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In small business retirement plans, the employees with the smallest balances need the most help. Here’s my frugal guide to making the plan work for everyone in your organization.

Greg Carpenter

January 26, 2023


I was talking with a long-time client yesterday about how best to communicate with his rank-and-file employees. He operates retail food stores, and most of his employees are hourly and work for wages toward the lower end of the scale. We worked through a series of actions any plan sponsor can take to help get employees to participate – and build wealth.

Point of disclosure: this business owner is FRUGAL, so several of these suggestions cost next to nothing to implement. Here are some key takeaways that you may be able to use in your small business retirement plans.

Recognize the importance and the ranked order of these four principles affecting lower wage savers:

Priority #1 – Participation. If employees don’t participate, there is no benefit. Recognize that employees are subject to inertia. If you can get them started in the plan, they will likely continue to participate.

If at all possible, provide some kind of employer match. A match, however modest, is the most effective way to spur participation rates. With a match, employees must participate to get the benefit, providing a strong incentive to begin saving. Realize that even a small match can provide strong incentives. Do the math on a match – a 1% match on a $500,000 annual payroll is only $5,000 – the potential benefits in employee saving and goodwill can amount to many times the amount of the match.

Use auto enrollment. Automatically enrolling new employees at a modest savings rate is the most powerful nudge you can provide. It’s a proven method of increasing participation – at zero cost.

Priority #2 – Deferring enough to help build retirement readiness. Employees need a nudge to keep saving, and to save at a maximum rate they can afford. Again, inertia can work for you.

Literally put the quarterly benefit statements in the employees’ hands. My grocery client uses this approach to keep plan balances front and center. He reckons that most lower-wage employees won’t ever bother to check balances online. By putting the balances in front of them every three months he is re-enforcing the positive momentum employees feel when they begin to save.

Make plan participation part of an ongoing communication strategy that addresses all of the benefits available to employees. The more highly you value the benefit, the more your employees will perceive it.

Use auto escalation. Like auto enrollment, an auto escalation strategy that plows a portion of any pay raise into savings is an effective nudge that keeps positive momentum going. No cost to the business.

Watch fees like a hawk. Put as much of the money being spent on the plan in the employee’s accounts where it is an effective tool for morale and motivation. Don’t treat plan fees as sunk costs. Any amounts saved can be used to enhance the benefit for employees – and you can reap the reward in improved morale and retention.

Priority #3 – Asset allocation. Once employees are in the plan and maximizing contributions, appropriate asset allocation is most important factor in plan success.

Use target date funds. Target date funds automatically set an asset allocation mix appropriate for the investor. Lower wage employees tend to be younger, and left to their own devices, tend to underinvest in equities. Target date funds are easy to understand and implement.

Pick a default investment option that give employees appropriate market exposure. Make sure your default option provides appropriate market exposure. Lower wage investors tend to choose default investment options. Setting the default as an age-appropriate target date fund is an excellent way to get employees appropriate market exposure.

Priority #4 – Keeping the savings in the plan. Lower wage investors tend to treat retirement savings plans more like a Christmas Club. Be aware of this tendency and limit the ways employees can remove money from the plan. The tax hit on premature withdrawals is devastating double-whammy on distributions.

Limit access to loans and hardship withdrawals. Loans, hardships and other forms of early distributions are optional items in a retirement plan. If possible, do not enable these provisions in your plan. Often, lower wage employees take out 401k loans, and then change jobs without repaying the loan, triggering default and sever tax consequences. It is best not to allow the withdrawals in the first place.

There is no “average” small business retirement plan. Understanding how to make your retirement plan effective for all your employees can be a great benefit to employees and employer alike.

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