Hit a Grand Slam with your Defined Contribution Plan

As we move into spring, many athletes, including my son, begin to prepare for the baseball season.  A lot of preparation goes into baseball. Such as going to the batting cage to get some practice in before the season even starts and finding the perfect bat.  Before having a son in baseball, I did not realize how important it is to have the right bat.  The size of barrel, length and weight of the bat all play a factor in having a successful baseball season. However, the key is the sweet spot, the location on the bat that provides the best chance of hitting the ball out of the park, for a home run or better yet a GRAND SLAM.

Cover your bases

Think of sponsoring a defined contribution plan as similar to baseball. Think about the bases and what is suggested to maximize successful retirement outcomes:

  • On first base: You first need employees to participate.   A goal for employers is to challenge at least 90 percent of their employees to participate in the retirement program.
  • On second base: You need adequate savings levels.  Did you know that employees may need to save on average at least 10 percent of their pay plus employer contributions over their entire working careers (ages 25-65) to have enough income in retirement? [1]
  • On third base: You need a well-diversified portfolio.  Aim for at least 90 percent of employees to be invested in diversified investment options.

Get more players in the game

Just like the perfect bat, plan sponsors need a perfect plan design and employee momentum to successfully load the bases and hit their grand slam. The Principal® PlanWorks plan design is a strategy to help plan sponsors toward finding their sweet spot by using certain plan features that work  together for retirement savers instead of against them.  This strategy includes:

  • Automatic enrollment for existing and new employees starting with at least 6%  elective deferral default and then use automatic escalation on an annual basis of at least 1% until the rate is at least 10% of pay. [1]
  • Re-sweep employees who have opted out of the plan or are not saving at the automatic enrollment default.    Our research shows that participation rates increase significantly and that 91% of employees will participate in the plan when automatic enrollment is implemented.[2]
  • Stretch the match formula to encourage employees to defer at higher levels to get the full employer match while managing overall employer contribution costs.
  • Naming a diversified investment option as the qualified default investment alternative (QDIA).  Many participants do not have the know-how or time needed to choose appropriate investments for their retirement savings [3]

Employing these strategies may provide employers with a grand slam and drive participants who may be on first, second and third base home toward retirement readiness.

Consider using the Principal® PlanWorks strategy for plan design to help your employees become retirement ready. Contact your financial professional or representative from the Principal Financial Group® for more information.

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[1] Based on analysis conducted by the Principal Financial Group, August 2013. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; a combined individual and plan sponsor contribution of 12 percent; Social Security providing 40 percent replacement of income; 7 percent annual rate of return; 2.5 percent annual inflation; and 3.5 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 85 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.
[2] The Principal Financial Group. Data based on a combination of 42,807 participants opting out of Automatic Enrollment or Automatic Increase as of 4/25/13 and 65,662 opting in to Principal Step Ahead Retirement OptionSM as of 3/31/13.
No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. The ultimate decision as to whether an asset allocation choice is an appropriate investment option for a plan and whether it can serve as a QDIA belongs to the appropriate retirement plan fiduciaries. The selection of any investment options on behalf of a plan is the fiduciary responsibility of the appropriate plan fiduciary, which is not Principal Life. Plan fiduciaries remain subject to a varying amount of ongoing responsibility, depending on the structure of the plan the fiduciary serves and the nature of the plan fiduciary’s position. Please consult with your counsel or other adviser as to the responsibility of a plan fiduciary with regard to the selection or retention of any plan investment option by a plan fiduciary.