Ways to boost financial confidence and loyalty for Gen Z employees

Have you ever found yourself pondering the classic “If only I could rewind the clock and share some pearls of wisdom with my younger self” scenario? As an employer, you have the chance to share this knowledge with your employees, especially when it comes to saving for the future.

The Impact of Early-Career Saving Hurdles

While everyone encounters challenges, certain obstacles tend to affect individuals early on in their careers more than their senior counterparts. Factors such as inflation, the cost of living, student loans, and impulsive retirement plan cash outs can significantly influence their financial well-being.

Gen Z employees, aged 18-24, emphasize that their overall well-being significantly influences their productivity. Many hold high expectations of their employers, expecting them to take responsibility for their financial wellness, provide retirement income, and offer guidance on investing in their retirement plans.[1]

Let’s explore some of the challenges faced by employees in their early careers and discuss practical solutions we can help implement to empower them.

Combating the Burden of Education Debt

Now that the student loan freeze has ended, some individuals are encountering this issue for the first time, while others are readjusting. The weight of education debt can hinder the employee’s ability to contribute to their retirement savings, delaying their progress toward financial independence. Under the new rules in SECURE 2.0, employers can match contributions to retirement plans based on employees’ student loan payments. This benefits individuals with student loans who might have refrained from contributing to a retirement plan, thereby missing out on employer matches and potential long-term savings. This simplified approach removes the complexity associated with previous non-elective contribution programs, which were subject to strict design and compliance requirements.

Saving in the Face of Inflation

Additional forces such as high cost of living and inflation serve as barriers to retirement savings, but younger employees seem to have the desire to save.

To encourage saving, the IRS provides a special tax credit, offering low- and moderate-income earners an additional incentive to save for retirement. If employees qualify for the Retirement Savings Contributions Credit, or Saver’s Credit, they might reduce their tax bill by up to $1,000 ($2,000 for a married couple filing jointly).

The Gift of Time in the Market

With time on their side, even small savings increments will have time to compound. This is where automatic plan design can be a very powerful tool to nudge savings.

• Auto-enrollment ensures that employees are automatically enrolled in a qualified retirement plan. This enhances participation while maintaining flexibility, as employees have the option to opt out at any time.
• Auto-escalation gradually increases employees’ contribution rates over time, typically by 1 – 2% per year. This feature not only instills a savings habit but also helps employees grow their retirement savings without requiring active involvement.
• Preventing cash outs is another way to keep employees invested. This can be done by limiting loans at the plan level. Additionally, it is an opportunity to educate employees on their roll-in and rollover options when joining or leaving the company.

Encourage younger employees to save, keep saving, and roll over their retirement assets, no matter how small. This habit will help them develop a continuous savings pattern which can set them up for a financially secure future.

Increasing Financial Literacy

Because many employees look to their employers for help with financial wellness, an opportunity exists to make an impact. By offering employee education resources or one-to-one meetings, we can help employees build financial confidence. This empowers them to make smart choices, affording them a feeling of control over their financial future.

Elevate Savings

Addressing the early-career savings hurdles requires a multifaceted approach. Employers who invest in their employees’ financial well-being not only contribute to a more secure retirement but also foster a workforce that is engaged, focused, and motivated. By exploring these solutions, companies can play a vital role in empowering their employees to overcome financial challenges, which can set the stage for a prosperous and secure future.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

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[1] Bank of America. “2023 Workplace Benefits Report.” Aug 2023.

While your retirement plan may not have a chirping reminder, regular reviews, fee benchmarking, and a prudent process are key.

Just as we routinely replace the batteries in our smoke detectors, it’s equally crucial to give your company’s retirement plan the attention it deserves.

Often, qualified retirement plans are treated like a smoke detector with fading batteries – they’re there, we know they’re there, but unless there’s an alarming beep, we don’t really bother to examine them in detail. But just as you wouldn’t overlook a chirping smoke detector, you shouldn’t neglect your company’s retirement plan, either.

As a plan sponsor, it’s vital to regularly review your retirement plan and benchmark for fees, services, and overall value.

Striking the Right Balance

Every employer has unique needs and preferences for the company’s retirement plan. Some prefer comprehensive plans with features like financial wellness resources, one-to-one education, onsite educational meetings, regular benchmarking analysis, and hands-on consulting. Others favor a simpler approach, with annual investment committee meetings, virtual employee education, online access to financial education, tri-annual benchmarking reports, and periodic vendor analysis.

Regardless of your preference, the key is to ensure that the costs and value of your plan are aligned. If you have ever used dollar store batteries for your smoke detector, you know that the low price means you need to change them out more often which may be more labor intensive and expensive in the long run. So, it’s not about finding the cheapest offer, but rather about finding a plan that is reasonably priced for the services received.

The Need for Regular Reviews

Regular reviews serve as an early warning system for your plan. They help you track your plan’s investments, fees, features, and benefits. You’ll be able to spot any potential issues early on, much like detecting a low battery signal from your smoke detector.

