Do you have a successful 401(k) plan? A small number of factors can help you determine the answer.
For more than 30 years, I have helped plan sponsors with their 401(k) plans. From Apple and IBM to John Deere and Mazda Motor Corporation, I have had the privilege of working with a number of great Fortune 500 plans, as well as hundreds of excellent small and medium-sized plans.
I have observed that the best plans always seem to possess the following seven attributes.
1. Reasonable cost
Your plan does not have to be among the lowest-cost in its peer group, but it definitely shouldn’t be in the highest quartile. You can feel comfortable as a plan sponsor if your plan is somewhere near the average.
Remember, it is OK with the Department of Labor if you pay more for services. You just need to have a reason. Better service, access to more services and a provider who is able to understand your plan’s complexity are all good reasons to pay more. The provider is a friend (or relative) of the CEO, we’ve always worked with them or senior management likes attending their annual conference in Florida in February are not good reasons.
I worked with a client that had a large Spanish-speaking workforce. The company had contracted with a recordkeeper with an excellent Spanish-speaking call center and website. Of course, it cost a bit more to provide these services. The vice president of human resources explained it perfectly by saying, “We provide a generous retirement benefit and want to ensure our employees clearly understand it.”
2. A lot of employees have account balances
The best plans now have at least 90% of employees with account balances. How did they achieve 90% participation? Auto-enrollment and annual auto re-enrollment.
3. A high percentage of employees contribute
Participation can also be measured by the percentage of employees who are making contributions. The best plans have at least 85% of employees contributing.
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!
I have clients where very few employees who leave the company roll their money out of the plan. Not only does this speak to the quality of the plan, but it also means that employees trust management. Employees who work for companies where management is an enemy rather than a friend take their balances out of the plan as soon as they are able.
5. Employees understand the plan
The best 401(k) plans are well understood by their plan participants. They tend to have straight-forward plan designs and a management team that can explain the plan easily. For example, at one of my clients, I have heard employees say to each other in employee education sessions, “Look, you need to be in the 401(k) plan and you need to contribute at least 8% to receive the maximum company match. It’s that simple.”
If employees don’t understand the plan, they won’t contribute the amounts necessary to build retirement-ready balances.
6. The fund lineup has a home for everyone
I believe there are four types of 401(k) plan investors: core funds investors who like to be well-diversified over the core funds lineup; index investors who want to invest predominantly or exclusively in index funds; specialty investors who look for unique investment opportunities in your plan to diversify their overall portfolio; and finally, “Do It For Me” investors, who make up the vast majority of your participants and prefer to invest in balanced investment options — like target date funds.
If you have a large 401(k) plan that has thousands of participants your investment menu needs to be broad enough for all of these investors.
7. The leaders in your company talk about your 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.
There are probably other attributes that successful 401(k) plans share. However, I have consistently found these seven to be the most important. How would you rate your plan on these factors?
Robert Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.
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