By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
Welcome to 2016! I hope you had a joyous and restful holiday season. Now it’s back to work!
I believe that every plan sponsor should resolve to consider making the following 2016 401k improvements to their plan:
1. Automatic enrollment
Out of all the 2016 401k improvements you could consider, this is probably the most important. According to a report from the Center for Retirement Research at Boston College, 67% of employees in plans without automatic enrollment contribute. In plans that use automatic enrollment, 90%+ of all participants contribute. Right now, less than 50% of all 401k plans use the auto-enrollment feature.
2. Automatic escalation
Currently, about 58% of plans using auto-enrollment auto-escalate participant contribution rates each year, according to the Plan Sponsor Council of America (PSCA). Most 401k plans auto-enroll participants at a contribution rate of 3%. However, retirement experts believe that employees need to add between 12% and 15% to their 401k accounts each year to build a retirement ready balance. Participants that don’t want to have their contribution rates raised can opt out of auto-escalation — but typically 80%+ don’t!
3. No loans
An addition by deletion, this is one of the only 2016 401k improvements that decreases participant choice. According to PSCA, more than 87% of 401k plans offer participant loans. Taking a participant loan is one of the worst investments a participant can make. Many participant loans are defaulted when participants change jobs. Loan defaults remove assets from participant retirement accounts forever. Defaulted balances are subject to state, federal and penalty taxes that many times approach 50%. Give serious consideration to eliminating your participant loan feature in 2016. If your participants currently can take multiple loans from your plan, consider cutting back to just one.
4. Target date funds
Approximately two-thirds of 401k plans offer target date funds, according to PSCA. Most retirement experts believe that 75% or more of your participants belong in professionally managed investment options, like target date funds. Choosing a target date series isn’t difficult since three mutual fund families dominate the target date funds market. Ask the adviser who works with your plan to help you select a target date series or ensure you are using the right set of funds.
5. Participant investment advice
An emerging benefit in 401k plans, participant investment advice will continue to become more prevalent during 2016. Advice services can be obtained from many sources. Fees range from free to very expensive.
If your 401k plan features these five plan design elements it will be considered among the leading edge 401k plans in the country! Consider making these 2016 401k improvements to your plan now.
I wish you much success in 2016!
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at: http://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.