Plan Design Ideas to Improve Outcomes for Lower-Income Workers
Director of Retirement Plan Services, M3 Financial
Based on the nature of your business and the varied experience, education and expertise required of your workforce, you may have a portion of lower-income employees. With employers across every industry fighting to win the war for talent, the following plan design ideas can be an effective approach for attracting and retaining lower-income employees. By adding a little flexibility to better accommodate these employees, both employers and employees will see benefits.
Implementing Automatic Options
Research from the Program on Retirement Policy at the Urban Institute in Washington, DC, shows that the best way to get lower-income employees to participate in a plan is to automatically place them in the plan. However, plan sponsors must also consider the effect on low-income employees if it is combined with automatic escalation. If the automatic deferral and auto-escalation rates are too high, they can be particularly harmful to low-income employees who make their deferrals from lower earnings.
One approach employers can use to help lower-income employees save is to defer part of their pay raise automatically into the retirement plan, rather than straight into their paycheck. These employees will still get a slight bump-up in their salary, while also getting a bump-up in their retirement savings. The money saved in their retirement will provide an extra security blanket for the employees’ future.
Adjusting the Match to Encourage Higher Deferral Rates
If employers adjust the plan’s match rate, this can encourage higher deferral rates. The Program on Retirement Policy’s research shows that employees often defer up to the maximum rate required to receive the full match. The higher the level at which the match ends, the more this can get people to contribute. However, plan sponsors wanting to increase low-income employees’ retirement savings by tweaking the match must remain sensitive to setting the threshold so high that they price these employees out. Connect with your M3 account executive to discuss finding the perfect balance based on your workforce.
Offering a Financial Wellness Program with an Emergency Savings Program
The DCIIA’s Retirement Research Center in Boxford, Massachusetts recommends offering a financial wellness program combined with an emergency savings program. Offering this tandem emphasizes the importance of having sufficient savings to cover emergencies and is the most powerful tool available for low- income employees.
Did you know that almost 30% of employees have no emergency savings fund (Life Insurance Marketing and Research Association)? Employees without an emergency fund will struggle to save and may withdraw money from their retirement accounts. Funding an emergency savings account can give lower-income employees a sense of security. Once an employee can establish a solid emergency fund, they will focus on a long-term retirement saving program.
Key Takeaways
If you have a lower-income population among your workforce, implementing certain plan design ideas can help your staff build a solid foundation of financial security and begin focusing on long-term retirement plans. Specific employee benefit plan designs that add flexibility are the key to retaining your workforce. This article addresses solutions that will benefit the employer and employee.
Reach out to your M3 account executive to learn more about how these concepts can fit into your benefit strategy.
Investment advisory services offered through Global Retirement Partners, LLC, dba M3 Financial, an SEC registered investment advisor.
