Although a higher percent of American workers are participating in employer-sponsored retirement plans, retirees may still not be saving enough for their retirement and may risk outliving their retirement assets. More individuals are also withdrawing retirement savings before they actually retire. Those are the findings in a report recently released by the Treasury Inspector General for Tax Administration (TIGTA).
The TIGTA performed its audit as part of its Fiscal Year 2010 Annual Audit Plan to identify retirement plan trends based on a wide range of statistical indicators. The agency studied plans through Calendar Year 2007.
The following are suggestions for employers to help improve employee retirement readiness through greater retirement savings participation.
Add automatic default participation. Traditional 401(k) plans have historically relied on participants to make decisions in their own best interest. However many employees do not make any decisions at all. Add a provision into your retirement plan where employees automatically are default participants at a specific percentage of contribution, for example, two percent, that gradually increases annually up to a percent such as six percent.
Add a matching incentive. If the company provides a match, even if small, spread over the entire six percent contribution suggested above, participants see instant benefit in making payroll deduction contributions.
Include a qualified default investment alternative. When added as an option to your plan, these investments automate the investment allocation process for participants so they are consistently properly allocated to take advantage of changes in the market. The automated process removes “human inertia” of participants who do not rebalance their accounts when necessary, and also removes the temptation to chase mutual fund returns that inevitably results in buying high and selling low.
Review fees. As a fiduciary, you are responsible for ensuring the fees of your plan are reasonable and prudent. However, these fees can be difficult to understand and identify. Hire a fiduciary expert to guide you in this process.
Implement sound fiduciary processes. Funds should be reviewed quarterly and under-performing funds should be placed on a watch list and replaced with better performers when necessary. Document your fund selection and monitoring criteria in your investment policy statement so that plan fiduciaries have a roadmap for making consistent investment decisions.
Eliminate hardship withdrawals and loan provisions. Hardship withdrawals and loans are not required provisions in a retirement plan. Their improper use can result in draining away participant retirement assets.
Regular communication. Communicate with employees on a regular basis about the importance of saving for retirement. Build this philosophy into your company culture.
Talk to your accounting professional about other ways you can encourage retirement savings among your employees.