Automating Your Retirement Plan
An Executive Guide to Automatic Features in Defined Contribution Retirement Plans

Utilizing an automatic feature retirement plan design that helps employees make important economic decisions that benefit their retirement goals

INTRODUCTION
The New Retirement Frontier

The great 401(k) retirement plan “experiment”, born out of a loophole in IRS regulations almost thirty years ago, is now an adult and will provide tens of millions of Americans with their primary source of retirement income.

Corporate America handed the retirement reigns to employees during the late ‘70s and early ‘80s because the workforce was mobile and needed a portable retirement plan. With this new retirement responsibility, employees received control of their retirement savings, how much to save and where to invest those savings.

For previous generations, who often stayed with one employer for their entire career, the defined benefit plan worked well; the employer made the “how to save and where to save it” decisions for their employees and employees dedicated their careers to that employer.

Today is a new world. Faced with a reality that millions of Baby Boomers are on the cusp of retirement, we are finally paying attention – collectively and individually – to our retirement realities. Employees want answers about how much to save and where to put those savings, and they are wondering how much they will have to live on in monthly retirement income. So how have employers, the retirement industry, public policy makers and others joined together to help American workers plan for their future?

What Are Automatic Plan Features?

A La Carte Menu
Automatic Enrollment (also known as automatic deferral or negative election): Automatically enrolling your employees in the retirement plan and requiring them to “opt out” if they do not wish to participate in the plan.  This feature can apply to new hires only or it can be applied to all employees in the plan. Some plan sponsors have also instituted it on an annual basis, requiring an employee to opt out every year if they don’t wish to participate.

Automatic Savings Increases (also known as acceleration or step up):
Automatically increasing the amount your employees contribute to the plan up to a pre-determined amount.

- Plan Determined Increases: Increases are determined at the “plan level.” The plan sponsor determines that everyone’s contribution to the retirement plan is increased by a set amount (usually 1% or 2%) every year. The increase will occur on a set date, such as the first of the year or at merit increase time when one percent won’t drastically impact take home pay, but can positively impact retirement savings accumulation over time.

- Participant Determined Increases: Increases are determined at the “participant level.” Employees choose the amount of the automatic increase and the timing of that increase. The increase will automatically occur on the date the employee selects. This feature is typically accessed on the service provider’s web site.

Automatic Investment Selection: Defaulting employees into investment options with embedded decision making and ongoing management.

- Age-based Target-date Retirement Funds (life cycle funds): Defaulting employees based on their age into strategic investments selected by the employer that offer diversification, professional management and ongoing rebalancing.

- Risk-based Asset Allocation Funds (life style funds): Funds that allow a participant to choose if they wish to be invested in a diversified, professionally managed fund that is aggressive, moderate or conservative in nature.

- Automatic mapping of balances into target-date retirement funds: Moving all employee retirement balances into age-based target-date retirement funds offering employees diversification, professional management and rebalancing over time. This can be done during a transition to a new service provider or for a group of plan participants who are invested inappropriately; (e.g., those too heavily weighted in company stock or for a group of individuals who had previously been defaulted into an investment that is not ideal for long-term investing, such as a money market or a stable value fund).

A retirement plan can incorporate any or all of these features into its plan design and choices, and participants can always opt out of any automatic feature as well. We refer to this menu of automatic plan choices as Schwab Retirement Smart Steps.™

Download Automating Your Retirement Plan

PDF format, 290KB, 16Pages.

CONTENTS
PART I THE RISE OF THE AUTOMATIC PLAN 2
PART II FUELING THE ADOPTION OF AUTOMATIC PLAN FEATURES 5
Shift in Perception
Shift in Application
Creative Use of Automatic Enrollment
Role of Employee Education in an Automatic Plan
PART III SEMI-AUTOMATIC FEATURES – A BRIDGE TO AUTOMATIC PLANS 9
Plan Sponsor Considerations

ABOUT THE AUTHOR
CLARE BERGQUIST
Director of Service Strategies
Schwab Retirement Plan Services

Clare Bergquist is Director of Service Strategies for Schwab Retirement Plan Services.

Clare is responsible for the strategic direction of Schwab’s service platform and serves as a member of the senior management team. Clare is a frequent speaker on retirement plan issues before various industry groups as well as professional organizations in the defined contribution industry.

With over 20 years of experience in the financial services industry, she is active in the defined contribution community, having served on a number of nationally recognized committees. Clare earned a B.S. in economics and Spanish from the University of Wisconsin — Madison. She holds NASD Series 6 and 63 licenses.

Visit The Charles Schwab Corporation (Schwab) Website

The Charles Schwab Corporation (NASDAQ: SCHW), based in San Francisco, California is a company founded as a traditional (brick-and-mortar) brokerage house, and which today is one of the world's largest discount brokers.

Schwab offers the same services as traditional brokerages but with lower commissions and fees than many other brokers. The company serves some 7 million individual and institutional clients, with $1.39 trillion in assets (as of March 31, 2008), from some 300 offices in the U.S. Clients can also access its services via telephone, wireless device, and the Internet.

Besides discount brokerage, the firm offers a wide range of investment research, mutual funds, annuities, bond trading, and now checking and mortgages through its Charles Schwab Bank. (Wikipedia.org)

Comments (0)

Name

Email

Comment

smaller | bigger

Add Comment