401k fixes

After working with hundreds of 401k plans for more than 30 years, I have consistently encountered a relatively small number of 401k fixes that can make a big difference in almost every 401k plan. None will cost you much money and some may even save you money. Check out this list to see how many of these 401k fixes you can implement in your plan.

Low-Cost 401k Fixes

1. Lower your investment expenses by using R6 or similar share classes

Many mutual fund companies offer or are originating R6 or similar share classes of their investment funds for retirement plans (hence the “R”). These share classes normally provide no revenue sharing (12b-1 or sub-TA fees) and are therefore cheaper than all other share classes.

They also typically have no minimum plan investment requirements. This is one of the 401k fixes that will save your plan money.

      Total cost: Cost savings

2. Decrease your investment expenses by reevaluating your TDF

Most experts feel that roughly 75% of all participants belong in target date funds (TDFs). The vast majority of 401k plans use TDFs as their Qualified Default Investment Alternative (QDIA). As a result, the mutual fund companies feel that their most important product is their target date series.

The market for target date funds is incredibly competitive, and fund companies will continue to lower their fees (expense ratios) in an effort to gain market share. As a result, it makes sense for you to evaluate your target date series every few years.

Consider those TDFs that consist only of index funds and, if your plan is large, take a look at collective investment trust (CIT) target date options. If you are able to move to a TDF series that uses index funds or is a CIT, this would be another of the 401k fixes that would result in cost savings for your plan.

      Total cost: Cost savings if moving to index or CIT TDF

3. Offer a Roth in-plan 401k conversion option

Offering a Roth in-plan conversion option in your 401k plan costs virtually nothing. This is one of the 401k fixes most valued by executives since it can provide tax planning options when markets fall.

A Roth in-plan conversion option allows participants to convert their pre-tax 401k balances to Roth after-tax 401k balances at any time. The costs to a plan sponsor relate to amending the plan and communicating the change.

Total cost: Less than $5,000

4. Incorporate HSA accounts into retirement planning

The role of Health Savings Accounts (HSAs) in retirement planning is just beginning to be appreciated. Many plan sponsors now realize that maxing out HSA accounts can be a significant retirement as well as health care benefit for employees.

Begin communicating in your employee education sessions the retirement benefits associated with funding HSAs. This is another one of the 401k fixes highly valued by your executive group since it yields additional tax planning options.

      Total cost: Nothing

5. Integrate financial wellness education with employee 401k education

Many employers are finding that employees who don’t know how to create a budget can’t begin to understand how to diversify their 401k plan accounts. Without basic financial knowledge, employees have a hard time comprehending more advanced concepts like risk and volatility.

In response, leading-edge employers are marrying financial wellness education with employee 401k education. This is one of the 401k fixes that may increase employee job performance and productivity since financially knowledgeable employees make better work-related decisions.

      Total cost: Nothing, if sourced from your existing employee education provider

6. Give your participants access to multiple levels of investment advice

Your 401k participants need help managing their accounts. Nearly every recordkeeper is now able to facilitate some type of online investment advice service. Many offer multiple levels of investment advice, varying in cost from free to 25 BPs or more. Larger plan sponsors now routinely offer multiple levels of participant investment advice.

      Total cost: Nothing for employers, free to 25 BPs or more for participants

7. Cure low participation with auto-enrollment

Many plan sponsors have trouble getting all their employees to enroll and contribute to the 401k plan. Auto-enrollment solves that problem quite effectively. Studies have shown that plans auto-enrolling employees have participation rates of 90% or more. This is another of the 401k fixes that have only plan amendment and communication costs.

      Total cost: less than $5,000

8. Fix failing nondiscrimination tests with auto-escalation

Plans that currently do not pass their ADP and/or ACP nondiscrimination tests should consider auto-enrollment and auto-escalation. After a few years, the NHCE ADP, the contribution percentage that determines how much your highly compensated employees (HCEs) may contribute, will rise as that group begins to contribute at rates that are more appropriate to building a retirement-ready account balance. A plan amendment and communication of the change are required.

