Setting Up Your Retirement Plan for Cruise Control

Benefits are becoming an increasingly more important factor for people while searching for jobs. I often come across businesses that have a 401(k) or other type of retirement plan, but typically failing to take the time to fine-tune the plan properly to help ensure that employees will be truly prepared for retirement. According to some figures, participants on average should be aiming to save at least 10% of their income into their retirement plan every year. We recommend that participants save between 12-15% of their salary for retirement. It can be daunting for participants to be pro-active enough to set their deferral percentages to where they should be.

Psychologically, it can be hard for participants to force themselves to save money. By some standards, business owners are doing a great disservice by letting employees save less than they should saving. This can set employees up for a rude awakening when they get to retirement. As employees get closer to retirement, they have increasingly less options and flexibility to bolster their standard of living if they fall short of their goals. This often leads to employees continuing to work in some form or reducing their standard of living in retirement, sometimes drastically.

This all isn’t even considering the potentially severe decrease in social security that may come near the end of the next decade. According to ssa.gov, the social security trust fund reserves are projected to become exhausted in 2034. This doesn’t mean Social Security will disappear, but it would only be able to pay about 78% of benefits that are entitled to retired and disabled workers*. The government could end up passing legislation to increase payroll taxes to help offset this loss. Did you know that benefits from Social Security have lost 40% of their purchasing power since 2000? For younger participants, it’s even more important for them to take saving for retirement seriously.

Our goal at RateMyRetirement while working with business owners and plan sponsors is to help them understand the value in setting up their employees for success. By suitable plan design and helping employees understand the power of saving into their plan, it can help to increase the success of their retirement planning. A few simple adjustments to plan design and setup can have a profound impact on helping your participants save for retirement.

Auto enrollment: This plan design feature allows an employer to automatically deduct elective deferrals from an employee’s wages unless the employee makes an election not to contribute or to contribute a different amount. This will help to ensure that your employees will begin deducting some portion of their salary into the plan unless they opt out.

Automatic escalation: This plan design feature automatically increases an employee’s contribution amount by 1% each year up to a specific cap. We have seen many times where participants enroll into the plan but forget to increase their salary deferrals. This will increase participants salary deferrals to a set maximum over time.

Qualified Default Investment Alternative using Target Date Funds: For many participants with a lack of investment experience, deciding where to invest their money can be a daunting and paralyzing task. Setting the default investment to Target Date Funds for participants that don’t choose where to invest their retirement plan funds will help to ensure that your they are in a properly allocated portfolio.

These changes alone can help force your participants to save for retirement while still giving the option to opt out of or changing their contributions. Sometimes, participants need some direction and encouragement through these features to ensure that they are saving for retirement. By reviewing how your 401(k) is implemented and overall plan design, a few simple changes can help make a real impact towards your employees retirement savings.

Interested in having your 401(k) plan reviewed for your business? Reach out to me below:

Alexander J. King

(321) 947-8218

[email protected]

References:

https://money.com/social-security-cola-inflation-report/#:~:text=That's%20because%20cash%20benefits%20from,year%20ending%20in%20March%202022.

*Ssa.gov/thereforme

Disclosure:

Any opinions are those of Alexander J. King and not necessarily those of Raymond James.?Expressions of opinion are as of this date and are subject to change without notice.?The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.?The information contained here does not purport to be a complete description of the securities, markets, or developments referred to in this material.?Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.?Past performance may not be indicative of future results.?Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. D?01(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Matching contributions from your employer may be subject to a vesting schedule. Prior to making an investment decision, please consult with your financial advisor about your individual situation.