TIAA-CREF, the leading provider of retirement services in the academic, research, medical and cultural fields and a half trillion dollar under management, today released a study recommending best practices for improving retirement plan effectiveness and retirement readiness of plan particpants.
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The white paper identified several additional retirement plan features that help drive overall retirement readiness and some surprisingly detailed recommendations that advisors advising on qualified plans should take note of:
- Automatic plan enrollment works, but contribution rates need to be at least 4% and increase automatically. Many organizations auto-enroll employees at a default rate of 2 to 3%. Too many employees stay at that rate, which is far too low to provide enough for retirement.
- Employer matches drive plan participation, but the algebra needs an update. Most employers match dollar-for-dollar to a certain rate, frequently in the range of 4 to 5%. Instead, employers should consider matching 50 cents on the dollar up to 8 or 10%. Employees view matches as “free money” and a match on a higher employee contribution percentage could encourage employees to raise their contribution rates accordingly without increasing the dollar amount of the employer’s matching contribution.
Annuitization options should be in all plans. Employees who save enough to generate at least 70% of pre-retirement income (including Social Security) have a good chance at a successful retirement. Yet research also has found that a retiree electing to take systematic withdrawals equal to the same income payments they would receive from an annuity has more than a 50% chance of running out of money in retirement. TIAA-CREF research suggests retirees should annuitize enough of their savings to generate approximately 20 to 30% of their overall income needs.
- The optimal number of investment options is between 5 and 10. Having too many investment choices leads to lower plan participation, employee indecision and increased fiduciary and administrative responsibilities for plan sponsors.
- Guidance is not enough. TIAA-CREF research found that individuals receiving actionable financial advice are five times more confident in their retirement prospects than the average American worker.
- Employee experience is crucial to plan success. To optimize participation rates and plan success, it is critical to target employees with personalized, relevant communications and educational tools that are available in person, online and over the phone.
- Limit or altogether eliminate retirement plan borrowing. Loans raise plan cost and detract from employee retirement readiness.