Over the past 20 years, defined contribution (DC) plans have become more predominant as the employer-sponsored retirement savings vehicles, shifting the responsibility for retirement planning to the individual employee. Yet LIMRA research has found that most consumers are not knowledgeable about finances and without this knowledge, are prone to making mistakes that will cost them greatly in the long run.
Plan sponsors can play an important role to promote smart savings for retirement and mitigate some of the common mistakes employees make when considering DC plans.
Based on LIMRA Retirement Research, here are five ways plan sponsors can encourage successful retirement savings by employees:
- Automatically enroll employees into a retirement savings plan, starting with a contribution rate of at least seven percent. Then, raise the contribution by at least one percent annually or with each salary increase.
- Default contributions and savings to a target date fund. Translation: direct employee contributions to a professionally managed portfolio of investments that rebalances the asset allocation to reflect time until retirement. The investment mix becomes more conservative as the retirement date gets closer.
- Re-enroll eligible employees annually. Your health plan is offered annually; shouldn’t your retirement plan be as well?
- Offer retirement income options to help participants make the transition from savings accumulation to retirement income.
- Provide ongoing education and planning tools to your employees to engage them and motivate them to save and plan.
For many Americans, retirement could last more than 20 years. Helping employees establish strong savings habits early in their working careers greatly improves their chances of a satisfying retirement. The resources employers once spent convincing employees to enroll can now be used for higher-level conversations on effective retirement planning.
It’s a “win” for everyone involved.