401(k)s for Engineering Firms: Structuring A Better Retirement Plan
Meeting your engineering firm’s project deadlines is critical to your business. But your 401(k) also faces a deadline — the deadline for each employee to accumulate a sufficient nest egg by the time they are ready to retire.
Of course your firm’s 401(k) is even more than a retirement plan. It’s a powerful recruiting and employee retention tool as well. Given the importance of the 401(k) to you, your firm and your employees, it’s critical to keep your plan up to specs. Whether you are outsourcing many of your 401(k) duties or handling them in-house, here are the best practices for forward-thinking engineering firms to keep their retirement plan up to code.
Five tips for optimizing your engineering firm’s 401(k)
1. Encourage higher savings. Defined contribution retirement plans are more likely than ever to be a critical component of retirement income. That’s unlikely to change soon. And the best way to ensure a healthy retirement nest egg is to start early and save meaningful amounts. Think of it this way: you can survive below average investment returns as long as you set ample money aside. Consider someone — we’ll call them Investor A — who saves 6% of her $70,000 salary every year. If she earns a 7% average annual return on those funds, she will accumulate $105,542 after 15 years. Then consider someone else — Investor B — with steady whopping returns of 14% each year. But if he only deferred 3% of his $70,000 salary each year, he will accumulate just $92,069 after 15 years. That’s $13,473 less than Investor A despite those (unsustainably) great returns.
What’s a reasonable deferral rate? The median among engineering firms was 6.8% in 2016, according to Vanguard. But employees should be encouraged to shoot for the maximum when possible. Better employee engagement can motivate your engineering and administrative staff to set aside meaningful funds for retirement. The key is to educate employees about the benefits of high deferral rates, always make it easy for them to contribute, and consider offering automatic escalation. Here, employees can elect to automatically increase their deferral, by say, 1% each year. Or auto escalation can be incorporated into auto enrollment, thereby boosting employee deferrals automatically.
High participation and deferral rates do more than help your employees save for retirement. They keep your company’s plan structurally sound. High participation and deferrals mean that your plan is more likely to pass those important nondiscrimination tests each year. And that means key, highly paid employees will be able to maximize their tax deferred savings.
Finally, if your firm is doing well financially and can contribute to your employees’ retirement accounts, your firm’s principals and other highly-compensated folks may be able to tax-shelter more savings than the standard $18,500/year ($24,500 for those aged 50 and over). Plan design options like profit sharing and cash balance are worth exploring if your executives are interested in maximizing their contribution each year. Talk to a retirement plan consultant today to better understand if these may be the right options for your firm.
2. Review your plan’s fees. Figuring out how much it costs to run a 401(k) can be a daunting exercise. There are recordkeeping fees, fund expenses, custody costs and advisor costs. In addition, fees can be opaque, as when mutual fund expenses are steered toward other service providers. Since plan fiduciaries are required to provide participants with important fee disclosures, a good time to review your plan’s fees may be when such disclosure information is being accumulated. Or you can work with an advisor to perform a benchmark analysis to see how your plan’s fees compare with offerings from other providers. At ForUsAll we conduct this analysis for clients all the time, and even have a Benchmarking Center to help plan sponsors as they investigate low-cost alternatives on their own. We’ve also created a fee comparison calculator that compares your all-in costs (including average fund fees for plans your size) across three well-known 401(k) providers. Check it out to instantly assess your costs and determine if a deeper fee audit is warranted.
3. Maintain high participation. The participation rate is a basic measure of plan health. Smaller firms typically don’t struggle to get most of the office to participate, but if the vast majority of eligible employees aren’t currently participating, then it’s important to assess what is preventing folks from signing up. Often what may be perceived as reluctance is really just employee oversight or impatience. Your engineers and administrative employees are smart enough to see the value in saving for the future, but they are more likely to join the plan if enrollment is easy, with minimal paperwork. Better yet, you can take advantage of inertia and make enrollment automatic. About half of plans in the industry currently use auto-enrollment according to research from Vanguard, requiring employees to opt out of the benefit if they do not wish to take advantage.
So what’s a good participation rate to benchmark against? According to that same Vanguard study, the average rate for the engineering sector is 91%. That’s excellent participation, and we suspect that’s not just because engineers understand the powerful impact of compound interest and tax-deferred investments over the long run.
4. Improve employee engagement. Some engineers in your firm may keep very close tabs on their investments, while others prefer to “set it and forget it”. Regardless, keeping employees engaged with the retirement benefit not only helps boost overall participation and savings rates, it’s also critical to staying mindful of asset allocation. That portfolio of 95% equities a senior employee selected at age 28? Probably no longer appropriate at age 48. A knowledgeable investment adviser with a solid employee education strategy can help employees with these important decisions, but another way to help employees stay on top of their investments is simply to include target date funds in the lineup. These funds can adjust asset allocations as the “target date” approaches, so you can essentially outsource rebalancing to the TDF’s manager. Participants merely have to select one in the year of their own estimated retirement, and voilà!
5. Review administrative tasks to see what can be outsourced. Are your employees administering the firm’s retirement benefit when they could be completing projects or closing new business? Administering a 401(k) is a complicated, full-time endeavor. And correcting innocent errors, like failing to allow an eligible employee the chance to make a deferral, can eat up valuable company time. You may want to consider reducing your administrative burden and liability by outsourcing 401(k) administration to an expert. The DoL’s gold-standard is to hire a 3(16) administrative fiduciary that can integrate your payroll system with the recordkeeper, greatly reducing the risk of errors.
A third-party 3(16) fiduciary also can handle mandatory employee communications, such as notices regarding eligibility and investment performance, and run nondiscrimination tests in plenty of time to take action in the event of a problem. They can even take on 401(k) loan approvals and hardship withdrawals.
You probably didn’t start an engineering firm to spend any time administering its retirement benefit. If you are not working with an advisor who can take on most of the administrative burden, consider working with one who can. In many cases, adding the right advisor can save you more than their fee, offering greater protection for your plan at less cost overall. If you’re still curious about the value that a 401(k) advisor provides, read about five reasons to hire one.
ForUsAll has helped many small and mid-sized firms optimize their retirement plans. It’s always refreshing to talk to engineers because they are typically quantitative, ever in pursuit of greater efficiency, and interested in understanding the boundaries of complex systems–all perfect qualities when diving into the details of your firm’s retirement plan. Whether you are thinking about starting a 401(k) from scratch or want to take a closer look at your existing plan’s fees and compliance, ForUsAll’s consultants are ready speak to speak with you. Set up a time to chat with us today!