When interpreting retirement plan data and statistics, a simple guideline is to flip the numbers to see the full story. This simple test can help employers and financial professionals better understand if plan design changes might be needed.
Data and statistics are critical when creating specialized retirement programs. As an actuary working with some of the best data science professionals in the retirement industry, I’ve learned that data has two sides, each with its own story.
When interpreting data, I have one simple rule: Flip every statistic to see the other side to examine if the story is still positive (or negative). This simple analysis can help us understand what the data truly means and take steps as necessary to make the changes to the plan design.
Here’s an example:
A company has a generous retirement plan. It uses automatic (auto) enrollment and auto-increase and has a 100% employer match on the first 3% of participant deferrals. As such, it has an 80% participation rate, and the average deferral rate is above the default deferral. Everything seems great to the employer as far as the retirement plan is concerned.
Then I flipped the data.
Now the company asks, “Why are 20% of employees opting out of the plan? As a large company, 20% means thousands of employees are not saving for retirement. How can we change this?”
The company talked with many of those who had opted out of saving in the retirement plan. It was discovered that the cost of living was higher in the city where the company had just relocated. Though employees were not required to relocate, some chose to do so due to commutes, schools, and better work-life balance. However, the upfront costs for an apartment, or saving for a downpayment on a house in this area were causing difficulty in also saving for retirement.
This tracks with a recent Principal survey which showed a roadblock to people saving for retirement is that their monthly expenses are too high.
- Sign-on bonuses with a 24-month repayment period if people left the company, which also encouraged employee retention.
- Increased communications about the available financial wellness tools and resources and how to use them.
The results? Recruitment and new employee starts are up along with retirement plan participation rates. Use of the financial wellness tools continues to increase and discussions with employees reveal higher financial confidence.
To capitalize on these results, the company is looking at pairing the sign-on bonus with a longer-term retention bonus structure to help save money for a downpayment on a house. A goal that supports retention efforts, helps employees build financial wealth and supports the economic health of the community where their office is based.
Here’s a second example:
A company was struggling with passing plan compliance non-discrimination testing. It had taken action to make improvements, slightly increasing savings and participation rates each year. The year we met, leaders proudly told me their highly compensated employees now could defer up to 6% of their salary. A percentage not possible a few years prior.
Then I flipped the data.
I commended them for taking action and making strides for all participants to save. However, the other side of the coin was that this same group couldn’t defer 7% or more of their salary for retirement. With the time value of money, every year in which they couldn’t defer more likely puts this group at a disadvantage regarding how much they may need to save for a successful retirement. Change needed to happen faster based on the data.
We examined multiple alternative ideas to their plan design to improve testing results such as:
- Including a safe harbor 401(k) plan feature and increasing the eligibility requirements for when an employee can begin to participate in the plan to help control cost.
- Adopting automatic enrollment and automatic increase but delaying when employees are enrolled and extending vesting schedules to help control costs.
- Using a dual plan design, which splits their population into two distinct plans as a creative way to pass compliance testing.
- Using a qualified nonelective contribution (QNEC), which typically means the employer contributes towards lower paid employees’ retirement accounts in order to increase the percentages used for testing.
They also reviewed other programs for the highly compensated employees to save for retirement, including:
- Back-door Roth contributions within the plan made as post-tax contributions and then converted to Roth contributions, which are not bound by annual contribution limits.
- Various nonqualified plans usually offered as additional benefits or incentives to higher paid employees
Looking at the entire spectrum of design choices enabled them to make a financially informed decision, confident that they had the lowest possible cost solution for their non-discrimination testing needs while weighing the pros and cons of each. By examining each option, they were confident in choosing the best design for the company and their employees.
Specializing in data-driven 401(k) plan design
Once we realize that statistics have two sides, the opportunities presented to us can become clearer. Simply flipping a retirement plan’s statistics can help financial professionals, employers, and retirement service providers better understand where improvements can be made. Like the examples above, we can work together to find a solution once we truly see the issue.
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It’s important to work with a retirement service provider who understands and has the expertise to consult on options to help deliver the desired results. If you’re looking for options that could work in building a more robust retirement plan—reach out to your Principal representative.
