Red Flags and Warning Signs: Employees Edition
What are signs your retirement plan needs a tune-up? Not too long ago I outlined some red flags and warning signs to look for when it comes to the operations side of retirement plans (you can watch the video or read the blog post). Now we’ll highlight the employee side.
Employee Participation Rates
What are the potential consequences of having a low participation rate in a retirement plan?
First, let’s talk about how you measure a retirement plan’s success. It’s actually different for each plan, and it depends upon what the plan was designed to do. One of the easiest metrics to point at is the participation rate, measuring what percentage of employees are contributing to the plan.
What does it mean if you have a low participation rate? First, what qualifies as “low” is a moving target and dependent on many factors. 70% might sound like a strong number. However, that’s actually lower than the national average, but it’s higher than some industry averages. You also want to take a look at which employees are opting out. For example, one of our clients had 80% participation. But when we took a closer look at the data, the 20% that had opted out were mostly minorities and people of color. This was a red flag that our education and communication efforts were falling short of reaching all employees and we needed to retool to better resonate with target this demographic.
If you have a significant number of employees opting out of your retirement plan, you need to zero in on exactly WHO is opting out (Millennials? The Sandwich Generation? Baby Boomers?) and WHY - is the plan not attractive to them? Does it not meet their needs? A good plan advisor can help you drill down into the data and determine what exactly the problem is and how to fix it.
High Employee Turnover
How can high employee turnover affect a retirement plan…and vice versa?
A few years ago we worked with an employer who could predict whether or not an employee was going to stick around by whether or not they signed up for the retirement plan when they became eligible. If they didn’t enroll at the 3 month mark, they rarely made their 6 month anniversary. They had a big problem with turnover and focusing on lowering the turnover rate was going to save them a substantial amount of money in hiring and training costs, not to mention improve their outcomes as a business in general.
High employee turnover rates can disrupt participation in the retirement plan, and can make it harder to maintain a healthy retirement plan. You will end up with balances in the plan that belong to people who are no longer there, making it difficult to track these former employees and their addresses to deliver notices. Small accounts can often mean higher costs to the plan, and you’re now making decisions on behalf of people you no longer know. This can put a lot of strain on already overburdened HR departments.
The answer to this employer’s problem wasn’t in the retirement plan alone. We were involved in the conversations about the benefits as a whole and employees meeting certain gateways that opened up a richer benefits package along the way, including helping the employer construct a student loan payback program and non-qualified deferred compensation plan.
It all goes back to what your employees want, and what is relevant to their situation. This is where a plan advisor comes in: they can help you determine if your retirement plan needs to change to meet the needs of your employees, or whether there’s even a problem with the retirement plan at all.
Excessive Plan Refunds/Capping Out
What are some strategies for addressing excessive plan refunds or capping out in a retirement plan?
The IRS puts certain limits on retirement plans for preventing discriminatory use and limits on contributions. Two red flags are found here. One is that a significant number of employees are reaching the maximum contribution limit, either from their own contributions or they can’t receive all employer contributions. The second is when a subset of employees are continually getting a refund. If either of these red flags are happening in your plan, you’ll need your advisor to take a closer look at the plan design. You’ll also want to determine what kinds of employees these are - are they management, for example? - and consider changing up the plan design, building another type of retirement plan or savings option for them, or restructuring your compensation strategy.
These are the types of red flags that indicate a strategic problem. Many plan sponsors will turn to “just do this and it will fix it” and it will fix that symptom of the problem for now. In reality, these red flags will require more than a tweak to actually fix the problem for good. A plan advisor should help you structure the plan so that you can meet the needs of all employees – including those who are trying to save well for their retirement.
Employee Complaints
What do you do when an employee says you don’t have a good retirement plan?
No HR office wants employees complaining about the retirement plan. But if you are experiencing this red flag, you might want to take a look at what your competitors are offering. Benchmarking studies can often highlight where you’re falling short, or the types of things to communicate to your employees about your total compensation package. Our high-turnover client we mentioned above thought they should go to 100% vesting right away rather than have them wait for three years, thinking it would build trust between the employee and employer. Out take: this move doesn’t necessarily build trust, plus, it may encourage employees to leave sooner rather than later (i.e. take the money and run!).
You don’t want to solve the wrong problem, or solve the right problem with the wrong solution. Your plan advisor should work with you to identify the correct problem and come up with a solution that will actually work.
If your plan advisor isn’t helping you take care of these red flags and warning signs - or they aren’t helping you to prevent them in the first place - it’s time to uplevel your advisor! Reach out to us - it’s our job to take care of your retirement plan, and we’re committed to providing you with the advice you need.