Demographics and Your Retirement Plan

Having a firm grasp of your firm's demographics can help you (and your financial professional) devise an appropriate plan design that can appeal to and attract all employee segments. Because retirement savings plan participation tends to increase with income and age, plan sponsors can use certain plan design options to attract lower-paid and younger employees who are the least likely to participate in the plan. What's more, adding plan design features that are appealing to other employee demographic groups can help attract and retain those employees.

Tailoring Design Elements

Plan sponsors can tailor specific plan design elements based on employee demographics. For example, if a workforce includes a large group of lower-skilled and lower-paid employees who find it difficult to make retirement savings a priority, the plan sponsor might modify the formula for its matching contributions to encourage these individuals to participate in the plan. In this case, replacing a matching contribution of 50% of the first 6% of pay with a match of 100% on the first 3% of pay stands a better chance of getting the attention of lower-paid employees. The actual matching contributions may be the same, but employees will have an easier time understanding -- and thus appreciating -- the 100% match formula.

Here are some other plan design elements that can be used to meet the needs of specific employees:

  • Eligibility: A key decision in plan design is when employees will become eligible to participate in the plan. In many cases, plan sponsors aim to get employees enrolled in the plan as soon as possible. However, if a plan sponsor experiences high turnover among certain employee segments, delaying plan eligibility for a certain period of time can help keep plan administrative costs in line.
  • Automatic enrollment: Because retirement savings plan participation rates tend to rise with employee income levels, plan sponsors with a large contingent of lower-paid workers might consider implementing an automatic enrollment feature to get more of these individuals into the plan.
  • A Roth 401(k) feature: Although the Roth 401(k) is a relatively new feature, initial research suggests that it is quite attractive to younger employees. The Roth 401(k) allows individuals to make taxable contributions to the plan with the promise that those assets can be withdrawn in retirement tax free. It makes sense that younger employees who tend to be in a lower tax bracket would take advantage of this feature, especially if the plan sponsor provides targeted education about its benefits. This feature is also likely to appeal to higher income employees who earn too much money to qualify for a Roth IRA.
  • Investment options: Finding the right number and type of investment options to offer through the plan is a bit of a balancing act. Too many options or options that are too sophisticated can intimidate certain segments of the employee population who are not used to making investment decisions. However, more financially savvy employees who want maximum control and choice may not be content choosing between just a few fund options. Your financial professional can help you put together a menu of options that is right for your employee base.
  • Loans and hardship withdrawals: For some employee segments, particularly lower-paid employees, the flexibility to withdraw money in certain circumstances can eliminate a major deterrent to participation. Therefore, implementing and communicating plan loan and hardship withdrawal features can be another way to increase participation levels.

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