Retirement Plan Design Trends: Retirement Preparation Begins with Thoughtful Plan Design
McCallen, Joan, Public Management
As economic factors and market conditions continue to improve, public sector employers are exploring ways to create retirement plan solutions that will help employees better prepare for retirement. How you design your plan and educate public employees who participate in the plan are important factors in retirement planning and retirement readiness.
Plan sponsors are taking several approaches to assist participants, including adopting automatic enrollment and escalation plan features, simplified investment offerings, guaranteed lifetime income options, and targeted educational resources.
Automatic enrollment and automatic escalation. The auto-enrollment feature, in which a new employee is provided notice and then enrolled into the retirement plan (but can later opt out), provides a springboard into the routine of saving regularly for new employees who may need an impetus to get started saving for retirement.
While a typical target auto-enrollment savings rate is 3 percent, (1) employers can choose an initial rate that is higher or lower. The auto-escalation feature allows participants to select a percentage or amount by which they would like to periodically increase their retirement contribution deferral and have their contribution deferral increased automatically over time.
Combined, the auto-enrollment and auto-escalation features may help better position employees to accumulate savings to complement their pension plan or replace a portion of their preretirement salaries.
Investment options and services. Studies have shown that too many investment choices may discourage participants from enrolling, delay enrollment, or have under- or over-diversified investment portfolios.
In addition to offering a manageable number of funds, plan sponsors can further simplify the process of enrolling and selecting investments by making target-date funds (2)--which incorporate a diversified asset mix, (3) automatic rebalancing, and a shift toward a more conservative asset allocation as the participant grows older--as part of their investment offerings.
Additionally, investment advisory services, such as managed accounts, offer participants the option to turn over the decision-making to a third-party investment professional.
Lifetime income. Yet another investment option, which may be particularly appropriate for participants nearing or entering retirement, is a lifetime income fund. These funds are typically structured as a balanced mix of underlying equity and fixed income funds, with an insurance company guarantee (for which an additional fee is charged) that provides for lifetime retirement income.
The lifetime retirement income payment is typically established as a percentage of a participant's income base or high-water mark, which is based on participant contributions and fund performance that is valued each year on a specific date (i. …