Key Points:
- Low-income workers, women, and people of color tend to have less access to retirement plans and accumulate fewer retirement plan assets.
- To address these disparities, three primary methods are proposed: automatic plan design features, creative matching contribution formulas, and innovative education strategies.
- Automatic enrollment, minimum contribution levels, and stretch-matching can improve retirement outcomes for employees.
- Comprehensive financial education and enhanced employee communications are crucial for increasing participation in retirement plans.
Despite commitments to help employees save for retirement and achieve diversity, equity, and inclusion (DEI) goals, many employees, especially low-income workers, women, and people of color, remain underprepared for retirement. To address these disparities, three primary strategies can be implemented.
The Current Retirement Landscape
Defined contribution (DC) plans, such as 401(k) plans, are common retirement savings vehicles for US workers. However, statistics show that these plans are not benefiting all demographic groups equally. Lower-income employees have lower access to and participation in DC plans. Additionally, there is a significant gender gap in retirement income, with women having a lower median household income after age 65 compared to men. Racial and ethnic disparities also exist, with households of color having lower levels of access, participation, and average balances in retirement plans.
1. Automatic Plan Design Features
Automatic enrollment is a proven method to increase retirement assets. It involves automatically enrolling new hires in their employer’s DC plan at a pre-set deferral rate unless they opt out. This helps overcome knowledge and inertia barriers that prevent employees from saving for retirement. Automatic enrollment has been shown to increase participation among eligible employees. Plan sponsors can further enhance automatic enrollment by setting a higher default deferral rate, adding automatic escalation of contribution amounts, conducting automatic re-enrollment, and examining the qualified default investment alternative (QDIA) available to employees.
2. Creative Matching Contribution Formulas
Employer matching contributions are a primary incentive for employees to participate in DC plans. However, two major challenges exist. Many eligible employees do not access the full matching contribution available to them. Additionally, fixed percentage matching contributions may not be enough to improve retirement outcomes for low-to-moderate income employees. To address these challenges, two strategies can be implemented: minimum employer contribution levels and stretch-matching. Minimum contribution levels ensure that employees receive a minimum match regardless of their own contributions. Stretch-matching requires employees to contribute above the maximum match rate to receive the full match, encouraging higher net contributions without increasing the employer’s dollar cost of the match.
3. Innovative Education Strategies
While plan design changes can increase participation, comprehensive financial education and enhanced employee communications are crucial. Employers can use quantitative plan data and surveys to identify groups that are under-engaged or unengaged in the plan. Based on this data, targeted education strategies can be designed. This can include on-site education sessions, webinars, and points-based learning portals. Effective communication strategies should use various media, be clear and concise, accessible to all employees, and feature inclusive language. Financial education and communications play a significant role in boosting employee engagement and improving retirement outcomes.
By implementing these strategies, employers can work towards achieving more equitable retirement programs and helping employees achieve better retirement outcomes.
Author : Editorial Staff
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