SUMMARY
A truly excellent retirement plan benefits both employees and employer. Regulatory compliance is the baseline of excellence—not the finish line. In this series on “going beyond the regulations,” we cover best practices across six areas:
- Fiduciary Governance
- Plan Design
- Fee Structure
- Investment Process
- Participant Support
- Provider Management
Each entry in the series is anchored by a quick-reference table of best practices. We also share examples drawn from our professional experience with real-world insights and tangible strategies. We invite you to join us as we explore the nuances of creating and maintaining an outstanding retirement plan.
Blueprint for success
Plan design is the architectural blueprint of a retirement plan, determining its functionality and effectiveness. You may already know you want a Safe Harbor plan. That’s a great start … but it’s only a start. You need to think through how to design the plan to meet your team’s specific needs and align with your business objectives.
A well-designed plan can be a powerful tool for attracting and retaining talent, boosting employee morale, and enhancing overall job satisfaction. By thoughtfully selecting features like automatic enrollment and escalation, QDIA re-enrollment, and setting the right default rates, you lay the groundwork for a retirement plan that goes beyond meeting legal standards to truly help your employees and, by extension, your business.
Here are two examples drawn from our own experience working with clients that show why plan design is so critical to long-term success:
Example 1: Automatic enrollment paired with automatic escalation to satisfy plan testing requirements
- Several years ago a JFG client in the transportation industry implemented automatic enrollment in an effort to boost participation. The automatic enrollment feature had a tremendous impact, boosting participation to over 90%. However, with the default rate set at 3%, the client continued to fail the annual discrimination test due to insufficient savings levels among the non-highly compensated employees.
- In 2016, after meeting with their JFG advisor the decision was made to increase the default rate to 4% and implement an annual automatic escalation feature up to 6%.
- Building on the success of automatic escalation the threshold was increased to 8% in 2017.
Result
- As a result of these plan design changes the client has passed the annual ADP/ACP discrimination test every year since 2018, even with over 75% of the highly compensated employees contributing up to the IRS maximum. From 2013 to 2022 savings rates for the non-highly compensated employees have increased from 4% to almost 7%.
- With the goal of getting all participants into the recommended savings range of 10% to 15% the client has increased the automatic escalation threshold to 10% for 2023.
Example 2: Automatic enrollment paired with automatic escalation to boost participant retirement readiness
Issue: Automatic Enrollment is a great plan design and helps employees actively participate in the plan, however those employees that are automatically enrolled typically continue to stay at the same rate.
- While working with their JFG Advisor, a plan analysis was conducted to review participation rates and retirement readiness of plan participants.
- The client desired a path to improve their plan design to improve their current state to target a 15% contribution rate.
- The plan previous utilized an Automatic Enrollment feature, however there was not an Automatic Escalation resulting in many of the participants deferring at their original rate of 3%.
Result:
- An Automatic Escalation feature was added to increase employee contributions at a rate of 1% per year.
- The new plan design effortlessly boosts contributions over time, ensuring participant retirement savings grow steadily.
- This hands-off approach aligns perfectly with the clients financial goals, providing a secure path towards a comfortable retirement.
Best practices for plan design
Now let’s turn to best practices. The following table serves as an introduction to successful plan design and can help everyone involved understand the relevance of each component.
Safe Harbor Plan Design
What it is:
A plan design that automatically satisfies certain non-discrimination tests.
Why it matters to the business owner:
Eliminates annual nondiscrimination testing complexities. Can allow for greater contributions by high-earning employees.
Why it matters to the employee:
Ensures a certain level of employer contributions, enhancing retirement savings.
Automatic Enrollment/ Escalation
What it is:
Automatically enrolls employees in the retirement plan and increases their contribution over time.
Why it matters to the business owner:
Increases plan participation and savings rates. Can improve plan performance metrics.
Why it matters to the employee:
Encourages retirement savings, especially for those who might not opt in on their own.
Default Rate to at Least 6%
What it is:
Setting the automatic enrollment default contribution rate at a minimum of 6%.
Why it matters to the business owner:
Promotes higher savings rates, improving overall retirement readiness of employees.
Why it matters to the employee:
Increases potential retirement savings without the need for active decision-making.
Default Rate at Level that Allows Participants to Receive Max Match
What it is:
Adjusting the automatic enrollment default rate to ensure full employer match receipt.
Why it matters to the business owner:
Encourages employee participation and satisfaction with the retirement plan.
Why it matters to the employee:
Maximizes the benefit they receive from employer contributions.
Automatic Escalation Cap to at Least 15%
What it is:
Setting a cap on automatic escalation to increase employee contributions up to 15%.
Why it matters to the business owner:
Facilitates higher employee savings rates, potentially leading to better retirement outcomes.
Why it matters to the employee:
Helps employees build substantial retirement savings over time without manual adjustments.
Implementation of QDIA Re-enrollment
What it is:
Re-enrolling all participants into a Qualified Default Investment Alternative.
Why it matters to the business owner:
Ensures that employees' assets are invested in professionally managed, diversified portfolios. Reduces liability.
Why it matters to the employee:
Offers a simplified investment decision and potentially more appropriate asset allocation, improving retirement outcomes.
Next steps
With a solid plan design established, it’s time to zero in on our next topic in going beyond the regulations: Fee Structure.
