Is Your Team Ready for the 401(k) Changes?

If you’re like many U.S. employers, you may have recently made, or are considering making, changes to your 401(k) plans in an effort to boost your employees’ retirement security, as well as their overall financial well-being.

In 2022: The Next Evolution of DC Plans , a survey of 363 employers by WTW (formerly Willis Towers Watson), three in four employers said they have made a change to their defined contribution (DC) plans in the last two years and expect to make at least one change over the next two years. Changes included auto-enrollment, auto-escalation features, and allowing participants to use their contributions for other purposes, like student debt repayment.

At the same time, many employers are watching closely as the Securing a Strong Retirement (SECURE) 2.0 Act passed by the House last March makes its way through the Senate. Among many provisions, the SECURE Act would require employers that establish new DC plans to automatically enroll new hires (once eligible) at a 3% pretax level and increase it by 1% per year up to at least 10%.

The shifting 401(k) landscape presents an opportunity and a challenge to HR pros. Expanding DC plans can boost employees’ current financial well-being while increasing employee engagement and retention. But these efforts must be made to retain long-term financial wellness and keep employees on track with their retirement savings goals.

Enhancements to DC plans typically target one of two key areas — how contributions are made or increasing flexibility in how contributions can be used. Here’s a closer look at specific 401(k) changes that are gaining popularity and some suggested best practices for implementing them.

Changes to Plan Contribution Structure

About half of employers automatically enroll new and existing employees into a 401(k) type plan, according to the Society for Human Resource Management (SHRM). Additionally, in the WTW survey, 28 percent of employers surveyed said they expect to enhance their plans’ automatic deferral features, such as increasing the automatic deferral amount over time, presumably, as salaries rise.

In addition, many employers have added or are considering adding features that can help workers boost their 401(k) contributions, such as allowing employees to contribute bonus payments directly into their retirement savings. More than 60% of employers surveyed by WTW already allow bonus contributions and another 2% are considering making this change. In addition, a handful of companies (7%) are allowing employees to make paid time off (PTO) contributions to retirement savings plans, and 5% of survey respondents are considering it.

Best Practices: If you implement an automatic deferral program or make changes to an existing one, it’s important to communicate the specifics clearly (and well in advance of any changes) with both current and newly hired employees. Uninformed employees may balk at the idea of their money being taken out of their paychecks automatically and choose to opt out, a move that can jeopardize their overall financial wellness.

To avoid this, consider hosting seminars and/or pre-retirement financial counseling that can help employees learn more about financial wellness and investing before the opt-out deadline. When you can fully explain the advantages of automated saving and long-term investing, you will likely have more employees buy-in. This can also spark interest in new contribution options beyond salary and wages, including bonuses and PTO.

Using 401(k) Contributions for Other Financial Wellness Goals

Allowing workers to divert retirement savings to other, more immediate, financial needs has gotten a lot of attention recently, particularly in light of the worsening student loan debt crisis. Some employers offer to pay matching funds to an employee’s 401(k) as long as that employee is contributing a certain minimum percentage of their total pay toward their student loan debt.

According to the WTW survey, 4% of employers are planning to allow workers to redirect DC contributions to student loan repayment in 2023, and 27% are considering allowing it for 2024.

Some companies are considering extending these alternative contribution options to emergency savings accounts (16%) and health savings accounts (9%) for 2024.

Best Practices: Given that federal student loan payments are due to restart in September, and that many workers turned to (and, in many cases, depleted) emergency savings during the pandemic, it makes sense that employers are looking at innovative ways to support financial wellness in the here and now.

But retirement savings are meant for, well, retirement. Employers may need to help employees balance short-term, acute financial needs with long-term planning. Integrating financial wellness services with 401(k) and other retirement account benefits can help employees achieve that balance.

It’s encouraging to note that 42% of employers in the WTW survey have already integrated DC strategy with existing financial well-being and resilience support programs. Another 21% expect to do so in 2023, and 18% are considering this integration in 2024. Changes in 401(k) savings strategies may work best when employees are given the information, education, and tools to help them make the best decisions for their own financial wellness — now and in the future.

The Takeaway

When it comes to 401(k)s, change is in the air. Enhancements and additions to your firm’s defined contribution plans can help you further support your employees’ financial wellness while they try to balance short-term challenges with planning for a financially secure retirement. Offering enhanced and flexible DC benefits can also give you an edge in attracting and keeping top talent.

SoFi at Work can help. Our holistic approach to employee financial well-being, including education, solutions, and contribution benefits, can help you empower your employees’ financial lives right now and into the future.

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FAQ

Why are so many employers looking to enhance their 401(k) programs?

Offering enhanced and flexible 401(k) benefits helps employers support their employees during challenging financial times, while also allowing them to plan for the future. Strong retirement savings benefits also help employers recruit and retain employees, which is particularly important in today’s tight labor market.

Is there a way to help employees pay student debt using 401(k) savings?

Yes, thanks to a letter ruling made in response to a request from a specific employer, the IRS recently gave the green light to employers to continue to match employees’ 401(k) account contributions, even if those contributions are used to pay down student debt. A small percentage of employers are experimenting with this new alternative.

What are some of the most popular changes to 401(k) contribution structures?

Many employers have implemented, or are considering implementing, the following changes to their 401(k) plans:

• Auto-enrollment

• Automatically increasing the automatic deferral amount over time

• Allowing employees to contribute to the plan with bonuses and paid time off (PTO)

• Diverting retirement contributions to student loan debt repayment, an emergency savings fund, or a health savings account, while still receiving a 401(k) match on those amounts

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