The economy shows plenty of bright spots as we begin 2018. GDP is stronger than it has been during the majority of the recovery, equity markets worldwide have been robust, and unemployment in the U.S. has been falling.
Lower unemployment has resulted in worker shortages in many cities. It is fair to say that competition for qualified employees will be more intense in 2018. As a result, your competitors will be doing everything they can to make their compensation and benefits packages stand out from the crowd.
In response to the top 401k trends driving the industry, I have identified the 11 changes listed below that many leading-edge employers will make to their 401k plans in 2018. Nearly all of these changes result in little or no cost to plan sponsors. In fact some will even save plan sponsors money.
Top 401k Trends For 2018
1. Inclusion of HSA information in 401k employee education sessions
PLANSPONSOR reports that more than 75% of employers in a Plan Sponsor Council of America survey say they consider HSAs to be a retirement benefit (as well as health care benefit). Health Savings Account balances carried into retirement can be used to pay for many expenses, completely tax-free!
Unfortunately, the use of HSA balances in retirement will likely be confined to executives and high wage earners until the amount that can be contributed is increased. A Republican health care proposal in early 2017 (which did not pass) doubled the maximum contribution amount. Look for continued pressure on Congress to increase the contribution maximum as HSAs become better understood.
In the meantime, if you offer an HDHP (High-Deductible Health Plan), make sure you talk about the use of HSAs in your 401k employee education sessions since the accounts are important retirement planning tools. This could be one of the most important 401k trends in the future.
2. Addition of SRI information/investments
Socially Responsible Investing (SRI) considerations are very important to your millennial employees. They want to know about SRI factors in their 401k plan investment options. Increase the value of your 401k plan to this important group by incorporating SRI information into your 401k plan communications program and employee education sessions.
3. Understanding your fiduciary responsibilities
Now that the implementation of the final fiduciary regulations has been delayed, that affects your responsibilities as a fiduciary to your 401k plan, right? Nope. Not at all. Your responsibilities remain the same — just as they were when the regulations were first conceived and passed. This is one of the most important 401k trends that will not be going anyay any time soon.
To gain peace of mind, elite plan sponsors will continue to try to understand the fiduciary responsibilities their investment advisor/er is taking on. Or in the case of those plan sponsors who work with brokers, bankers and insurance company advisors, the fiduciary responsibilities they are not taking on.
Many plan sponsors will solve the problem by deciding to work with Registered Investment Advisers (RIAs) who sign on as fiduciaries without limitation. Plan sponsors who work with RIAs don’t have to worry about whether to sign BICE Agreements or where their adviser’s fiduciary responsibilities stop, because RIAs are required by law to sign on to 401k plans as fiduciaries without limitations.
4. Incorporation of behavioral economics/finance elements in plan design
Smart plan sponsors are updating their 401k plan designs to incorporate behavioral economics/finance elements that use adverse participant behaviors in ways that actually benefit plan participants. This includes taking advantage of participant inertia by auto-enrolling new hires at higher initial contribution percentages (4% to 6%) and auto-escalating them to higher on-going contribution percentages (10% to 12%). Very few participants opt out of these elections, resulting in higher account balances that give them a much better chance of achieving retirement readiness.
5. Addition of annual re-enrollment
With the objective of reaching plan participation rates of 90% or higher, innovative plan sponsors re-enroll non-participating employees into their 401k plans each year. Studies show that the vast majority will not opt out. Most plans that re-enroll have participation rates between 92% and 95%.
6. Stretching matching contributions
Continuing the behavioral economics/finance plan design theme, progressive employers are stretching their matching contributions to encourage participants to contribute more to receive the full match. The most common match has been 50% of the first 6%. Many employers will be moving to 25% of 12%, in which case participants would need to contribute 12% to receive the maximum matching contribution of 3%. The objective is to motivate participants to add at least 15% of their compensation each year (participant plus employer contributions) to their 401k plan account.
7. New limitations on loans
Taking a participant loan is generally one of the worst decisions a 401k participant can make. Leading-edge employers will seek to limit plan leakage (via defaulted loans) by reducing the number of loans that plan participants can take or eliminating loan provisions entirely.
By offering a loan option in your plan, you are indicating to participants that it is OK to take a loan. Many will think, “Why would we have the option if it wasn’t a good thing to do?” However, for most participants, it is likely that things will not turn out well.
Those participants who depart from your organization (either because they have found a new job or because you laid them off) will likely default on their loans, permanently removing those balances from their retirement accounts.
8. Selection of the right QDIA
Target date funds, customized target date funds, CIT target date funds, lifestyle funds, risk-based funds, managed account funds, balanced funds — which option is right to use in your 401k plan as a QDIA (Qualified Default Investment Alternative)? In recent years, there has been a proliferation of new flavors of professionally managed balanced account options suitable for use as QDIAs.
Count on your investment adviser to help you run through the options to find the best version for your corporate culture. Target date funds have the fewest negative attributes and are the easiest for participants to understand. All the other options have significant limitations.
Savvy plan sponsors will spend the time necessary to make sure they have the right QDIA available at the lowest possible cost. Remember that everyone you are auto-enrolling will be invested in this option.
9. Addition of participant investment advice
This is one of the continuing 401k trends. Most participants feel they need help allocating their 401k account balance to the proper investment funds. Many large recordkeepers now offer basic participant investment advisory services (robo-type, algorithm-based) at no cost.
Quite a few recordkeepers also offer a higher level of participant investment advice at costs ranging from 25 to 100 basis points. In all cases, the provider of the services signs on as a fiduciary. Leading plan sponsors will ensure that their participants have access to some level of investment advisory services in 2018.
10. Use of specialized 401k investment advisers
This is another one of the 401k trends that are rising in importance. Sharp plan sponsors have already realized that the easiest way to solve the fiduciary dilemma is to work with an investment adviser employed by an RIA. They further refined their search by considering only those RIAs that work exclusively with 401k plans.
These advisers have no conflicts of interest, are able to offer services at the lowest possible cost, and do a much better job of making things simple for you and your plan participants.
If you work with an advisor who has a business that includes individuals, foundations, and institutions, etc., consider switching to an adviser who works only with 401k plans. You will receive much better advice.
11. Continuing emphasis on financial wellness education
Merging financial wellness education with 401k plan education is one of the continuing 401k trends as well. If you don’t discuss basic financial wellness concepts in your education sessions, consider doing so in 2018. Without basic financial knowledge, employees have a hard time understanding more advanced concepts like risk and volatility.
As you finalize your performance plan for 2018, consider how these important 401k trends affect your initiatives. I hope you have a prosperous 2018!
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, 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 Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider 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, a 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.