By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC
As Congress continues to explore ways of making our retirement system stronger, legislators should consider the 401k plan fixes outlined below. I have ranked these suggestions from 1 to 10 (with 10 being a major impact) based upon how I feel the fix would impact participant retirement readiness:
401k Plan Fixes
1. Require “auto” features
Two no-brainer 401k plan fixes are auto enrollment and auto escalation. We know that these plan design features work. Employee education does not. Require all 401k plans to auto-enroll all participants and escalate their contributions annually.
Impact score: 10. We know this works!
2. Require re-enrollment
Annual re-enrollment also works. Legislate its requirement into all 401k plans. Those plans that have implemented auto enrollment, auto escalation and annual re-enrollment have participation levels of 90% or more.
Impact score: 10. We know this also works!
3. Eliminate participant loans
One of the worst financial decisions any 401k plan participant can make, eliminate them as soon as possible.
Impact score: 5. Many participants who take loans end up defaulting on them when they leave their employer, permanently removing assets from their retirement account. Putting guard rails like this on 401k plans both guides and protects participants. One of my two 401k plan fixes that is an addition by subtraction — a deletion of a plan feature that makes 401k plans better.
4. Allow unlimited Roth 401k contributions
State and federal governments get their tax revenue since these contributions are after-tax while those participants – probably most of us – who didn’t contribute enough in our early years have a chance to catch up. The existing $5,500 annual catch-up contribution for those age 50 and older is appreciated but falls significantly short of what is necessary to help participants catch-up.
Impact score: 3. Most of us don’t have the capacity to make a large contribution each year. However, many of us occasionally have a year when it is possible. Why not have the option?
5. Require a QDIA in every plan
Participants have shown that they appreciate the do-it-for-me approach in 401k plans. Require every 401k plan to offer at least one series of life-cycle, target date or risk-based investments. Participants are accepting do-it-for-me solutions. Are plan sponsors and legislators listening?
Impact score: 8. Employee education does not work! For years we held employee education sessions where we gave participants the tools, shared how to use them and then watched participants fail when the equity markets crashed in 2008-09. Participants have accepted guided solutions by not opting out of auto options. If their contributions are invested in a QDIA and they are advised to leave it alone until they retire, the impact could be enormous.
6. Require electronic notice distribution
Similar to the other auto features discussed previously, assume that all participants wish to receive all required notices and documents (including participant statements) in electronic form. This seems to be a no-brainer since most participants probably toss every notice they receive directly into the trash. We need to pull this phase of plan administration into the 21st century. Everyone has an email address or access to the internet. Believe it or not, there are children in my daughter’s third-grade class who have their own cell phones! Allow opt-out to hardcopy for those few who want it.
Common sense impact score: 10. A huge win for recordkeepers and plan sponsors in terms of cost reduction. This cost savings should find its way to participants as well.
7. Every party with a signed contract is a fiduciary
This is an incredibly common sense requirement: if you have a signed contract with a qualified retirement plan sponsor to provide administrative, trust, custody, investment advisory, investment education, audit or any other services, you are a fiduciary. Every decision you make must be in the plan participant’s best interest.
Common sense impact score: 10. Why isn’t this the law right now?
8. Get all company stock out of 401k plans
Company stock has proved to be a poor investment for many 401k plan participants. Senior management is often conflicted in providing advice and guidance about investing in company stock at times when that advice would be most helpful to participants.
Impact score: 4. Fewer and fewer plans will offer company stock investment options as a result of recent court case rulings. However, there is no reason to hold back from eliminating it as an investment option. The second of my suggested 401k plan fixes that is an addition by subtraction.
It seems legislators are struggling to find impactful changes to make. They should consider these eight 401k plan fixes.
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 firstname.lastname@example.org.
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 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.