Defined Contribution 2.0: The Pursuit of Building a More Equitable Retirement Program

Defined contribution plans are one of the most common ways American workers save for retirement. Yet statistics show DC plans are not benefitting everyone equally. Data from the Federal Reserve, the Bureau of Labor Statistics and elsewhere suggest low-income workers, women and people of color tend to have significantly less access to retirement plans and accumulate less retirement plan assets relative to other demographics.

In terms of income percentile, data from the Bureau of Labor Statistics is clear that employees in lower wage groups struggle across the board, with low access to, participation in, and take-up rates for defined contribution plans.
When it comes to gender, women in their retirement years have a median household income that is nearly $10,000 less than men in the same age group.

And the numbers are even worse across racial and ethnic lines, with Black and Hispanic households averaging $30,000 less in retirement savings than White households.

To address these inequalities, we offer three tactics to improve retirement outcomes.

Expanding Automatic Plan Design Features
Many employees who are automatically enrolled in a plan remain enrolled. But plan sponsors should also consider:

  • setting the default enrollment rate at a higher number, such as 6%;
  • adding automatic escalation, where the employee contribution amount is increased annually unless the employee opts out;
  • conducting automatic re-enrollment, so employees need to affirmatively re-opt out of the plan periodically; and
  • reviewing the plan’s qualified default investment alternative to determine if it is likely to lead to retirement readiness for employees who do not change their investment selection.

Employing Creative Matching Contribution Formulas
Studies show billions of dollars in “matching” funds are unrealized by eligible employees. Additionally, for lower-income employees, a matching contribution made as a fixed percentage of their salary might not be a significant dollar amount. With this in mind, there are two key tactics that can improve retirement outcomes:

Minimum contribution levels. Such as, “Employer will contribute the greater of 100% on the first 4% of an employee’s deferrals or $2,000.”

Stretch matching. For example, consider matching 50% on the first 4% of contributions and 100% on the next 2% of contributions (for a total employer match of 4%), rather than just simply matching the first 4% at 100  %. This tactic may not be right in every situation; stretch matching can sometimes have a negative impact on lower-income employees if they are unable to budget the higher deferral rate required to achieve the full employer match. It’s important to monitor participant behavior closely and adjust as needed.

Enacting Innovative Education Strategies
Comprehensive, data-driven financial education and enhanced, varied employee communications are a crucial part of driving positive retirement outcomes. Leveraging plan data, employers can work with financial providers to customize on-site or virtual education sessions, webinars, points-based learning portals that incentivize employee participation, and more.

The educational materials should avoid industry jargon and use inclusive language. Additionally, employers should use various media at various times to accommodate different learning styles and preferences.

Final Thoughts
It’s been known for some time that financial wellness has a direct impact on employee productivity and engagement. But employers are also starting to see financial wellness as a pillar of social responsibility.

Companies can do well by doing good — especially by employees who need help the most.

The SHRM Blog does not accept solicitation for guest posts.

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