By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
The 401k world is changing — fast. Has your plan kept pace? Is the design of your plan still market competitive? Leading-edge plans adhere to the following 401k plan design best practices:
Key 401k Plan Design Best Practices
1. Participant investment advice
The time when all 401k participants have access to professional investment advice from multiple sources is here. Many recordkeepers now offer at least two types of investment advice: algorithm based (think robo-adviser) and a more personalized version (either a proprietary option or through a firm like Financial Engines, or both). Costs range from free to 60 basis points.
2. Online education
Many progressive employers have realized that their employees need help with financial literacy. Not only will improved financial decision-making skills help them make better employee benefit decisions, but it will also help them do their jobs better. These employers are combining financial literacy/wellness education with 401k plan education and hiring firms to deploy online access to 10-15 minute modules. An online approach ensures that education opportunities are offered to millennial’s where and when they want them — on their smart phones at a time of their choosing.
With opt out rates at less than 80%, auto-enrollment has become the 401k plan design solution to low participation. Note that initial auto-enrollment default contribution percentages have increased to 5% or 6% (from 3%).
Participants need to add at least 15% to their 401k accounts each year in order to retire with a retirement ready balance. Make sure your 401k plan design includes annual auto-escalation of participant contributions of 1% per year to at least 10%.
5. Annual re-enrollment
Many employers are re-enrolling non-participating employees each year and defaulting their investment choices into target date options. Use of annual re-enrollments typically increases plan participation to 90% or more.
6. A stretched match
In order to encourage a higher level of participant contributions, many employers are stretching their matching contributions over a broader employee deferral. A traditional match had been 50% of the first 6% of employee deferrals (resulting in a 3% employer match). A stretched matching contribution will provide the same 3% employer matching contribution over a larger employee deferral — 25% of the first 12%, for example.
7. Roth 401k deferral option
Many young participants will benefit from a contribution strategy that includes the use of Roth 401k accounts. After five years, balances in these accounts may be distributed tax-free (for qualified distributions). Those participants that contribute to Roth accounts for their entire careers may build an enormous tax-free balance. Also, your executive group will appreciate having the option to utilize these accounts to execute tax planning strategies.
8. Leakage management
Protecting plan participants from themselves has become an important plan design feature. One way of doing that is eliminating opportunities for leakage — reducing or eliminating plan loan and withdrawal options (unless a hardship reason exists). Loan balances are often defaulted when participants change jobs, permanently removing assets from participant retirement balances.
Important Compliance Features
9. Elect to comply with 404(c)
By complying with ERISA section 404(c) employers can shield themselves from lawsuits brought by participants relative to the investment options offered in the plan. Ask your investment advisor to outline what you need to do to comply.
10. Elect a QDIA
Employers electing a Qualified Default Investment Alternative (QDIA) receive protection from participant lawsuits relative to losses participants may suffer in the QDIA investment. Again, ask your investment advisor to explain.
And you should also consider…
- Progressive plan designs support plan objectives which the employer regularly communicates.
- Employer profit sharing contributions are less valuable in terms of motivating participants to contribute than employer matching contributions. If possible, replace employer profit sharing contributions with employer matching contributions.
- If your employee group is small (100 employees or less) it is very likely your ownership group would benefit from using a safe harbor plan design. These plan designs provide exemptions from non-discrimination testing requirements if a mandatory level of employer contributions are made.
Review your plan soon and make changes this year. Most of these 401k plan design best practices cost very little to implement.
About the Author
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 email@example.com.
About Lawton Retirement Plan Consultants, LLC
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 firstname.lastname@example.org 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.