Retirement Security Strategies

Offer a Retirement Income Calculator

Workers who have calculated how much they must save to meet their retirement needs tend to have higher savings goals than those who haven't. Provide access to a retirement income calculator. The best calculators allow workers to factor in assets and income from multiple sources (e.g., benefits due a spouse, personal savings, expected government payments, and assets from past employers).

Provide Access to Financial Advisors

Advice tailored to each participant with ongoing personalized attention by an advisor is especially effective in helping workers achieve retirement security. Consider allowing workers to meet with an advisor at reduced or no cost during paid work hours. To avoid liability, use certified third-party advisors who are not selling products or services.

Provide a Regular Retirement Income Statement

At minimum, annually provide plan participants with a clear, concise retirement income statement that projects the monthly income they can expect to receive in retirement based on their current balance and contribution rate. Place the monthly income projections on the first page of the statement and account balances and investment performance further back. This makes it easier for participants to find the income projections, and it emphasizes long-term versus short-term performance.

Relax Plan Eligibility

Shorten or eliminate the waiting period before newly-hired workers can start participating in their plan. Letting them join immediately gets them saving right away and on the path to retirement security.

Offer a Stretch Match

Encourage workers to save by matching the amount of money they put into their workplace retirement plan. A "stretch match" encourages saving at a higher rate. For example, instead of matching 100% up to 3% of pay, offer a 50% match for up to 6% of pay. Point out that not participating is like "leaving money on the table."

Use Automatic Enrollment and Escalation

Enroll workers in their defined contribution plan automatically when they are first hired. While they have the chance to opt out, inertia and procrastination will likely keep them in the plan. For those who do opt out, ask whether they would like to be automatically enrolled in January of the next year or on the first anniversary of their hiring date. For those who still haven't enrolled, try a "back-sweep" to automatically enroll them later - maybe this time they'll stay in the plan.

Since the default contribution rate in plans with auto enrollment is usually not enough for most people to achieve a secure retirement, automatically raise the percent of pay they save over time. Workers who start saving with their first paycheck and whose contribution rates go up at the same time as pay hikes rarely miss the money they're saving.

Limit and Structure Investment Choices

Defined contribution plan sponsors must offer enough investment fund choices to meet different participant needs, but too many choices can cause confusion, inertia and procrastination. Experience has shown offering five to ten quality funds results in the highest participation.

Because people are most likely to choose options at the beginning of a list, place the most "appropriate" investment options (e.g., target-date and balanced funds) at the top of the list. Ordering choices is a way to guide participants so they don't end up with an overly conservative or aggressive portfolio—a common occurrence when investments are listed in order of risk.

Promote Asset Diversification

When building a defined contribution plan menu of investment choices, include several asset classes (e.g., a combination of domestic and foreign stocks, bonds and short-term investments). The financial industry offers a multitude of mutual funds that can help small investors achieve diversification—with index, balanced and target-date funds among the most popular. Moreover, make sure to educate participants on the need to diversify their investment portfolios and how to do it.

Promote Rebalancing

Asset values rise, fall and grow at different rates, which can result over time in an investment portfolio out of sync with the asset mix initially chosen by the participant. Rebalancing is how investors make sure their portfolios maintain a level of risk within their comfort zone. Unfortunately, few plan participants rebalance their portfolios regularly, if at all. Encourage participants to establish a plan for rebalancing their portfolios once or twice a year. Another option: choose an investment firm that offers automatic rebalancing and encourage participants to take advantage of it.

Offer Target-Date Funds

Target-date funds (TDFs) are hybrid mutual funds that invest in a mix of assets (e.g., stocks, bonds and cash) that put retirement savings on autopilot. The mix is automatically rebalanced at a specific date (usually a retirement date). Over time, the fund's asset mix typically becomes less risky so investors have more stable values and returns as they near the time they will begin withdrawals.

When choosing a TDF option for your plan, be aware there is great diversity in products on the market. Make sure to understand the specific fund's glidepath (i.e., asset allocation over time). Some products feature a glidepath that matures at the participant's projected retirement date, while others may carry the investor well into retirement. TDFs also vary in risk, ranging from conservative to aggressive. Some are actively managed while others use index funds with a passive management approach.

Pay Attention to Investment Expenses and Other Costs

Administrative, investment and other expenses associated with a retirement account can have a sizable negative impact on retirement savings. Make sure the fees charged your plan are reasonable in terms of the quantity and quality of services provided. Benchmark your fees against those charged to similar plans. Regularly monitor fees to make sure they remain competitive, and that participants are not paying for plan features or services not being used.

Curb Leakage from Loans and Hardship Withdrawals

The reasons for plan loans and hardship withdrawals can be compelling, but they can have a negative impact on retirement income balances. Reduce the chance of such an impact by doing one or more of the following:

• Restrict the number of outstanding loans a participant can have at one time.
• Establish a waiting period between loans.
• Limit the dollars available via loans and withdrawals.
• Allow individuals who are no longer employees to continue making loan payments to avoid the taxes and penalties associated with a benefit distribution.
• Automatically restart worker contributions after a hardship withdrawal.

Assist with Rollovers

Make it easier for participants to move their retirement savings to a new plan when they change jobs. On the flip side, make it easier for new hires to transfer money from a previous employer's plan into your plan. This will reduce lump sum distributions and leaving money behind in a plan tied to a former job. Administratively, helping with rollovers reduces the number of plan statements you must deliver and the number of former employees you must track.

Offer Other Benefits to Help Workers Manage Risk and Increase Savings

Other types of employee benefits can substantially affect an individual's ability to save for retirement. Such benefits typically help workers cope with (1) life's surprises that can wreak havoc on an individual's finances and (2) provide funds for other financial goals that often compete with retirement goals.

• Life insurance
• Disability protection
• Medical, prescription, dental, vision and hearing benefits
• Long-term care insurance
• Emergency loan programs and hardship funds
• Employee assistance programs
• Educational assistance plans

Of course, educating workers on taking advantage of these benefits is as important as providing the benefits.

Make Personal Finance Information and Education Available

Educate workers on the features of their retirement plan and the other employee benefits available to them. But don't stop there—Offer information and education that will help them with other aspects of their financial lives. Achieving retirement security is interconnected with an individual's ability to do such things as:

• Manage debt and credit
• Create and maintain a budget
• Save and borrow for major purchases like a home, car or child's education
• Reduce taxes, and
• Work with a financial advisor.

Offer Lifetime Income Options and Guidance

Asset decumulation is just as important as asset accumulation. When planning for decumulation in retirement, participants must consider investing, systematic withdrawals and the possible use of annuities. Provide information and education to help participants make the complex decisions they face.

Consider making lifetime income options part of your plan. Because you are purchasing an option for a group of individuals, you are in a strong position to negotiate a group price that delivers more income and/or protects participant wealth much more than these persons could purchase on their own in the retail market.