Over the past few years, our world and many workplaces have shifted dramatically as we endured a global pandemic. While employers focused on workforce reductions and remote work, setting priorities for their 401(k)/403(b) plans was often low on the priority list. However, as life begins to normalize, we are beginning to see a renewed interest in retirement plan design.

Employers are realizing they are more likely to retain employees who feel valued and adequately compensated for the work they are doing. Understanding what is important to your employees goes a long way in structuring a compensation package they will appreciate. “Reinventing Retirement. Defined Contribution Plans 2021,” by the international consulting firm Mercer, revealed the “critical importance of focusing on employees and what they need, want, and expect.” Mercer suggests starting by reviewing participant demographics and key behaviors across the benefit programs, with an eye toward the financial pressures experienced during the pandemic. Using the information gathered, it may be easier to understand subsets of employees and what they value and need from their employer.

Several key areas of plan design review

Eligibility: Employee attraction and retention is vital during this strong labor market with low unemployment and vast job openings. New employees are often dismayed to learn they must wait up to a year before beginning employee deferrals into their new employer’s retirement plan. Reducing the waiting period for entering the plan can be a quick, easy win. However, determining the eligibility period can be a balancing act, especially for companies with high turnover. In situations of high turnover, requiring at least 90 days of employment can help to weed out short-term employees, without triggering the administrative work necessary to allow their participation in the plan.

Payment of 401(k) expenses: The decision to pay for retirement plan expenses from company assets or plan assets is a topic that many plan sponsors debate. From a fiduciary standpoint, there is no risk of excessive fees being charged to participant accounts if the company is covering the bill. Besides the fiduciary liability benefit, paying the fees from company assets can be advantageous because they are tax-deductible and may result in tax savings. Additionally, it can improve transparency to participants, which may contribute positively to employee relations.

Roth 401(k)s: As of April 2022, approximately 75% of 401(k) retirement plans offer a Roth deferral option. This number has increased drastically over the last five years. Younger savers are starting to take advantage of the Roth 401(k) tax benefits, which includes the money growing tax-free and tax-free withdrawals at retirement. The Roth deferral option does not meaningfully impact plan sponsors, as any employer match is applicable to both pre-tax and Roth deferrals. Yet, Roth 401(k)s provide participants the benefit of future tax-free withdrawals.

Distribution Options: Plan sponsors can provide a buoy to participants by ensuring the plan allows for hardship distributions and/or loans, so that if a disaster strikes, the participant will be able to access the balance of their retirement plan account. For participants closer to retirement age, there is a desire for the plan to allow regular monthly distributions, similar to a pension plan. Additionally, it has become painfully obvious during the pandemic that having an emergency savings is a luxury for many. As a result, retirement plans with flexible distribution options are appreciated by participants.

Employer Contributions: The decision to offer a match and/or profit share can be a difficult subject for many business owners. Employees often desire cash compensation in place of other job-related perks. However, many business owners take a paternalistic approach when making decisions on behalf of their employees and their future retirement potential. Providing a match option requires that participants have some ‘skin in the game’ in order to receive the additional employer dollars. While others feel that a match lacks compassion for those without the discretionary income to contribute to the plan.

Automatic Enrollment: When considering ways to boost participation, auto enrollment and auto escalation are quickly becoming best practice. Research in behavioral economics shows that when it comes to complex choices such as whether to save and when to retire, people’s decisions are often influenced by social norms and the presentation of their options. In terms of retirement plans, auto enrollment and auto escalation are widely accepted by employees and they tend not to opt-out, if the deferral rate stays below 10%.

Retirement plans are designed to be a long-term savings vehicle; they should be structured to positively impact participants and improve their retirement readiness. Ensuring the plan design is up-to-date with today’s standards can go a long way in attracting, retaining, and engaging employees. The Retirement Plan Division of Greenleaf Trust appreciates the work all of our plan sponsors do every day to benefit their employees and our retirement plan participants. As always, our team is ready and willing to assist with your retirement plan needs.