The 4 Levers: How Employers Can Improve Retirement Outcomes

Employers who want to do more to help employees retire comfortably have four levers they can pull to improve their retirement plan:

• Reduce fees 
• Increase employer match 
• Encourage employee contributions 
• Improve investment returns 

Some employers might tackle all four at once, but if you can only choose one, which should you choose? Here’s what we found out. 

Investigating Your Options

To determine which lever delivered the best ROI, we created a hypothetical scenario for an employee who is 35 and makes $70,000 per year. We assumed a baseline of 2% fees, 50% employer match, 6% employee contribution, and 7% investment returns. We then asked: If we improved each of these levers individually by 20%, which one would yield the most monthly income at age 67? 

• Fees: Lowering fees by 20% reduced them to 1.6%. That’s good but it only increases monthly income by 1%. 
• Match: Increasing the employer match to 60% was better but still only delivered a 4% improvement. 
• Employee contributions: This is where we start to see meaningful increases. Bumping up contributions to 7.2% jumped the monthly income by 12%—nearly $700 per month. 
• Investment returns: Now the gains are getting big. A 20% increase in returns to 8.4% leads to a monthly income increase of 38%. That’s $2,185 per month! 

Clearly, if you can only do one, increasing investment returns offers the most bang for your buck, but we went a step further. What if an employer did pull all four levers at once?  

It turns out, each lever boosts the others so that the cumulative effect is greater than the sum of each part. Increasing all four factors by 20% leads to a 62% increase in monthly income—that’s $3,499 more per month.

But How Do Employers Affect Investment Returns? 

You don’t control the markets but you can influence investment returns through the lineup of funds you make available in your plan. If your plan is stuffed with low-quality, underperforming funds, employees lose out on potential returns. However, if you and your advisor work together to include funds that consistently perform above the median, employees can earn a lot more over time.

To maintain a high-quality fund lineup:

• Benchmark the funds every few years. If there are funds performing below the median, consider replacing them with funds that have a more consistent track record of success. 
• Look for conflicts of interest. You may be able to see revenue sharing in fee disclosures. Or you can simply ask your advisor if anyone is paying them to make referrals. 
• Work with a fiduciary advisor. Simply by hiring a fee-only advisor who’s legally obligated to put client interests first, you can help your employees boost their returns.^{1 2}

Not all retirement plans are built the same and not all plan investments offer the same value. By focusing on what helps employees maximize their returns, you can make a significant difference in the quality of your employees’ retirement. 

See How Your Plan’s Investments Stacks Up 

Compare your investment lineup against similar plans using objective data. Download the Investment Scorecard to see whether your plan’s investments are pulling their weight. 

Footnotes