By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement PlansPrint This Post
Addressing the Retirement Savings Gap Remains a Focus of National 401(k) Day
The month of September is often connected with the celebration of Labor Day, a holiday to honor and recognize the American labor movement and the contributions of laborers to the development of the United States. But over the past several decades, September has also included the celebration of National 401(k) Day which is scheduled for September 11 and is designed to promote retirement savings education. The Profit Sharing Council of America (PSCA) created National 401(k) Day in 1996 and chose the date so that employees could “start the week with Labor Day and end the week with Retirement “.
Yet despite the many advancements in the retirement plan marketplace in recent years designed to foster greater retirement readiness, including broader plan features and more robust investment alternatives, there continues to be a retirement savings gap for many employees. Surveys indicate that many business owners, particularly small business owners, are still hesitant to sponsor retirement programs like 401(k)s due to perceived cost and administrative headaches. * Consequently, only about 52% of private sector employees participate in a workplace retirement plan. **
However, there are some strategies that business owners and employees can utilize to help reduce the retirement savings gap and make the goal of retirement a reality. For example, an increasing number of business owners are looking to design their retirement programs to assist employees in meeting their retirement objectives by incorporating features such as:
- Automatic enrollment of new employees into the 401(k) plan
- Establishing a default salary deferral rate for new employees
- Establishing an automatic escalation provision to annually increase employee salary deferrals
- Establishing a default investment selection for new employees in a diversified investment option
- Eliminating or restricting plan loans to limit employee ability to access assets before retirement or separation from service. Many plans may still offer a hardship withdrawal provision.
Another benefit of these plan features is they effectively help employees put their retirement savings on “auto pilot” creating good retirement savings habits and increasing their opportunity for an improved financial future. As an additional bonus, the recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act provided some helpful guidance and tax incentives for business owners that elect to incorporate some of the features highlighted above in their retirement plans. The SECURE Act also included provisions that could shortly provide some relief to small business owners by allowing them to join pooled retirement plan arrangements that might lessen complexity and make them more affordable.
There are also some best practices that employees can utilize to help improve their chances for retirement readiness, such as:
- Start contributions early – it’s never too late to start saving for retirement, but the key to maximizing retirement savings is by starting early.
- Take advantage of matching contributions – many 401(k) plans are designed to include a matching feature. If available, participants can supercharge their retirement savings by taking advantage of any employer matching contributions.
- Select personally compatible investments – retirement plans often allow participants to select from a menu of investments that create an investment portfolio that aligns with their personal risk and tolerance levels.
- Avoid early withdrawals – premature withdrawals from a retirement plan can result in expensive fees and tax penalties for a participant.
- Check-in periodically – although retirement plan assets are generally considered long-term investments, remember to monitor these investments as you go and make adjustments as needed.
National 401(k) Day reminds us that both business owners and employees can play an important role in shrinking the retirement savings gap and improving retirement readiness by incorporating key strategies and best practices that can lead to better financial outcomes. Talk to your retirement plan provider to confirm the plan design features available for your retirement plan and consult with your legal and/or tax advisor before making any changes.
*Empower Institute (2018)
**American College of Financial Literacy
Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.