What is an employer sponsored retirement plan?

A business may offer its employees the option to invest for their individual retirements through a defined contribution plan that is owned or “sponsored” by the company and often managed by a retirement plan servicer provider. Participating employees may select how much they wish to contribute, and that amount will be deducted from each paycheck and invested in their employer-sponsored retirement account.

Do you own a business? An employer-sponsored retirement plan can be an effective strategy to assist your employees in saving for retirement, while helping your organization attract and retain employees.

As an employer, you should carefully consider and implement the plan features that best support your employees’ retirement savings efforts. Retirement plan committee decisions around the setup and structure of the employee benefit retirement program can have a significant impact on the retirement preparedness and financial security of your workforce for decades to come.

Below, we’ll explore five different plan options and the potential advantages of each.

Auto-enrollment

Auto-enrollment is a plan design option that allows you as an employer to automatically deduct a set percentage from your employee’s wages each pay period to contribute to the employer-sponsored retirement plan. With auto-enrollment, employees are automatically enrolled in the employer-sponsored retirement plan even if they take no direct action. Your employees do, however, have the option to elect to contribute a different amount, or not to contribute at all.

Automatic enrollment can encourage retirement saving for new and non-participating employees who might not otherwise consider the employer-sponsored plan as a part of their retirement savings strategy. Historically, the industry consensus was to auto-enroll employees at the IRS-mandated minimum 3% contribution rate. However, many firms now enroll participants at 6%, as evidence suggests 6% is a manageable threshold for most individuals and typically results in minimal opt-outs from auto-enrollment.^1,2 As a plan sponsor, you should work with other retirement plan stakeholders  and senior leaders to set an auto-enrollment contribution rate that is aligned with your organization’s strategy and resources.

Auto-escalation

This structure allows you as an employer to automatically increase elective contributions from an employee’s wages to the employer-sponsored retirement plan, often structed as incremental annual increases over a number of years. Auto-escalation is typically structured as a 1% annual increase that caps out at 15%.³ Your employee can elect to not contribute or override the auto-escalation and make their own adjustments to the contribution rate. Auto-escalation can be an impactful tool to increase employee annual contribution rates to a level that helps participants progress toward their retirement savings goals.

Offering a company match

When employers offer a contribution matching benefit, it means they contribute to their employee’s retirement savings plan up to an established limit based upon the amount the employee contributes. If you go this route, your employees will be incentivized to increase their retirement contributions in order to receive the full employer contribution match. This, in turn, helps them harness the power of compounding and grow their retirement savings balances.

There are various contribution matching structures that you as an employer can consider, such as a dollar-for-dollar match or various percentage match formulas (e.g., you will match 100% of your employee’s contribution up to an X% cap). The array of matching structure options gives you, the sponsoring organization, flexibility to select an option that aligns with your company’s priorities and resources. An added benefit and planning consideration for employers is that matching contributions made to an employee’s account may be tax deductible.⁴

Employee education

Research shows that a lack of employee understanding of their employer-sponsored benefits undermines retirement plan participation.⁵ Having a robust employee education program ensures awareness of available benefits and can therefore empower your employees to better understand the available investment options within the retirement plan, increase their recurring contributions and ultimately save more for retirement. As an employer, you may want to consider offering a range of financial planning educational resources to help your employees formulate a personalized retirement savings plan and navigate other major personal financial decisions (e.g., saving for a home, a child’s education, etc.).

Benchmarking

Plan benchmarking involves completing a review of all service providers supporting your organization’s retirement plan at least every few years to ensure you are receiving the expected level of customer service, that your fund performance is up to par and that your current plan fees are market competitive. Minimizing plan fees to the full extent possible benefits your employees because it enables the ability to increase their plan balances and enhance the growth potential of their retirement savings over time. Retirement plans can have a various number of structures and fee arrangements, so you’ll want to review your options and evaluate the fees and expenses, as well as the services related to your retirement offering. Apart from reviewing fees, we also recommend reviewing your plan’s current design, investment offerings and participant outcomes, as that aligns with fiduciary best practices.

The bottom line

Careful structuring of your organization’s retirement plan, along with clear communication of the plan offerings, may benefit your employees and your company.

Auto-enrollment and auto-escalation can both boost employee participation, while employer matching contributions can incentivize increased contribution rates for employees and benefit you as the employer in the form of tax deductions. Plan offerings are flexible and should be calibrated to your organization’s specific goals and resources.

As your workforce demographics change, it is important to periodically review your plan with benchmarking to ensure it is still meeting its intended goals.

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