Five Features of a Healthy 401(K) Plan
August 7, 2018
Many companies offer 401(k) retirement plans as a valuable incentive to recruit and retain the best talent. Other companies offer 401(k) plans from a place of parental responsibility to encourage their employees to save for their own retirement. Since 401(k) plans vary greatly, you might wonder whether your company plan is competitive and doing what it should to encourage retirement savings. The following five discussion points will help you understand if your 401(k) is holding up well against other plans.
Your plan level costs do not have to be among the lowest in the plan’s peer group, but those costs shouldn’t be excessive. Better service and access to more services can be good reasons to justify plan fees. And it isn’t always easy to discover how much you’re paying. To know for sure, ask your provider for a copy of its 408(b)(2) notice for each vendor. This ERISA required disclosure will list all plan fees for that vendor.
Low investment menu costs do not guarantee good investment returns, but low mutual fund expenses have been shown to be a predictor of better investment returns. Index funds are often cited as solid low cost investment options and should be weighed against what actively managed funds offer. Either way, the lowest share class available to the plan should be used.
A HIGH PERCENTAGE OF EMPLOYEES HAVE ACCOUNT BALANCES
Workplace culture can include a saving culture as more employees participate in the plan. Saving can reduce employee anxiety about retirement and provide a sense of comfort they are on a good path. The best plans have upwards of 90% of employees with account balances. Automatic enrollment and profit sharing help make this a reality.
A HIGH PERCENTAGE OF EMPLOYEES CONTRIBUTE
Saving helps an individual build financial confidence and adds stability in difficult times. A company match can provide a significant incentive to save. A plan could automatically enroll its employees too. This type of enrollment would force an employee to otherwise make an active choice not to save. The best plans have over 80% of employees contributing their own money.
THE INVESTMENT MENU
A well rounded investment menu should include options covering a range of risk profiles. Mutual funds that grow more conservative as an employee ages and others that maintain a target risk profile are good options. A variety of single asset class mutual funds permit participants to customize their savings to their own risk profile too. Yet another option is to offer a brokerage window or professional management for “do it myself” and “do it for me” investors.
A menu of proprietary funds from the employer of the plan’s advisor/representative is generally not a good idea as these funds are often higher in cost.
Offering too many options can also be a problem. Employees may feel overwhelmed by too many choices and suffer from “analysis paralysis.” The right fund lineup should have a home for everyone.
Plan sponsors can choose among many optional plan features, and those choices should be based on the company’s attitude toward the plan. For example, the company’s desire to encourage long term saving may include a generous company match but exclude loans and in-service distributions. Likewise, a company may offer those options to ensure their employees have a variety of tools to meet their financial goals.
This is not meant to be an exhaustive description of a good 401(k) plan, but rather to highlight some of the signs of a thoughtfully designed one. Please do not hesitate to contact me if you would like to discuss your plan or are thinking of starting one up.