Retirement plan design is a critical aspect of organizational management, directly affecting both the financial security of your employees and the overall success of your business. Here’s an overview of some key elements of retirement plan design, how they can impact your organization, and best practices for success.

Eligibility 

Legally, a plan must allow employees to participate in a qualified retirement plan after meeting the following requirements:

• Age 21
• One year of service (defined as working 1,000 hours or more in 12 mont

Employers may allow employees to participate in the retirement plan earlier than these requirements (such as immediately) – which makes it a more attractive benefit to potential new hires. However, if an employer tends to have higher turnover, restricting participation to employees who have reached particular milestones—three months, six months or one year of service—might make sense. 

Enrollment and Contributions

Another element of retirement plan design is the enrollment process and contribution structure, which typically includes the following:

• Employee Contributions. Employee plan participation is voluntary, with varying levels of employee contributions.

• Employer Contributions. Employers may match employee contributions up to a certain percentage, provide fixed contributions, or offer profit-sharing arrangements. A generous match can serve as a strong incentive for employees to participate and maximize their savings, enhancing their overall appreciation of the plan.

The introduction of automatic features has had a significant impact on retirement savings behavior and outcomes. Incorporating automatic features in your retirement plan design is something that is likely to appeal to talented and skilled employees you wish to attract and retain. According to Vanguard’s “How America Saves 2024” report, the positive effects include:

Increased Participation: Plans with automatic enrollment have participation rates of about 94%, compared to 67% for plans without this feature.

Higher Savings Rates: Employees automatically enrolled in their plan have an average total contribution rate of 12.7%, versus 10.3% for those voluntarily enrolled. This increase is attributed to the automatic, periodic increment in contribution rates which helps participants save more consistently over time.

Improved Asset Allocation: Default investment options have significantly improved the asset allocation of participants who might otherwise have left their contributions in cash or overly conservative investments.

Vesting Schedules

The vesting schedule of employer contributions is another key aspect of retirement plan design. Workplace retirement plans typically implement one of these types of vesting schedules:

• Immediate Vesting. Employees own all employer contributions immediately.

• Cliff Vesting. Employees must work for a specific period before they are fully vested.

• Graded Vesting. Employees gain ownership of employer contributions gradually over a period.

Employers may use a vesting schedule as another strategy to support employee retention in their organization. When employees leave before becoming fully vested, they leave behind part of any matching or other types of employer contributions. This can be either a larger or a smaller incentive to stay, depending on the amount at stake. Rewarding loyalty by stretching out the vesting period could help you boost retention.

Roth Account

According to Vanguard’s 2024 report, 82% of employers offer a Roth 401(k) option in addition to a traditional 401(k) option. However, just 17% of employees contribute to the Roth. Including a Roth 401(k) option in your retirement plan design will make it more attractive and can provide real value to many employees – particularly younger workers. Iimplementing an education campaign focusing on Roth versus traditional options is a great way to promote awareness and give your employees an informed choice. They’ll value the forward thinking concern about their financial future.

Investment Options

One of the most important elements of retirement plan design is creating and managing a broad and diverse menu of investment choices to fit the needs of your workforce. To meet the varied needs of your employees, consider offering both of these categories of options:

A Broad and Diverse Menu of Mutual Funds. Offering a variety of well-vetted and low-cost mutual funds, including index funds and actively managed funds, allows employees to tailor their portfolios according to their risk tolerance and retirement goals.

“Help Me Do It” Investment Solutions. Target-date funds, risk-based asset allocation funds or managed account solutions can serve as options for employees who are less investment-savvy and would like help and guidance making their investment selections.

3 Best Practices For Effective Retirement Plan Design

1. Focus on Employee Education and Communication. Comprehensive education and clear communication about the retirement plan options, benefits, and investment strategies are essential. Offering regular workshops, one-on-one counseling, online resources, and easy-to-understand materials helps employees make informed decisions and take full advantage of their retirement benefits.

2. Regular Plan Review and Adjustments. Regularly reviewing and adjusting the retirement plan ensures it remains competitive and aligned with industry standards. Soliciting employee feedback can provide valuable insights into necessary changes.

3. Leverage Technology. Implementing user-friendly technology platforms for managing retirement plans can streamline administration and enhance the employee experience. Tools for tracking and managing contributions, monitoring investments, projecting retirement income, optimizing Social Security benefits and accessing other educational resources are particularly valuable.

Final Thoughts

A well-designed retirement plan can significantly impact an organization's ability to attract and retain talent, enhance employee morale and productivity, manage costs, and foster a positive organizational culture. By incorporating best practices, organizations can create a retirement plans that not only benefit their employees but also contribute to their overall success.

4 WAYS RETIREMENT PLAN DESIGN CAN POSITIVELY IMPACT ORGANIZATIONS

1. Talent Attraction and Retention. A robust retirement plan design can serve as a significant differentiator when trying to attract and keep top talent, especially in competitive job markets.

2. Employee Morale and Productivity. Knowing they have a retirement plan design that supports retirement readiness can help alleviate employee financial stress, leading to increased focus and productivity at work.

4. Cost Management. While offering a competitive and generous retirement plan design represents an ongoing expense for employers, it can also provide long-term financial benefits by enhancing employee loyalty, reducing turnover and the associated costs of hiring and training new staff.
5. Organizational Culture. Offering retirement plans that cater to diverse employee needs (such as different income levels, generations and career stages) fosters an inclusive culture. In addition, encouraging long-term financial planning promotes a culture of stability and security.