      Total cost: Less than $5,000

9. Hire an investment adviser from the right firm

Many plan sponsors have hired advisors from banks, insurance companies or brokerage firms to provide investment advice on their 401k plans. These advisors are beholden to the company they work for and financially motivated to sell clients their firm’s investment products.

Hire an adviser who works for a Registered Investment Advisory (RIA) firm. These individuals are required by law to put their clients’ interests ahead of their own since they must sign on to their clients’ plans as fiduciaries. Brokers, insurance company advisors and bankers are held to much lower standards.

This is another one of the 401k fixes that can save you money, because an adviser working for an RIA will charge you market competitive rates and practice fee transparency.

      Total cost: Nothing or cost savings

10. Move to online employee education

It is nearly impossible to get participants to attend employee education sessions. It is an even greater challenge to get them to participate. And do they ever learn anything? There are many studies showing that adults learn better in short bursts, no longer than 10 or 15 minutes.

Update your employee education program by offering it online and on demand. Your employees can then access short educational modules in their homes with their spouses or partners. This is another one of the 401k fixes that will increase employee productivity and save you money since you won’t be pulling employees away from their jobs.

      Total cost: Cost savings

11. Fix inappropriate investing by re-enrolling everyone into a TDF QDIA

I still talk with way too many participants who have invested 100% of their account balance in a real estate fund, for example. Conversely, there are a number of participants in each plan who are investing too conservatively by allocating 100% of their balance to the money market fund.

Finally, there are quite a few participants who used advice from their brother-in-law (for example), when initially establishing their account and haven’t made any changes since.

Studies indicate that the vast majority of plan participants desire a “do it for me” investment approach. In other words, they belong in a TDF – a professionally managed, diversified investment fund that automatically adjusts its risk exposure as time goes by.

Address inappropriate investment selection by re-enrolling your participants into your TDFs. Participants can always opt-out of the reallocation or change their allocations after re-enrollment. This is one of the 401k fixes that only requires communication to employees.

Total cost: Less than $5,000

12. Address low fixed-income returns by offering a stable value option

No plan sponsors offer a money market fund in their 401k plans anymore, right? You might be surprised at the number that still do! Not only have prime money market funds become subject to gates and redemption fees, but their NAVs can vary as well.

That means it is now possible to lose money in a prime money market fund. Think a government money market fund is the answer? Those funds have an even lower yield than prime money market funds. Your employees deserve the opportunity to invest their money safely, without the prospect of loss and with a reasonable return. Make sure your 401k plan offers a stable value fund as its safest investment option.

Total cost: Nothing

Two Additional 401k Fixes To Consider

The following two 401k fixes are ones I am encountering lately and I can see them becoming more important as we move into a post-COVID-19 world.

Review ESG factors

Data shows that millennial investors like to consider ESG (environmental, social, and governance) factors when making investment decisions. Morningstar now offers sustainability ratings on most mutual funds to provide a measure of the social responsibility of the companies that make up the investment holdings in the mutual funds.

Make sure you share these ratings with your participants. Studies show that millennial’s place greater value on retirement plans that have a socially responsible investment component.

You should also begin to consider these factors when choosing new investment funds and reviewing your investment menu. Ask your investment advisor to add Morningstar Sustainability Ratings for your investment funds to the performance reports produced.

Add an emergency, or sidecar, savings account

Hardship withdrawals and defaulted plan loans can cripple employees’ chances to achieve retirement readiness. Many employees are forced to take these withdrawals as a result of a financial emergency because they have no other savings.

Emergency, or sidecar, savings accounts were legislated to help employees create a savings account they could use for emergencies instead of tapping their retirement plan accounts. These accounts are funded via payroll deductions with after-tax contributions.

Most American workers’ biggest financial problem is that they don’t have any emergency savings. Progressive employers are bolting on emergency savings accounts to their 401k plans. You may think this is one of the more expensive 401k fixes, but it is not. All plan sponsors need to do is design and communicate the benefit – employees fund it.

Need assistance figuring out if any of these 401k fixes will work for your plan? Ask your investment advisor for help!


About the Author

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 is also an award-winning business writer having written for many organizations including Forbes and SourceMedia. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) 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 employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

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.