Diversified Offers Guidance for Effective Plan Design

Diversified is offering a white paper of best practices for ensuring a plan sponsor’s retirement plan is designed to help employees achieve their savings goals.

“Effective Communication Begins With Purposeful Plan Design” urges plan sponsors to spend time reviewing their plan’s design before developing new communication or education materials to ensure all features support the key objectives. It also offers guidance for maximizing every opportunity to shape participant behavior to help employees save for a well-funded retirement. 

Highlights from the white paper include: 

  • Implement automatic enrollment to optimize its benefit. More than half of all plans that auto-enroll employees use a default rate of 3% or less. Don’t follow the crowd. Consider setting a default rate that is at least as high as your current opt-in rate and integrate automatic escalation to improve participants’ retirement readiness over time. 
  • Design employer contributions to maximize plan objectives. Despite studies showing the impact of matching contributions on savings rates, many sponsors default to standard formulas such as a 100% match up to 3% of pay or a 50% match up to 6% of pay. If increasing the average savings rate is a key goal for the plan, consider extending your match to 25% up to 12% of pay. In many plans, the rate at which the match is maximized is the most commonly chosen participant contribution rate, therefore, stretching this incentive will likely result in higher savings rates. 
  • Narrow the number of investment options. Research shows that the number of available investment options is directly related to participation. Plans that offer 10 to 14 funds have the highest participation rates, but as more funds are added,  rates decline. While retirement professionals may appreciate the subtle differences among asset allocation plans, target date funds, and one-decision investing solutions – the average participant does not. For many participants, more options implies more work.
  • Limit plan loans. Eighty-seven percent of all retirement plans offer loans, and 47% of plans offer multiple loans. If your plan is falling short on average balances, loan activity is likely to be at least partly to blame. If improving employee retirement readiness is a business goal for the plan, why not consider a change to plan design to limit or eliminate plan loans? 

To request a copy of “Effective Communication Begins With Purposeful Plan Design,” e-mail RetirementResearchCouncil@divinvest.com.