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Optimizing Plan Data
Improve Plan and Participant Success in Automatic Programs.
A white paper from T. Rowe Price demonstrates that pursuing improved retirement readiness for employees doesn't have to be costly.
We understand that achieving plan objectives in an environment of constrained budgets, talent competition, and increasingly complex fiduciary requirements can sometimes seem like a difficult balancing act.
But with the right combination of plan design and automated program features, plan sponsors can improve retirement plan effectiveness and help drive participant success within reasonable budget levels.
Below, we'll focus on three foundational components with possible actions to consider:
- Employer contributions
- Vesting
- Eligibility
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Employer Contributions: Adjusting Your Match Can Significantly Reduce Costs.
- Change the match percentage while leaving the basic structure intact
- Change the structure of the matching formula
- Change the timing of when contributions are made
- Move to a different type of contribution
Vesting: Realignment Allows for More Effective Features.
- Create multiple vesting schedules
- Change the timing of when vesting occurs for new contribution types and/or new hires
- Change the method by which vesting is calculated
Eligibility: Modifications Can Offset Improvement Costs.
- Change who is eligible for each type of contribution utilized
- Change the timing of eligibility
- Change the nature of eligibility calculations
Two Examples: Cutting Costs While Boosting Participation and Improving Retirement Outcomes
Background
This company, with 3,120 employees, has very low plan participation in its retirement plan. The vast amount of employees are not on track to achieve a typical 70% income replacement ratio (from all sources) by the time they reach retirement age. To correct this, ABC is considering a full range of automatic features including automatically enrolling new hires, automatic enrollment of all existing eligible employees, and automatic increase program for all participants.
Goal
Add a full range of automatic features while reducing annual cost.
Actions
- Introduce a 100% match on the first 4% of deferrals
- Add a 2% non-elective contribution with last-day rule
- Auto enroll all eligible employees at 4%
- Auto increase all employee deferral rates by 1% each year up to 10%
Estimated Results
- Reduce annual cost by 7.2%
- Increase participation rate from 58.7% to 97.4%
- Improve average retirement income replacement ratio while maintaining the average for employees over 60
Conclusions
By lowering the nonelective contribution rate even further, adding a last-day rule to be eligible to receive the nonelective contribution, and implementing automatic features, ABC could improve the average replacement ratio for younger employees while maintaining the average for employees over age 60 and actually lower annual employer costs by 7.2%.
Read our white paper
Get more details and assumptions on the ABC and XYZ examples, as well as additional scenarios that we explored.
Background
This company, with 4,233 employees, has reasonable participation in its retirement plan, reflecting the use of automatic enrollment of newly hired employees. However, the vast majority of employees are not on track to achieve a typical 70% target retirement income replacement ratio (from all sources) by the time they reach retirement age. To correct this, XYZ is considering adding; Automatic enrollment of all existing eligible employees and Automatic increase program for all participants. The company is concerned about the costs and would like to understand what the likely impact will be on participant outcomes.
Goal
Decrease annual costs by 10% and increase participation rate.
Actions
- 100% match on the first 3% of deferrals
- 0% match on deferrals over 3%
- Auto-enroll all who are eligible at 6%
- Auto-increase 1 % each year up to 15%
Estimated Results
- Annual cost reduced by 10.4%
- Participation rate improves from 85.1% to 99.3%
- Improve average retirement income replacement ratio average while maintaining the average for employees over age 60
Conclusions
By decreasing the matching deferral rate to 3%, even with an aggressive approach to automatic features, XYZ can still dramatically improve participant outcomes for all employees younger than age 60 and maintain rates for those age 60 and above. This can all be accomplished while lowering overall annual employer contribution costs by more than 10%.
Read our white paper
Get more details and assumptions on the ABC and XYZ examples, as well as additional scenarios that we explored.
Applying the Concepts: Communication Is Key.
As is true for all types of plan changes, an effective and thorough plan for communicating changes to employees is critical to success. Similarly, when periodically reenrolling or resetting participants, a strong opt-out communications program will help ensure that participants aren't surprised by actions taken on their behalf and will create an opportunity to present a strong rationale for why the actions are being taken.
This material has been prepared by T. Rowe Price Retirement Plan Services, Inc., for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price Retirement Plan Services, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this website, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
Contact your T. Rowe Price representative to find out how we can take your plan to the next level.