Addressing the Root Cause of Retirement Plan Inadequacy

Challenge

A higher education plan sponsor wanted to evaluate what steps they could take in helping their plan participants achieve income replacement adequacy. Like many industries, higher education is heavily dependent on a strong workforce to drive organizational goals and to achieve their institutional objectives. Ensuring the financial health of the workforce allows for more secure employees and creates an environment that fosters the healthy growth and development of staff.

The plan sponsor had the following concerns:

  1. The compensation and benefits costs of an aging workforce;
  2. Perceived lack of opportunities in a workforce due to inadequate career development and promotion opportunities;
  3. Poor savings behaviors among young savers;
  4. The impact of heavy loan activity on replacement income adequacy for mid-career employees; and
  5. Lack of knowledge about the retirement process and key decisions that employees need to make before and after retirement.

Like many employers, the concern lay in developiing a retirement structure that delivered strong results without having those results burden the employer by increasing contributions or guaranteeing benefits.

Process

Multnomah Group worked with the plan sponsor to conduct an assessment of the retirement readiness of their population. This study analyzed participant accumulations and savings behaviors for every employee in the plan to determine, both in aggregate and individually, how effective the plan was in driving participants towards generating adequate assets to replace their current income in retirement. The results of that study were as follows:

  • Employees under the age of 40 participated and deferred at significantly lower rates than their peers of similar wage and position over the age of 40;
  • The average participant between the ages of 40 and 60 had $180,000 less in accumulations than would be required to meet their needs in retirement based on their current savings rate;
  • Employees over the age of 60 averaged more than twenty years of service and were contributing at a very high rate; and
  • Loan activity had been increasing at a significant rate and default rates were more than 10%.

The plan was being fully utilized by older employees, but delays in their saving required them to save materially more and work materially longer to achieve their retirement income goals. Based on that analysis, the Multnomah Group reviewed options that would:

  • Remove obstacles to new hire participation;
  • Drive deferral rates to levels estimated to generate adequate income replacement;
  • Reduce instances where participants may sabotage their retirement savings plan through loans and in-service distributions; and
  • Develop an effective education strategy that furthers the goals of the sponsor and the needs of the participants.

The results of that process were important in improving the effectiveness of the plan.

Result

Implemented Automatic Enrollment for New Hires

  • Increased enrollment rate for new hires in the 30 days after hire by 500%
  • Increased the deferral percentage for new hires by 20% over the same age peers pre-automatic enrollment

Implemented Automatic Deferral Escalation for New Hires

  • Achieved 80% acceptance of auto deferral escalation
  • Capped escalation at a level that targeted a total (employee and employer) contribution savings rate of 15% of pay

Modified Loan Policy to Limit Loans to no More than Two

  • Reduced loan instances
  • Eliminated serial loan activity wherein small number of participants borrow additional funds each time the employer makes a contribution to the Plan

Developed an Education Policy Statement

  • Detailed priorities of the education services provided by the vendor
  • Focused education on financial literacy for younger employees and financial planning for older employees
  • De-emphasized investment product education in favor of enhancing education on savings

Provided Income Replacement Estimates for their Employees

  • Estimates included the percentage of their income they were on pace to replace given their current accumulations and savings rate
  • Provided online and in-person financial counseling resources for assisting participants in improving their current income replacement and customizing calculations to account for changes in behavior

These steps in concert have begun to materially change the financial security of their workforce. Changes to savings and investing behaviors rarely happen overnight, but developing plan designs and services that improve the likelihood of participants achieving their goals is an important objective that greatly aids the financial health of both the employee and the employer.

To find out how Multnomah Group can help your organization achieve its goals, please feel free to contact one of our consultants.

Multnomah Group, Inc.
Phone: (888) 559-0159
Fax: (800) 997-3010
www.multnomahgroup.com