N STRATEGIES FOR RETIREMENT PLANS
This section of The Rea Report is dedicated to providing readers with a glimpse behind the curtain at Rea & Associates . To read past articles in this series , visit www . reacpa . com / business-of-our-business .
also finds younger workers are likely to put off saving for retirement altogether or start contributions at too low of a level to lead to adequate preparedness , mistakenly believing they can “ catch up ” in the future . In the meantime , more experienced workers are unlikely to increase retirement plan contributions over time , failing to consider how inflation rates might ultimately impact their savings .
Auto-Escalation Strategies and Us : The Rea Strategy
Auto-enrollment and auto-escalation features for retirement accounts take the guess work out of preparing for a secure retirement , for employees and business owners alike . In fact , here at Rea & Associates , we use automatic features in our own plan design strategy to encourage our employees to save for retirement from day one . In other words , unless an employee proactively opts out , they will automatically be enrolled in our 401 ( k ) program , and their contributions will automatically escalate by 1 percent each year until their contributions reach 10 percent of their salary . Our first-hand experience has reinforced our belief in the power of automatic enrollment and escalation options for retirement planning . In the six years since our adoption of auto-escalation strategies , our firm-wide average deferral rate has risen nearly 5 percent , growing from a pre-escalation average of 5 to 6 percent to an impressive 10 percent today .
But , don ’ t just take our word for it .
A new report , Automated Enrollment : The Power Of The Default , released by The Vanguard Group , revealed employers who utilize automatic enrollment features are likely to see participation rates triple to around 91 percent among new hires , compared to the 28 percent participation rates reported by companies without automatic enrollment features .
Moreover , the study revealed automatic features may also increase the likelihood of deferral rate increases , as well as default investment fund retention among participants . Even of the 37 percent of participants remaining in plans without automatic enrollment after three years , more than nine out of every 10 participants remained in the plan at ( or above ) the initial default deferral rate . In short , auto-escalation strategies increase the annual contributions employees make across the board , even for employees that chose to opt out .
Finding The “ Sweet Spot ”: How to Decide Where to Set Deferral Rates
Over the years , employers have sought to increase the baseline deferral rate beyond the traditional standard of 3 percent annually – a conservative baseline that might not adequately prepare employees for retirement . Fortunately , employees are open to increasing their initial baseline contribution . Vanguard ’ s research found that a sponsor ’ s plan could offer initial deferral rates even as high as 6 percent , and the participation rate among employees automatically enrolled in the plan with income between $ 15,000 and $ 29,999 would still come in at around 85 percent .
This is great news for employers who have considered implementing auto escalation strategies in the past and have questioned where to set rates to ensure that employees will not only participate in the program , but that they will contribute enough to safely retire on time . At Rea & Associates , our automatic increase provision is 1 percent , up to a “ sweet spot ” goal of 10 percent . By timing automatic increases to fall concurrently with annual salary increases , we ’ re able to encourage greater savings contributions , as the increased deferral is less noticeable as a reduction of take-home pay . This approach has proven incredibly successful for us – and more importantly , our employees – as we continue to prepare our employees for retirement .
We ’ re Here to Help
Successful retirement planning isn ’ t an elusive recipe , or a lucky guess . Don ’ t wait to take the first steps to help better prepare your employees to enjoy the fruits of retirement . If you ’ re considering adopting auto escalation retirement strategies in your business , Rea & Associates ’ retirement plan design and administration services team can help . If you ’ d like to learn more about auto escalation strategies and how we can help create a plan for your business , give me a call today .
By Paul McEwan , CPA , MTax , AIFA ® , principal & director of benefit plan services , paul . mcewan @ reacpa . com ( New Philadelphia office )
55 PERCENT of all Americans are at risk of being unable to retire comfortably given their current retirement preparations .
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The National Retirement Risk Index , developed and monitored by Boston College 17