Unintended Effects on Plan Contributions

The second key element in “Defining a Retirement Plan Standard of Excellence” is Inspiring participants to save for retirement.

There are several methods through which this can be accomplished: automatic enrollment, auto escalation, financial wellness programs, investment advice, and managed accounts.  Statistics prove the primary reason participants are not on track to reach their retirement income replacement goal is because they are not saving enough.

The Vanguard white paper we’ve linked below outlines how changing the matching formula to encourage a higher salary deferral rate could be a good alternative to automatic enrollment or automatic escalation features. Be aware, if the plan is utilizing one of the safe harbor options, the matching formula will need to be designed within the safe harbor regulations. Otherwise the plan may be subject to non-safe harbor discrimination tests.

In conclusion, this is a great time to begin discussions with plan sponsors regarding this concept so changes can be implemented and communicated to participants going into a new year.  In addition, the IRS restatement cycle has begun.  This requires all 401(k) plans to be restated which creates a perfect opportunity to make changes and enhancements.