don’t understand the value of your plan, they may look elsewhere for a company with better employee benefit options.
Here are three essentials for designing a retirement plan that helps you retain and attract the best employees:
1) Automatic, simple enrollment with escalating contributions
If there’s no easy, systematic way to enroll in the 401(k) plan, employees tend to procrastinate — it’s just human nature. This creates problems for both individual employees and the company. Employees miss out on valuable retirement benefits they are going to need in the future, and low participation rates may lead to higher plan costs for the company.
Unfortunately, procrastination is common when people have to opt into a 401(k) plan, because it gives them one more task to do. But when you design your plan for automatic enrollment, employees have to consciously opt out of their retirement benefits.
Ideally, this enrollment should also automatically increase each participant’s contribution once a year by 1 percent of their pay, until they reach the maximum contribution. Since automatic enrollment tends to boost plan participation, the company is able to take full advantage of the tax benefits from matching employee contributions.
2) Financial education and benefits explanation
Many companies make the mistake of letting employees see planning for retirement as optional instead of essential, and do little or nothing in terms of educating employees about financial planning and their employee benefits. But for many people, contributing to a 401(k) means the difference between a comfortable retirement and constant financial struggle.
Providing financial education helps employees understand how the 401(k) plan, along with other retirement income sources, is an important piece of their retirement plan.
As a rule of thumb, most people need to save at least 20 times their current income to maintain their lifestyle in old age. For a $50,000 annual income, that means saving at least $1 million in today’s dollars. The average person saves 8.5 times their income, which would be $425,000 — less than half the income base they need to draw on.
Most people who do not accumulate a sizable 401(k) account end up working well into their retirement years at jobs that they never imagined doing. That’s why it’s so important to include ongoing financial education as part of your retirement benefits package. If your company has retired employees who used their benefits to secure a comfortable retirement, consider asking them to provide testimonials and encourage employees to take their 401(k) plan seriously.
3) Assistance with communication and support
At many companies, when an employee has questions about the retirement plan that the HR staff doesn’t know how to answer, they advise the employee to ask their accountant or financial advisor. But if the employee has an accountant, that person may not do much aside from completing their tax filing. Similarly, an employee’s insurance agent or banker may not have much advice to offer when it comes to planning for retirement.
Those unresolved questions are the reason many people decide to not participate in company retirement plans or stop contributing.
That’s not to say that your HR department should serve as a financial advisor and be able to answer every question about your 401(k) plan. The best practice is for HR to serve as a resource center, a place that works to understand employees’ questions and get the right information to them. The plan advisor should be prepared to support the HR staff by fielding and resolving questions from participants.
When you supplement your retirement plan with automatic enrollment, education and communication, your employees are more likely to see the benefits of participation and the value that your organization’s plan offers.
Would you like to learn more about employee benefits and how they increase retention? Read our free e-book, Make Retirement Benefits Your Secret Weapon For Employee Retention.
