During plan design discussions, we frequently ask Committees the same question, “What is the company’s goal in offering a retirement plan to your employees?” An often heard and easy response is, “to provide a benefit to our employees.” While that answer may serve as an organization’s “why,” it doesn’t necessarily satisfy the “what.” Is the Plan offered to provide a competitive compensation and benefits package to recruit or retain employees, help employees retire or help employees adequately save? These represent distinct goals and each would steer a Committee in a different direction as it relates to plan design, match structure, vesting schedule, eligibility, etc. Once the Committee defines the goal and ideally incorporates into the Investment Policy Statement (IPS), it becomes a guiding objective for the Committee and something far more measurable than simply offering a benefit to employees.
What’s Your 401k Plan’s Goal?
If the primary goal of your organization’s Plan is to facilitate recruitment or retention of quality employees, how does that translate in the Plan? The match or other employer contribution then becomes a key focus. Establishing a competitive match structure for your industry, as well as one your CFO can support, is a critical step. A richer match structure versus competitors could help attract the talent your organization desires. Furthermore, if retaining talent is equally paramount, perhaps a 3-5 year cliff or graded vesting schedule will entice employees to stay at the company longer to avoid forfeiting the match dollars. Alternatively, if the organization operates in a high turnover industry, and you aim to attract top talent for only 2-3 years, immediate vesting may produce a greater impact. Ultimately, determining which plan features are the best investments for both the organization and participants is far easier when the goal is quantified.
An organization more focused on preparing employees for retirement, also known as “retirement readiness”, may be concerned with different plan features than the previous example. Education and guidance on financial planning and income replacement may be spotlighted. As such, promoting and even subsidizing the cost of advice or a managed account offering may be a more appropriate use of Plan Sponsor dollars versus offering a generous match. Perhaps partnering with a recordkeeper that offers one-on-one financial planning meetings for participants is more important than a vendor with a cutting edge participant website. A Plan Sponsor concerned with retirement readiness and a younger workforce might consider education on the topic of budgeting to ready participants for long-term retirement saving. Again, no decision is better than the other. Providing participants with the tools to understand their specific retirement needs and how to achieve those goals should drive Plan Sponsors’ decisions.
So how does a Committee define the goal for offering a retirement benefit to their employees? Introspection into employee demographics as well as the organization’s culture should offer several clues. A Committee might feel paternally compelled to educate participants on budgeting and savings but those initiatives might not be as relevant for a population nearing retirement and requiring divestment advice. In another example, adding an automatic deferral increase structure to increase participants’ savings might prove prohibitive for hourly employees living paycheck to paycheck. Establishing appropriate goals tailored to your Plan’s population not only gives the Committee direction, but can result in a greater positive impact to participants.
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Once established, adding the primary objective to the Plan IPS only further reinforces for the Committee the meaningful outcomes it should seek. Particularly with frequent Committee turnover, incorporating a goal into the IPS also encourages continuity of the Plan’s direction while remaining amendable as the organization’s goals evolve. Next time your Committee reviews the Plan’s IPS, consider expanding the “Purpose of the Plan” section to include the Plan’s “What,” its goal, as well as the “Why.” For assistance with the development of your Plan’s objectives and its application to plan design, please contact HighMark Wealth Management.