By Scott Albraccio
Employees today have been inundated with statistics about outliving their 401(k) savings, and warnings that they need to start saving as much as they can, as soon as they can, to make sure they have enough to carry them through retirement. Life expectancy has increased as well, to 85 for men and 87 for women based on the most recent IRA actuarial tables, and this is also putting pressure on people to save.
There is an ongoing war for talent — employment levels are still low compared to pre-COVID numbers — and it is more important than ever for employers to offer a competitive benefits package to current and prospective employees.
In this blog, I’ll share the most common pitfall employers face in setting up and managing their retirement plans, and offer insights on how you can create a competitive plan that will attract and retain employees.
Eligibility waiting period
I have had the opportunity to speak with many companies’ HR executives and review their retirement plans, and there’s one pitfall I see over and over again: the 12-month waiting period for eligibility.
This, unfortunately, is no longer acceptable to new hires. Any potential employee evaluating his or her employment opportunities is going to want to start saving for retirement as soon as possible.
Employers are more concerned about their employees’ long-term well-being, too. Some are scaling back the waiting period for retirement eligibility, allowing new employees to more quickly start saving and take advantage of employer matches. I’ve been advising companies to set a waiting period of no more than three months.
Auto-enrollment and auto-escalation
I see more and more plans being amended to implement auto-enrollment and auto-escalation for new participants. As the name suggests, auto-enrollment automatically signs up an employee to make a 3% contribution to a retirement plan while auto-escalation increases this share by 1% every year to a maximum contribution of 10%.
There are opt-out clauses if a participant does not want to contribute, and they have 90 days to request a refund of their deposits. This acts as a protection for the plan sponsor (the plan’s fiduciary) so the employee cannot accuse the sponsor of not making the plan available.
Safe harbor match
Not offering a competitive “safe harbor” match can make you less attractive as an employer to
prospective employees. The basic match has always been 100% of the first 3% and 50% of the next 2% of compensation, for a total maximum employer contribution of 4%. I see more employers moving to 6%, in addition to a discretionary profit-sharing contribution.
The safe harbor match may also be an issue for your Highly Compensated Employees (HCEs). If your HCEs receive a refund of deferrals at the end of the year, you are most likely violating the testing your Third Party Administrator (TPA) is conducting.
Qualified plans need to provide balance between your lower paid workers and your HCEs. There must be equality between the two groups representative of the percentage of savings vs. earnings.
Depending on your type of business (small closely held or large employer) you have tax advantages related to the type of retirement plans you fund, defined contribution vs. defined benefit. You should consult with your TPA, CPA and financial advisor as to the best option given your situation.
SECURE ACT 2.0
The newly passed SECURE Act 2.0 (Setting Every Community Up for Retirement Enhancement) will mandate some of these options for all new plans starting in 2023 and 2024. It also offers tax credits to employers for matching contributions in newly established plans, and rewards participants with additional incentives.
The team at Grey Ledge Advisors can help ensure that you set up the best retirement plan for your current and future employees. Give us a call today at 203-458-5414.