For more than 30 years I have helped plan sponsors create successful 401k plans. During that time I have noticed that a successful 401k plan appears to possess the following seven attributes:
1. Reasonable cost
Your plan does not have to be the lowest cost plan amongst your peer group, but it definitely shouldn’t be the highest. Remember, it is ok with the Department of Labor if you pay more for services. You just have to justify why you are paying more.
2. Participation: I’m in the plan!
A successful 401k plan has at least 90% of all employees with account balances. How did they achieve 90% participation? Auto-enrollment!
3. Participation: Not only am I in the plan, but I am contributing!
Participation can also be measured by the percentage of employees who are actually contributing. A successful 401k plan has at least 80% of eligible employees making contributions.
4. New employees roll money in, departing employees leave their balances
Successful 401k plans are the best for a reason. Many provide access to investment opportunities that just aren’t available anywhere else. For example, a number of years ago I worked for a large life insurance company that offers a guaranteed rate fund in their 401k plan. Since the fund is subsidized by the company, it continues to pay over 4%, even in this low-interest rate environment. What a deal!
5. Employees “Get” the plan
The best 401k plans are well understood by their plan participants. They tend to have straightforward plan designs and a management team that can explain the plan easily. If employees don’t understand the plan, they won’t contribute.
6. A successful 401k plan fund lineup has a home for everyone!
I believe there are four types of retirement plan investors. The Core Funds Investor who likes to be well-diversified over the entire fund lineup. The Index Fund Investor who wants to invest predominately or exclusively in index funds. The Specialty Investor who looks for unique investment opportunities in your plan to diversify his/her overall portfolio. And finally, the Accidental Investor, who comprises the vast majority of your participants and prefers to invest in professionally managed options — like target date funds. If your retirement plan is attempting to serve a large number of employees (i.e.: in the thousands) your investment menu needs to be broad enough for all of these investors.
7. The leaders in your company talk about the plan
All of the best plans, without exception, receive significant support from their company’s leadership team. These individuals not only talk about the plan at official corporate gatherings; they feature it as a recruiting and retention tool in their everyday conversations.
There are probably more attributes that a successful 401k plan should have, however, I have consistently found these seven to be the most important. How would you rate your plan on these seven items?
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.
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.