Here’s a quick guide:

Topic	Warning Sign	Action
Investments	Underperforming fund	Replace fund
Fees	Benchmark to peer group	Ask for a fee reduction
Payroll	Clunky uploads	360 integration
Participation	Less than 90%	Re-enrollment
Employee Education	Low contribution rates	Implement a robust education program

Decoding Plan Fees

Plan fees can vary widely. But as a plan fiduciary, what’s crucial is that you’re aware of what you’re paying and that it’s reasonable for the services received.

Fee reasonableness is necessary because ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. This includes ensuring that the fees paid for services are reasonable and the plan receives fair value for those services.

The importance of maintaining a prudent process and regularly benchmarking retirement plans has been underscored by several court cases. For instance, in the case of Sacerdote v. New York University, the court highlighted the necessity for plan fiduciaries to follow a prudent process when selecting and monitoring service providers. Similarly, in the case of Tussey v. ABB Inc., the court ruled that the plan fiduciaries breached their duties by failing to monitor recordkeeping costs and negotiate for rebates from the service provider.

These cases highlight the significance of having a robust process in place to regularly review and benchmark retirement plans, reinforcing the importance of fee reasonableness and the duties of plan fiduciaries under ERISA.

We’re Here to Help

If you need help decoding your retirement plan fees, look for your 408(b)2 document. This document will provide a detailed breakdown of the costs associated with your plan, allowing you to make an informed decision about fees, and we can help you run a benchmarking report to determine if your fees are reasonable for the services provided.

Working Order

Just as we ensure our smoke detectors are in working order, it’s crucial to sit down with an experienced retirement plan consultant to review your company’s retirement plan. Remember, we’re here to help ensure your retirement plan is in top shape.

So, don’t treat your qualified retirement plan like a chirping smoke detector any longer. Give it the attention it deserves. After all, a well-maintained retirement plan is a smooth ride toward a secure future.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.

Profit sharing is not just a tool to reduce your company’s tax liability; it is also a powerful means of expressing gratitude towards your employees.

As we close the books on last year, employers often find themselves looking for ways to lower their impending tax bills. At the same time, companies are trying to retain and reward top talent. Is there a strategy that accomplishes both? Absolutely, and it’s known as profit sharing. This tax-efficient strategy can serve as a power tool for expressing employee appreciation and has the potential to improve morale, engagement, and loyalty.

The Power of Profit Sharing

When a company makes a profit sharing contribution, it directly reduces its taxable income. This step can result in substantial tax savings, especially for closely-held businesses where the owner is also the largest shareholder such as LLCs, PLLCs, S-Corps, and Sole Proprietors.

Profit sharing is not a one-size-fits-all approach. The amount contributed can vary from year to year, offering flexibility, based on the company’s performance. This means that in profitable years, you can choose to contribute more, while during leaner years, you can reduce the amount.

Aligning Profit Sharing with Company Goals

The vesting schedule of the profit sharing contribution is another critical aspect that aligns with company goals. There are three primary types of vesting schedules: immediate, graded, and cliff vesting.

1. Immediate vesting means the employee owns the employer contributions right away.
2. Graded vesting gradually increases the employee’s ownership of employer contributions over a set number of years, such as 20% vesting per year for five years.
3. Cliff vesting allows the employee to gain complete ownership after a specific period of service, like 0% in year 1 and 2, then 100% after 3 years.

Thoughtfully selecting the vesting schedule should encourage employees to stay with the company longer, reducing turnover, and boosting organizational stability. However, vesting schedules are dictated by your plan document. Consult with your TPA for specifics. Additionally, a retirement plan consultant can be instrumental in these discussions, helping to navigate the complexities of vesting schedules, and align them with your company’s objectives.

What if an Employee Leaves Early?

A common concern is what happens if an employee leaves before they are fully vested. The unvested portion of the employer contributions goes into a forfeiture account. These funds can be recycled to pay for future employer contributions and/or plan expenses, without creating additional tax liabilities for the employer.

This mechanism ensures that your company does not lose out if an employee decides to leave early. Instead, these funds can be utilized to further enhance the retirement benefits of your remaining employees.

Looking Ahead

If your current vesting schedule doesn’t resonate with your company’s goals, it’s worth discussing and potentially revising later in the year. By planning ahead, you can ensure that next year’s profit sharing contributions are structured to optimally meet your company’s objectives and your employees’ needs.

A Winning Combination

Just like the classic combination of peanut butter and jelly, profit sharing contributions present a unique opportunity for companies to lower their tax liabilities while simultaneously expressing appreciation for their employees. It serves as a reminder that when the company succeeds, everyone shares in the success. This powerful message can significantly contribute to building a loyal, engaged, and motivated workforce.

As a plan fiduciary, your actions can profoundly impact your employees’ financial futures. By exploring and implementing strategies like profit sharing, you can play a pivotal role in boosting their retirement readiness while simultaneously working toward your company’s financial and strategic goals. A retirement plan consultant can provide valuable guidance on profit sharing strategies.

PENSION PLAN SPECIALISTS, PC

805 Broadway, Suite 600

Vancouver, WA 98660

360-694-8409

pensionplanspecialists.com

[email protected]

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.

©401(k) Marketing, LLC. All rights reserved. Proprietary and confidential. Do not copy or distribute outside original intent.