Company Retirement Plans

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Prepared by Susan Clifford, CPA– Principal

There are benefits when employees increase their participation in company retirement plans.  The future benefit for employees is a more secure retirement.  At companies with a match, the employees’ immediate benefit is not foregoing the “free-money” they otherwise pass-up.  For highly compensated employees, often including the owners, higher participation among the non-highly compensated increases what they can put into the plan.

But despite the benefits, companies aren’t very successful in encouraging employee participation. Here are some suggestions that might help:

  • The easiest may be to initiate auto enrollment.
    • Employees can still opt out, and some do, but more end up participating than when employees have to opt in.
  • Educate your employees on the benefits of participating in the retirement plan and help them identify ways to start and then increase their contributions.
    • Figure out ways to explain the plan other than a lengthy retirement plan guide.  Make sure they understand that social security was never intended to be the sole support of a retired worker and isn’t sufficient for a comfortable retirement.  Demonstrate the advantage of tax-deferred savings over after-tax savings with charts and examples.  Provide general financial literacy training; topics might include improving your credit score, saving for short, mid, and long-term goals even while you are paying off student loans or credit card debt, understanding how much credit you can comfortably manage.  Then find ways to help them determent how much they will need for a comfortable retirement and how much they must save to get there.  Once they are in the plan, help them understand investment risk and return – most employees are not investing in the stock market on their own and likely do not understand what they need to know to successfully manage their retirement account.  Hold a series of meetings aimed at different age groups so the message can be more focused and thus more meaningful.  Bringing in a recent retiree who used the retirement plan successfully and/or one who didn’t could really serve to bring home the message in a personal way.  And particularly if you give raises to all employees at one time, a general suggestion that they consider using a portion of the raise as to a way to increase their contribution level without reducing their take-home pay might be beneficial.
  • Finally, use the company match.
    • Make sure your employees understand what they are leaving on the table each year if they are not contributing enough to earn the full match.  Communicate with each employee at the end of the year: tell the ones with a full match how much the company contributed; tell ones who contributed but less than the maximum how much the company contributed and what the employee “left on the table”; and tell the non-participants how much “free” money they missed out on.  And consider not increasing your match but changing your match threshold.  If you match 100% up to 3%, considering matching 50% up to 6%.  Or if you match 50% up to 4%, instead match 25% up to 8%.

Employees who don’t save enough for retirement end up scrimping through the last years of their life, relying on family members, or dependent on one or more non-profit and/or government assistance programs.  Everyone, the employee, the family, and society, benefits when employees participate fully in the company retirement plan.

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