As an avid yoga practitioner, I have personally experienced the many benefits of being flexible while suffering from the pain and limitations of rigidity over the past 20 years. The flexibility benefits also apply to plans 401 (k) and 403 (b).
The Auto plan brought defined contribution plans into the 21st century and brought us closer to replacing defined benefit plans. We had to start somewhere and even the author of the Pension Protection Act 2006, Mark Iwry, A former senior advisor to the Treasury Secretary admits that proposing a 3% forbearance rate is not optimal, but he wanted to be conservative with these new draft plans.
We have learned that a savings rate of 6% or more is required, complemented by the company’s match and automatic escalation, to achieve the 12% to 15% savings rate that most people need to be comfortable in the To retire.
But we also learn how important it is to be flexible and how every action elicits a reaction, just like with yoga. The consistency of a plan has a huge impact on the forbearance rates, while the automatic registration affects the participation rates. Expanding the game can help participants put off more, but few DC Plan sponsors do.
Plan sponsors need to decide how much money they can afford for their match. The most common choice is 3%, which is set as a 50% match for the first 6% of participants. Why not extend this match to 25% of the first 12% to encourage people to save more? Same money, very different results. The downside is that staff have to contribute 12% to maximize their match, which isn’t that terrible.
Abbott Labs was even more flexible with their match, choosing to help younger workers who had student loans and couldn’t contribute, missing out on Abbot’s generous 5% match. The company allowed these employees to receive the 5% match when 2% of their income is used to pay their student loans – – The same amount that other workers had to defer to get the 5% match. Brilliant! Abbott’s move is copied by many other plan sponsors.
Why not go further and allow less highly paid workers to bring the company together even if they are not contributing to the plan or are contributing less? It is the same idea as the match for those who are paying back their student loans. Both programs could hurt discrimination tests as fewer workers with lower pay contribute, but the government may also be flexible on the tests and give the company credit for those workers who receive the game without contributing. And that’s not a problem for 403 (b) plans that don’t run discrimination testing.
Automatic registration is a proven way to increase participation rates. But what if 90% or more of the workers are already on the plan? Why bother? What about high-volume retail or grocery companies that run a lot of low balances? Schedule high-volume sponsors who can wait six months or when sales tend to decline to initiate auto-registration.
The most common standard option is funds on the cut-off date. However, do all employees born within five years need the same asset allocation? Many note keepers offer managed accounts that are more flexible. If the cost is too high, it is recommended that participants move to managed accounts when they turn 50 or when the account balance gets larger.
Finally, what about eliminating the need for bank loans and most hardship withdrawals by providing a sidecar? Emergency savings accounts?
Ultimately, organizations and their employees have a limited amount of dollars to spend on retirement and other benefits. How difficult would it be to recommend the correct allocation to retirement and other retirement programs for every employee, especially when plan sponsors switch to high-deductible health insurance and set up health insurance accounts that offer triple tax benefits?
Ultimately, the industry needs to make retirement income more flexible so that plan sponsors and participants can postpone the guarantee as they keep the records and provide the flexibility that most pensions currently don’t.
Not only does the DC industry, including plan sponsors, need to be flexible when it comes to providing benefits, they also need to consider the individual needs of each employee and offer bespoke solutions based on their needs, resources and benefits when health , Prosperity and retirement grow together in the workplace. Flexibility and customization are required through advice, technology and data.