Plan Design
Best Practices in Equitable Plan Design
Keywords: Plan design
Why does having an equitable retirement plan matter? While the U.S. has a sizable income gap, the wealth gaps (by gender and race) are even wider. Roughly one third of U.S. household wealth is held in the form of retirement assets. Employer-sponsored retirement savings is one of the most accessible and common ways for people who do not come from generational wealth to invest in the stock market and build wealth. Because of this, access to retirement savings could be a critical intervention in reducing wealth inequality. How an individual employer designs their retirement plan can impact how equitable the actual distribution of retirement benefits are — choosing to own the responsibility instead of placing the expectation onto individuals to figure it out. What does an equitable retirement plan look like? These bullets outline some best practices when it comes to designing an equitable retirement plan.
- Select automatic enrollment and automatic escalation: This means that all eligible employees will be enrolled by default, but they can still choose to opt-out. By making it the default option, more employees will receive retirement benefits, even those who might otherwise not have the knowledge or outside advising to create a retirement strategy. Automatic escalation similarly defaults to raising the percent deferred into retirement each year, with employees always having the option to opt out. Under the SECURE 2.0 Act of 2022, new plans beginning after December 31, 2024 will be required to utilize automatic enrollment and automatic escalation.
- Offer a non-elective (guaranteed) contribution: The most common plan designs center around offering an employer match to incentivize employees to contribute from their own paycheck as well. What often happens in reality is that high-earners can afford to contribute from their paycheck and take advantage of the match, whereas lower paid employees prioritize immediate needs, and miss out on the employer contribution altogether. Offering a non-elective contribution means that all eligible employees will receive the benefit, regardless of whether they are able to contribute from their own paycheck.
- Cover fees: If an employer can afford to cover applicable administrative and advising fees, it will help maximize their employees' retirement savings. Fees taken out of retirement accounts result in compounded reductions over time, leading to less long-term savings.
- High eligibility / short vesting: Offering retirement benefits to a broader spectrum of staff (e.g. including part-time) supports all workers. Having immediate vesting means that employees retain retirement savings even if they change jobs frequently or after a short period.
- Offer relevant and trusted financial education: An advisor who is accessible and whose employees have shared life experiences can help invoke confidence in the guidance provided. Mistrust can lead participants to adopt approaches that may reduce long-term savings.