8 strategies to maximize DC retirement plans

Is your DC plan a “Savings” or “Retirement” program? Many plans have the word “retirement” in their name, but operate more like a savings plan: employees put aside balances they can tap during their careers to address temporary income shortfalls or high-cost life events. However, if you see the program’s goal as helping employees plan and actually save for a secure retirement, then new strategies may be in order. For example, you may now want to default employees to much higher contribution rates than the current norm of 3% or 4%. If you realistically believe the organization can only offer a savings vehicle, then educate employees that they are largely expected to look out for their own retirement income needs.

Conventional wisdom suggests employees need to save around 15% of pay to retire at age 65 with adequate resources, according to Aon Hewitt. But many employer-match contribution formulas don’t encourage employees to reach this target. Under a typical formula for an employer with only a defined contribution program, a plan provides 3% of pay as a non-elective contribution, with a matching contribution of 50% up to 6% of pay. Assuming the employee elects to contribute the default 6%, this produces total contributions of 12% of pay (6% employee + 3% non-elective + 3% match).