Our Thoughts

401(k) Design: How to Help Employees Stop Wishing and Start Investing

Take it from a pro who knows: Offering your employees a retirement saving plan “is one of the greatest contributions you—their employer—can make.” 

So says Larry Adams, CPFA®, AIF®, partner and senior advisor at FJY Financial. With more than 30 years of experience in the financial industry, Adams’s professional mission is to ensure that entrepreneurs who run small businesses understand how to help employees achieve financial independence through retirement planning. 

To that end, his ebook401(k) Design to Help Employees Stop Wishing and Start Investing, offers practical advice on how to set up a well-run plan, encourage employee participation, and meet your fiduciary responsibilities. 

The Employer’s Duty

Why is it so important for employers to step up? America has a retirement crisis. Adams cites the following sobering statistics from the Government Accountability Office: 

  • 29% of Americans 55 or older have neither a retirement nest egg nor a pension plan. 
  • Americans between 55 and 64 have an average of $104,000 in savings. That amount would generate $310/month if turned into a lifetime annuity. 
  • Americans between 65 and 75 have an average of $148,000 in savings. That amount would generate $649/month if turned into a lifetime annuity.

Many workers don’t understand the fundamentals of retirement saving, says Adams. As their employer and leader, “it should be part of your job to make sure they have enough money to provide for themselves when their work-life ends.”  

The Savings Head Game

Misconceptions and wishful thinking abound when it comes to retirement savings. Knowledge, combined with effective strategies, can dispel myths and show people the value of a 401(k). Here are a few examples of Adams’s game plan for getting employees on board: 

The Rule of 72

This is an easy-to-understand set of formulas that explain how compound interest can work in employees’ favor… 

72/interest rate = the time it takes savings to double 

…and how quickly inflation can erode a portfolio… 

72/inflation rate = the time it takes for a portfolio to lose half its value 

Many 401(k) websites calculate income replacement ratios. By incorporating the Rule of 72 into calculations, employees can gauge how far their current savings would go in retirement and how much more they may need to make sure inflation doesn’t erode their retirement lifestyle. 

 Social Security Reality Check

Adams predicts the financially challenged Social Security system will become an income means-tested program that considers investment earnings when calculating how much a retiree receives. It’s uncertain how heavily workers can rely on Social Security payouts in retirement. 

In the meantime, he offers a free Social Security Calculator Report, so retirees can use a benefits strategy that could generate hundreds of thousands of dollars in additional benefits over a lifetime. 

The 401(k) Emotion

Human emotion often causes people to make illogical or uninformed investment choices that sabotage their financial interests, notes Adams. Automating employees’ retirement process will encourage them to increase savings rates, improve investment decisions, and solve the income replacement challenge.  

He calls it Auto5 (Auto to the fifth power): 

  • Automatic Enrollment – Enroll workers within 30 days of their start date with the onus on employees to opt-out. 
  • Automatic QDIA – Notify employees they’ve been enrolled in your company’s Qualified Default Investment Account (QDIA). This is an investment fund or model portfolio designed to produce long-term appreciation through a mix of equity and fixed income exposure balanced by the investor’s age. 
  • Automatic Escalation – Adams contends that the most critical auto feature is increasing the percentage of income funneled into employees’ 401(k) as their salary rises. 
  • Automatic Re-enrollment – Workers would have to choose to opt-out of your 401(k) and QDIA adjustments during open enrollment periods. 
  • Stretch Match – Most employers match 50% of an employee’s 401(k) contribution up to 6% of the worker’s gross pay. Adams suggests a 50% match up to 2% of gross pay and a 25% match on the next 8%. This encourages employees to save at least 10% of their pay, which is the minimum that Adams says is needed for a secure retirement. 

Adams’ ebook includes more approaches to educating your employees about retirement planning and encouraging engaged participation. 

A Sound Program for Employee Success

When you set up your company’s 401(k) plan, you have a fiduciary responsibility, meaning you must do what’s in your employees’ best interest, counsels Adams. To avoid unwanted stress, his ebook includes information on meeting compliance deadlines, tracking investment performance, and keeping fees reasonable, among other topics. Subjects include: 

  • Whom to hire when you need outside help with fiduciary duties. 
  • How to create a 401(k) that is robust and diversified without offering so many choices that employees feel intimidated about making informed decisions. 
  • Why auto rebalancing is a key to portfolio performance. 
  • Why fees affect returns and how to control them (hint: lower fees don’t always mean higher returns). 
  • How workers can leverage other people’s money (yours, Uncle Sam’s) in retirement. 

Are you using the right processes, systems, and techniques to responsibly manage your company’s retirement plan? Are you doing everything you can to ensure your employees feel confident that they will have enough money to retire and pay for all the things on their bucket list? 

Download 401(k) Design to Help Employees Stop Wishing and Start Investing and get started today!