The Benefits Balancing Act Part II — Cost-Saving Strategies for Retirement Plans

Since more Americans will retire over the next 20 years than ever before — further increasing the importance of retirement benefits — how can companies provide portable and predictable benefits that keep up with inflation and also accommodate early retirement needs?

Shift plans and offer new options: 401(k)s and other defined contribution plans are fast displacing defined benefit pension plans which pay out monthly benefits at a certain age based on such factors as final salary and years of service. (See ‘Traditional Pension Plans Fading Fast’ for examples of changes at IBM and Verizon.)

Whether it’s a 401(k), 403(b), employee stock ownership or profit-sharing plan, defined contribution plans provide employees with individual accounts whose cash values are determined by contributions, plan expenses, income, gains and losses. The Economic Growth & Tax Relief Reconciliation Act further increased the amount employees can save in tax-deferred accounts. These include the new Roth 401(k) — an increasingly popular retirement-savings vehicle because of its higher contribution limits and after-tax contributions.

New hybrid plans that blend defined benefit and defined contribution features are another retirement-savings option. A cash balance plan is one example. It promises an employee an employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution. A pension equity plan is still another. These credit employees with a certain number of points for each year of service and determine final benefits when employees retire or leave by multiplying average career pay by total points earned.

Prepare employees for the shift from entitlement to ownership: With the rates of personal savings, participation in employer pensions and individual retirement accounts declining, employees need to save more not only for their own financial health but to blunt the potential strain on Social Security and Medicare and resulting economic impact. What can you do to increase your employees’ retirement readiness?

• Passive Enrollment — Automatically enroll employees at specified contribution and investment percentages immediately upon hire or upon meeting eligibility requirements. Once enrolled, chances are they won’t opt out.
• Educate Employees — Provide expert advice in managing retirement savings, including the spending needs in the three phases of retirement: Active retirement (continued earnings and increased leisure), full retirement (no more work); and final retirement (the family visits you).

For more on these and other cost-saving strategies, contact Mary Kesel, CEBS, at (336) 721-2029 or mkesel@benefitadvocates.net.