A nice little 401k success story came out of some recent testimony to the U.S. Senate Special Committee on Aging after U.S. Senator Susan Collins (R-ME), the chairman of the committee, invited the president and CEO of a company from her state to testify at a hearing on improving retirement security.
Senator Collins, you may recall, recently introduced two bipartisan bills intended to improve retirement security.
Senator Collins invited Denis St. Peter of CES, Inc.—a 40-year-old engineering consulting firm with about 100 employees based in Brewer, Maine, with offices throughout the state—to share how the company implemented some successful initiatives that significantly boosted the retirement savings of his employees.
When St. Peter became president and CEO of CES about a decade ago, one of his priorities was to increase his employees’ participation in the company’s 401k plan.
St. Peter was concerned that many CES employees were underfunding their retirement savings. In 2010, only six in 10 were participating in CES’ retirement plan, and the average contribution was a meager 3.9 percent of salary. After CES implemented a new approach, participation increased to nine in 10 employees with an average contribution of 13.9 percent.
Under St. Peter’s leadership, CES adopted several best practices to help promote retirement savings. These included:
- Implementing a match up to 4 percent for employees’ contributions
- Educating employees on the importance of investing by disseminating information on investment strategies
- Establishing an investment committee to review performance of investment funds
- Using a third-party administrator for compliance testing and administrative advice
Relevant testimony
Here is an excerpt from St. Peter’s Feb. 6 testimony to the committee:
Over 10 years ago, we started an ownership and leadership transition for our company. The two founding partners were approaching retirement and I was a candidate to become a shareholder and the incoming president.
I recall a conversation with the decision-makers at the time about their approach to retirement planning for employees. At the time, we had a 401k Plan with periodic profit sharing for employees and no matching. One of the decision-makers explained that their approach was to provide what would be considered a match as compensation to the employee, and the employee would decide how much of that compensation that they would defer into the 401(k) plan.
I respected and understood the logic of this approach; however, there were four reasons that contributed to our decision to pursue a change to this approach. These were:
- I knew from discussions with some employees at that time that the lack of a matching program was perceived by some employees to be a missing component of our benefits package. An attractive employee benefits program is a critical to our mission, vision, and values.
- I understood that CES employees, in general, appeared to be underfunding their retirement savings. In 2010, we had a 62.3 percent participation rate and average employee contribution at 3.9 percent of base salary. These results were better than I had anticipated and likely was due to the excellent work of our experienced Human Resource (HR) Director who worked hard at educating our employees about the importance of saving for retirement and the tax advantages of deferring income.
- Lastly, our annual 401k top heavy testing was in jeopardy of not passing, which was another indication that our retirement savings planning approach was not working well enough for our employees and could limit some of our key employees from contributing as much as they would want in the future.
Our team assembled, budgeted, and implemented an approach to improve our employee retirement savings. Our team included our HR Director, our Chief Financial Officer (CFO), other key employees, me, our 401k financial advisor, and our 401k third party administrator (TPA).
This planning process occurred during the 2009-2010 timeframe during the recovery from the last recession. Early in the process we were uneasy about committing to matching due to the uncertainty of the economy. We benchmarked against other retirement saving approaches in our industry to help us establish our goals. This research led us to the conclusion that firms our size within our industry generally match up to 4 percent of salaries.
Also, the Safe Harbor 401k provision is a 4 percent match (100 percent of the first 3 percent and 50 percent of the next 2 percent), which results in a total retirement savings rate of 9 percent of eligible compensation for those employees who commit to the deferral rate needed to receive the full match.
Our plan included a step-up increase in the matching contribution of 1 percent of the employees’ eligible compensation (base salaries plus performance bonuses) per year for four years (2011 to 2014). We communicated to our employees that this 1 percent match was in addition to their current compensation.
Due to our uneasiness about the economy and the increased operating cost of the new matching contributions (projected to be at least $30,000 per year for each 1 percent match and $120,000 per year for the 4 percent match), we told them that we were optimistic about the four-year plan but that we would be making an annual decision about each year’s increase based on the economy, the Company’s performance, and our annual budgeting process.
We also implemented a communication plan with employees that involved private discussions with employees and our HR Director, other key managers of our staff, and our 401k financial advisor, to help them understand the importance of retirement saving and the advantage of tax-deferred savings; the benefit of the additional matching funds that they would receive if they elected to make deferral contributions to their 401k accounts; and education on different investment strategies available to them through the 401k Plan.
Proof is in the pudding
St. Peter’s testimony went on to note the company implemented several other best practices during the past 10 years to help promote retirement savings.
The results to promote employee retirement savings netted the following results:
- Participation Rate: increased 27.2 percent, from 62.3 percent in 2010 to 89.5 percent participation in 2018.
- Annual Contribution to Plan: the employee deferral increased 391 percent from $118,835 in 2010 to $464,337 in 2018 with the employer match of $0 in 2010 to $223,412 in 2018. This resulted in an increase of 356 percent to the average annual contribution as a percentage of base salary from 3.9 percent to 13.9 percent.
- 401k Plan Asset Value: increased 296 percent from $2,454,000 in 2010 to $7,270,000 in 2018.
Recommendations
St. Peter’s testimony concluded with some bullet point recommendations for changes to the tax rules governing 401k plans to facilitate greater employee retirement savings:
- Increase the annual deferral limits and catch up contribution to promote and incentivize more retirement savings.
- Eliminate Required Minimum Distribution (RMD) starting at age 70 1⁄2.
- Increase the ADP and ACP limits so that those employees who are in a position to save for retirement are not as limited by the savings rates of those employees who are less able to save for retirement.
- Incentivize very small employers (1-25 employees) to create and maintain retirement programs by increasing contribution limits (including catch-up contributions) under the SIMPLE plan.
- Allow higher contribution limits under SIMPLE programs for other small employers (26-100 employees).
“America is on the verge of a retirement crisis,”Senator Collins said in a statement about the testimony. “Under Mr. St. Peter’s leadership, CES has dramatically improved the retirement security of its employees. I appreciated his willingness to share the challenges small businesses face in establishing retirement plans and the steps he took to strengthen this benefit for his employees.”