Retirement readiness is all the rage, and defined as financially prepared employees that can retire without lowering their standards of living. Employers obviously have a responsibility to help their employees achieve retirement readiness by offering quality 401(k) plans with features that guide participants to positive participant outcomes.
So, how retirement-ready are your clients’ plans? If they don’t include most or all of the following, it could be a problem.
PLAN DESIGN
- Auto-enrollment
Automatic enrollment of all new participants at a default contribution percentage of at least 3 percent. Progressive employers are auto-enrolling at contribution rates closer to 6 percent. According to a 2017 JPMorgan survey of larger plans, 64 percent of employers have implemented auto-enrollment.
- Auto-escalation
An annual automatic increase in participant contribution rates of 1 percent per year, typically up to a maximum of 10 percent. Based on a 2017 Callan survey, 63 percent of large 401k plans auto-escalate participant contributions.
- Auto re-enrollment
Automatic re-enrollment each year of participants who opt out of initial enrollment at their time of hire or who stop contributing during the year. According to a 2017 T. Rowe Price survey of larger plans, 61 percent 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 percent range. These features also give participants a shot at attaining the annual contributions of 12 percent to 15 percent of gross pay that Vanguard and other experts recommend.
- Tighter rules surrounding participant loans
Requirement of hardship withdrawal criteria in order to take a loan and/or reduction in the number of loans available in an effort to plug leakage.
Fidelity advises that 50 percent of participants who have a loan also 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.
CONTRIBUTIONS
- Roth 401k availability
Retirement-ready 401k plans allow participants to make after-tax Roth 401k contributions. The Callan survey indicates that 68 percent of larger 401k plans offer Roth 401k contributions.
- Stretched employer match
An employer match spread over a larger percentage of employee contributions. For example, 25 percent of the first 12 percent rather than the standard 50 percent of the first 6 percent. The goal of the stretched match is to encourage participants to contribute more so they can get closer to the 12 percent to 15 percent annual contribution target. According to the T. Rowe survey, 38 percent of large employers offer a stretch match.
EMPLOYEE EDUCATION
- Integration of 401k plan and 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 employees’ understanding and appreciation of their benefits, but also helps them do their jobs better.
INVESTMENTS
- Lowest possible cost investment options
A mix of actively managed and index options that all use the lowest-cost share classes available.
- Participant investment advice
According to the Callan survey, 83 percent of large 401k plan sponsors offer some sort of investment advice assistance to their participants.
- Availability of target date funds
Fidelity reports that more than 45 percent of all participants have their entire 401k account balance in target-date funds. The JP Morgan survey indicates that 62 percent of employers offer target-date funds.
According to the T. Rowe survey, nearly 50 percent of employers use a metric to gauge retirement readiness. Most—52 percent—use a metric that is provided by their recordkeeper. I expect the use of retirement readiness measurement tools to rise in the future.
So again, how many of these retirement-ready features do your plan sponsor clients have?
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Lawton is an award-winning 401k investment adviser with over 30 years of experience. 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 401k plan sponsors. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com.
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 bob@lawtonrpc.com.
