Everybody Wins – Select Plan Design Features Can Help Improve Outcomes for Lower-Income Workers

advice guidance 401kDepending on the nature of your business and the varied experience, education and expertise required of your workforce, you may have a significant population of lower-income workers. In a highly competitive hiring environment, the following plan design ideas can help attract and retain workers. By adding just a little flexibility to better accommodate your lower-income workers, everybody wins.

Automatic Features

Research from the Program on Retirement Policy at the Urban Institute in Washington, D.C., shows that the best way to get lower-income workers to participate in a plan is to automatically put them in the plan. At the same time, plan sponsors must also consider the effect on lower-income workers if it is paired with automatic escalation. Setting the automatic deferral and auto-escalation rates too high can be particularly harmful to lower-income workers, who make their deferrals from lower earnings.

The Defined Contribution Institutional Investment Association defines low income as $20,000 – $47,500 in annual household income.

One tactic employers can use to help lower-income workers save is to defer part of their pay raise automatically into the retirement plan, rather than straight into their paycheck. These workers may not necessarily feel like they’re losing out on something, because they still get a slight bump up in their salary while getting a bump up in their retirement savings.

Adjusting the Match To Encourage Higher Deferral Rates

Employers and their advisor often adjust the plan’s match rate to encourage higher deferral rates. The Program on Retirement Policy’s research shows that participants often defer up to the maximum rate required to receive the full match. The higher the level at which the match ends, the more people feel encouraged to contribute. However, plan sponsors wanting to increase lower-income workers’ retirement savings by tweaking the match must remain sensitive to setting the threshold so high that they price these workers out.

Combining a Financial Wellness Program With an Emergency Savings Program

The DCIIA’s Retirement Research Center in Boxford, Massachusetts, recommends offering a financial wellness program combined with an emergency savings program. Offering both programs emphasizes the importance of having sufficient savings to cover emergencies and is the most powerful tool available for lower-income participants. Findings from the Life Insurance Marketing and Research Association show that almost 30% of lower-income workers have no emergency savings fund, which can lead them to not save, or to withdraw money from their retirement accounts. Funding an emergency savings account can give lower-income employees a sense of feeling in control and more security about their day-to-day experience. That’s a great foundation to build before beginning a long-term retirement savings program.

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For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.