For more than 25 years I have helped plan sponsors with their 401(k) plans. During that time I have noticed that the best plans appear to possess the following seven attributes:
1. Reasonable Cost. A plan does not have to be the lowest cost plan amongst its peer group, but it definitely shouldn't be the highest.
2. Participation – I’m in the Plan! The best plans, as you might expect, typically have 80% to 90% of employees with account balances.
3. Participation – Not only am I in the Plan, but I am Contributing! Participation can also be measured based upon the percentage of employees who are actually contributing. The best plans have a high percentage of employees making contributions (solidly in the 80% to 90% range) as well as a high percentage of employees who have account balances.
4. New Employees Roll Money into the Plan, Departing Employees Leave their Balances. The best plans are the best for a reason. Many provide access to investment opportunities that just aren’t available anywhere else. For example, a number of years ago I worked for a large life insurance company that offers a guaranteed rate fund in their 401(k) plan. Since the fund is subsidized by the company, it continues to pay over 6%, even in this low interest rate environment. What a deal!
5. Employees “Get” the Plan. The best 401(k) plans are well understood by their plan participants. If employees don’t understand the plan, they won’t contribute.
6. The Fund Line-up has a Home for Everyone! I believe there are four types of retirement plan investors: The Core Funds Investor who likes to be well-diversified over the entire fund line-up. The Index Fund Investor who wants to invest predominately or exclusively in index funds. The Specialty Investor who looks for unique investment opportunities in a plan to diversify his/her overall portfolio. And finally, the Accidental Investor, who comprises the vast majority of plan participants. If a retirement plan is attempting to serve a large number of employees (i.e., in the thousands) the investment menu needs to be broad enough for all of these investors to find a home.
7. Company Leaders Talk about the Plan
All of the best plans, without exception, receive significant support from their company’s leadership team. These individuals not only talk about the plan at official corporate gatherings; they feature it as a recruiting and retention tool in their everyday conversations.
Do the 401(k) plans that you work with exhibit the seven signs of a successful 401(k)? Consider performing an audit before year-end to find out. You may uncover areas to improve upon during 2014.
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). Mr. Lawton was named as a Top 100 Retirement Plan Adviser by PLANADVISER and a Top 300 Retirement Plan Adviser by 401(k) Wire. Mr. Lawton may be contacted at email@example.com or 414.828.4015.
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