As a 401k plan sponsor, you have no doubt embraced the concept of retirement readiness. Employee retirement readiness can best be defined as financially preparing employees so they may retire without reducing their standard of living.
Employers have the responsibility to help their employees achieve retirement readiness by offering a 401k plan with features that guide participants down the path to retirement readiness. I believe the following attributes are generally found in retirement ready 401k plans:
1. Auto-enrollment. Automatic enrollment of all new participants at a default contribution percentage of at least 3%. Progressive employers are auto-enrolling at contribution rates closer to 6%. According to a JP Morgan survey of larger plans, 64% of employers have implemented auto-enrollment.
2. Auto-escalation. An increase in participant contribution rates of 1% per year, typically up to a maximum of 10%. Based on a Callan survey, 63% of large 401k plans auto-escalate participant contributions.
3. Auto re-enrollment. Automatic re-enrollment each year of any participant who opts out of initial enrollment at their time of hire or who stops contributing during the year. According to a T. Rowe Price survey of larger plans, 61% of employers either currently re-enroll or intend to adopt re-enrollment provisions in the near future.
The combined use of these three “auto” features generally results in plan participation rates in the low 90% range. These features also give participants a shot at attaining the 12% to 15% in annual contributions to their 401k accounts that Vanguard and other experts recommend.
4. Tighter rules surrounding participant loans.In an effort to plug leakage, the requirement of hardship withdrawal criteria in order to take a loan and/or a reduction in the number of loans available. Fidelity advises that 50% of participants who have taken a loan have at least one more. The odds that a loan will be paid back if a participant changes jobs are very low. In addition, 401k plan loans are terrible investments for participants.
5. Roth 401k availability. Retirement ready 401k plans allow participants to make after-tax Roth 401k contributions. The 2017 Callan survey indicates that 68% of larger 401k plans offer Roth 401k contributions.
6. Stretched employer match. An employer match spread over a larger percentage of employee contributions. For example, 25% of the first 12% rather than the standard 50% of the first 6%. The goal of the stretched match is to encourage participants to contribute more so they can get closer to the 12% to 15% annual contribution target. According to the 2017 T. Rowe survey, 38% of large employers offer a stretch match.
7. Integration of 401k employee education with financial wellness education. Most employers have recognized the link between financial wellness education and 401k plan education. Many believe that educating on basic financial concepts not only increases employee understanding and appreciation of their benefits but also helps them do their jobs better.
8. Lowest possible cost investment options. Retirement ready 401k plans offer a selection of passive investment options with all funds using the lowest-cost share classes available.
9. Participant investment advice. According to the 2017 Callan survey, 83% of large 401k plan sponsors offer some sort of investment advice assistance to their participants.
10. Availability of target date funds. Fidelity reports that more than 45% of all participants have their entire 401k account balance in target date funds. The JP Morgan survey shows that 62% of employers offer target date funds.
According to the T. Rowe survey, nearly 50% of employers use a metric to gauge retirement readiness. Most, 52%, use a metric that is provided by their recordkeeper. I expect the use of retirement readiness measurement tools to rise in the future.
How many of these retirement ready features does your 401k plan have?
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 email@example.com.
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 firstname.lastname@example.org or visit the firm’s website at: https://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.