Designing a Retirement Plan That Works: Best Practices for Employers and Employees

The landscape of retirement planning has evolved significantly over the years. Gone are the days when employees spent their entire careers with one company and retired with a guaranteed pension. Today’s workforce is mobile, seeking opportunities for growth and advancement across multiple employers.  

This shift means that organizations must rethink their approach to offering a retirement savings benefit—not only to support employees in achieving long-term financial security but also to attract and retain top talent in an increasingly competitive job market.

For employers, offering a well-designed retirement plan isn’t just a perk; it’s a strategic advantage. A robust plan signals to employees that their financial future matters and that their employer is invested in their well-being beyond their tenure at the company.  

The challenge, then, is designing a plan that balances financial feasibility with meaningful benefits—one that stands out among competitors and aligns with the organization’s overall talent strategy.

So, what does a top-tier retirement plan look like? And how can employers build a plan that meets both business objectives and employees’ needs? Let’s explore best practices for structuring retirement plans that serve as both a recruitment tool and a foundation for strong financial futures.

Key Considerations in Retirement Plan Design

When designing a retirement plan that meets both employer and employee needs, several critical factors come into play. A well-structured plan must be both financially sustainable for the organization and effective in guiding employees toward long-term retirement success.  

Below are the essential elements employers should evaluate when crafting a best-in-class retirement offering.

1. Eligibility

The first step in structuring a retirement plan is determining eligibility—when employees can begin participating. Common best practices include immediate eligibility, 30-day, or three-month waiting periods. When determining eligibility policies, employers should consider "wash rates," or the percentage of new hires who leave within a short time, to ensure they aren’t making contributions for employees who won’t remain with the company long term.

2. Enrollment

Once eligibility is established, the next consideration is the enrollment process. Automatic enrollment has become the industry standard. Historically, employees had to actively opt into a 401(k) plan, leading to lower participation rates. Now, new plans are required by law to include automatic enrollment, meaning employees are enrolled by default and must actively opt out if they do not wish to participate.  

3. Employer Matching Contributions

Employer contributions play a significant role in increasing employee engagement with the retirement plan. A well-designed match structure not only incentivizes employee participation but also helps maximize retirement savings. The most effective approach is to require employees to contribute in order to receive the match, ensuring they have a stake in their own retirement.

Employers typically set the initial employee contribution (payroll deduction) at a level that aligns with their match (e.g., 6%). Paired with automatic enrollment is automatic escalation, which gradually increases employees’ contribution rates over time. A common structure starts at 6% and increases by 1% annually, capping at 10–15%. This approach helps employees build their savings gradually without significantly impacting their take-home pay.

4. Testing and Compliance

Employers must also consider the impact of what’s known as “non-discrimination testing,” which ensures that highly compensated employees (HCEs) do not receive disproportionate benefits compared to non-highly compensated employees (NHCEs). If a company has many HCEs, they may fail these tests, limiting contributions for executives.  

One solution is to offer a safe harbor match, which provides a preset contribution formula—such as 100% of the first 3% of salary and 50% of the next 2%—to automatically satisfy non-discrimination requirements.

5. Consider Profit Sharing

Beyond traditional matching, some companies introduce profit-sharing contributions, allowing employers to make discretionary contributions based on company performance. These contributions, often in the 1–2% range, can foster a sense of shared success and long-term financial security. They also provide ways to engage employees by giving them a sense that they can benefit from the company’s overall success, thereby positively impacting their own personal contributions and leading to greater retention rates.

6. Vesting Schedules

Vesting policies determine when employees gain full ownership of employer contributions. This is a key tool for retention, ensuring that employer contributions benefit long-term employees while protecting the company from short-term hires walking away with full benefits.

Common structures include:

• Cliff Vesting: Employees receive 0% ownership of employer contributions until they reach a specified milestone (e.g., three years), at which point they become fully vested.

• Graded Vesting: Employees gradually earn ownership over time (e.g., 25% vested after one year, 50% after two years, 100% after four years).

Safe harbor contributions, however, require immediate vesting, making eligibility criteria even more important for companies using this structure.

7. Plan Costs and Transparency

Fee structures can significantly impact plan effectiveness, and employers should ensure complete transparency when selecting investment options. Companies should opt for open-architecture investment platforms that provide access to a broad range of funds rather than being restricted to proprietary investment products.

While fee analysis and benchmarking are critical, they are complex enough to warrant separate discussion. Employers should regularly assess their plan’s costs and compare them to industry benchmarks to ensure they are offering a competitive and cost-effective program.

8. Customization for Employee Needs

A successful retirement plan must cater to employees at all income levels. Recent legislation, such as the SECURE Act 2.0, introduced emergency savings accounts within 401(k) plans, allowing employees to build short-term savings without penalties. This feature is particularly beneficial for lower-income workers who may struggle to contribute to retirement while managing immediate financial needs.

On the other end of the spectrum, highly compensated employees often find traditional contribution limits (currently $23,500) insufficient for their retirement goals. Employers can offer executive deferred compensation plans that allow additional savings beyond 401(k) limits, providing greater flexibility for top earners.

Employers can also leverage new comparability profit-sharing plans, which allow contributions to be allocated differently across employee groups—often favoring older employees or business owners who need to accelerate retirement savings. These plans must comply with IRS guidelines but can be an effective tool for maximizing benefits for key employees.

9. Strategic Blend of Pre-Tax and After-Tax (Roth) Contributions

One of the most important aspects of retirement plan design is giving employees the flexibility to choose between pre-tax and Roth 401(k) (after-tax) contributions—or a mix of both. This decision can have significant long-term tax implications, making it essential for employees to understand their options.

Traditionally, employer-sponsored retirement plans like 401(k)s offered pre-tax contributions, meaning the money is deducted from an employee’s paycheck before taxes, reducing taxable income in the present. These contributions grow tax-deferred, and taxes are paid only upon withdrawal in retirement—ideally, when the individual is in a lower tax bracket.

Roth contributions, on the other hand, are made after taxes have been paid. This means there’s no immediate tax break, but the money grows tax-free, and all qualified withdrawals—including earnings—are also tax-free in retirement.

A well-designed retirement plan should allow employees to contribute to either pre-tax or Roth accounts—or a combination of both. This flexibility enables individuals to make strategic decisions based on their income level, career stage, and expectations for future tax rates.

• For younger employees, Roth contributions can be an excellent choice since they have decades of potential tax-free growth ahead of them and they are in a lower tax bracket.

• Mid-career and high-earning employees may benefit from pre-tax contributions to reduce their taxable income now while they’re in a higher tax bracket.

• A hybrid approach, contributing to both pre-tax and Roth accounts, helps employees hedge against future tax rate changes and provides different buckets of money to draw from in retirement, optimizing their tax liability.

Creating Win-Wins for Employers and Employees Alike

By considering these elements—eligibility, enrollment, matching contributions, vesting, plan costs, and customization—employers can design a retirement plan that meets the needs of their workforce while supporting long-term business objectives. Companies that apply these principles will benefit from a high-performing retirement program that serves both their employees and their bottom line alike.