Spring 2007 issue of Horizons

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so we believe that this percentage has seen a significant increase since 2005.

Committed to Saving Many employers are concerned that their employees are not saving for retirement. Yet despite their best efforts to provide a good 401(k) or similar retirement program, many employees simply won’t save.

Not all companies can afford the McDonald’s match. What is the most common match formula used as an incentive to get employees to contribute to their 401(k) plan? According to the PSCA survey, the most common formula is 50 percent of the first 6 percent contributed from pay. The second most common formula was dollar-for-dollar on the first 4 percent deferred. The first formula should provide an incentive for employees to reach for that 6 percent deferral level so that no match dollars are left on the table. Even with a match, some employees don’t contribute. Some don’t seem to understand the match. What can an employer do? Some employees won’t contribute, period. However, we recommend illustrating the match through examples. Consider using play money at employee meetings. On the dollar not contributed to the plan, tear off 40 percent for taxes and hand back the remainder. On the dollar contributed to the plan, pull another dollar from the employer’s pocket, add it to the employee’s dollar and then discuss what those two dollars might be worth in 20-30 years. Compare the match to using a soft drink machine. How many people wouldn’t feed a machine 50 cents if they thought the machine would dispense a dollar back? With any employee meeting, it also helps if owners or management participate. That demonstrates that saving for retirement is a serious business and also demonstrates the company’s commitment to the plan.

What have companies tried to increase savings behavior? Let’s start by looking at Big Mac land. Mc Donald’s 401(k) plan has an automatic enrollment feature. Eligible employees who fail to complete enrollment forms are automatically enrolled at a default rate, with their account invested in a default investment option. According to an article on Plansponsor.com, the company has initiated a comprehensive campaign to educate workers about retirement and financial issues. The company subsidizes one-on-one investment advice for some employees. It educates workers through meetings, webcasts, newsletters and electronic compensation statements. McDonald’s also offers a 300 percent match for the first 1 percent of earnings that workers put in their 401(k). It provides a 100 percent match for the next 4 percent of earnings. The company is considering the addition of an automatic escalation feature for salary deferral contributions. With an escalation feature, the default rate for salary deferrals would increase over time. How many companies sponsor automatic enrollment plans? According to the Profit Sharing Council of America’s 49th Annual Survey, approximately 17 percent of survey respondents had automatic enrollment in 2005. The Pension Protection Act of 2006 included a number of provisions designed to encourage automatic enrollment,

What about scare tactics?

There are more than enough scary statistics to go around concerning inadequate retirement savings. However, the statistics themselves don’t seem to provide incentive for saving. Those spouting statistics on the need to save may assume that people behave rationally and make good financial decisions based on what is best for them.

3 u summer 2007 issue