Effective Retirement Plans
Retirement plans are evolving to enroll employees sooner, retain them longer, and offer reliable income options for retirement. Key design elements include immediate enrollment, lowering eligibility age, and providing a variety of investment options for converting savings into retirement income.
Modernizing Defined Contribution Plans
Originally supplemental, defined contribution (DC) plans are now primary retirement savings vehicles. According to Holly Tardif of WTW, plan designs must reflect this shift. Features like vesting schedules, eligibility, and auto-escalation of contributions are crucial. With the SECURE 2.0 Act, integrating financial resilience and retirement income into plans is vital.
Case Studies in Effective Plan Design
Successful plan sponsors are adopting innovative features:
- City of Dunwoody, Georgia: Lowered eligibility age from 21 to 18 for 401(a) and 457(b) plans, allowing contributions from the first day of employment.
- Michigan Office of Retirement Services: Raised auto-escalation ceiling to 15%, aiming for participants to replace 70% of pre-retirement income.
- Wayne-Sanderson Farms: Combined three retirement plans into one, added auto-enrollment and auto-escalation, with a 100% employer match for the first 4% of contributions.
Trends in Retirement Plan Features
Auto-enrollment is more prevalent in larger plans, with 70% adoption in plans with $1 billion or more in assets. Employers are considering options like lifetime income and guaranteed income features based on their plan’s philosophy. Some view DC plans as accumulation vehicles, while others see them as integral to providing secure retirement income.
Addressing Social Security and Decumulation
Educating participants on Social Security benefits and offering systematic withdrawals are key steps in transitioning to retirement income. Providers are developing products like in-plan annuities within target-date funds (TDFs) to generate guaranteed income. However, sponsors must be cautious of potential pitfalls and ensure plan documents allow features like systematic withdrawals and partial distributions.
Future Directions
As demand for retirement income solutions grows, recordkeepers and asset managers are expected to launch more products. Plan sponsors should focus on modernizing plan documents to include features like systematic withdrawals, ensuring participants can convert their savings into a reliable income stream. This approach will help meet the diverse needs of participants and support them in achieving financial security in retirement.
