The closing bell of 2017 marked the ninth straight year of positive returns in the domestic stock market. A long bull market, such as the one we’re in now, causes people to become more lax about certain areas of their financial life. For fiduciaries to a corporate-sponsored retirement plan, one such area is employee engagement. This specific area of the plan – the measurement of employee participation, deferral rates, and interaction with available tools and resources – is crucial to the health of the plan and the participants within.
During the past few months, I have been asked by plan sponsors to review their plans because of lack of engagement more than any other period of time in my career. Plan sponsors are telling me they are concerned about their employees not being able to retire on time; they are curious why their employees don’t engage better with the plan; and they want to know how I can help fix these issues.
Several suggestions appear adequate on the surface, such as more education or more frequent employee interactions. While these sound logical, and may help a few people, these suggestions are the not the answer. A plan with dismal employee engagement needs a better solution. This solution should look more like a “top-down” approach, beginning first with plan design.
Plan designs to help with employee engagement are multi-faceted and take into consideration behavioral finance, the science of how people make decisions about money. Money is a difficult topic for most people and if you ask them to make difficult decisions, they will likely make the wrong decision or not make a decision altogether. A properly designed corporate-sponsored retirement plan takes the emotion and thought out of the process for the participants and helps guide them to making better decisions.
To design a plan employees will engage with, the plan should include the following:
- Auto-enrollment between 6% and 10%
- Auto-escalation at least 1% each year
- Annual re-enrollment to engage with employees who opted out the previous year
- Qualified Default Investment Alternative set with either target date funds or managed account
- Consistent interactions with the employees about the benefits of the plan and various financial planning topics
These plan features will ensure your employees engage with the plan, are saving more for retirement, have assistance with their investment strategy, gain a better understanding on complex financial topics, and have the best chance possible at reaching a dignified retirement.
Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC. MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies.