Have your plan sponsor clients designed a successful 401k for their participants? A small number of factors can help determine the answer.
For more than 30 years, I have helped plan sponsors with their 401k plans. From Apple and IBM to John Deere and Mazda Motor Corporation, I have had the privilege of working with a number of great Fortune 500 plans, as well as hundreds of excellent small and medium-sized plans.
I have observed that the best plans always seem to possess the following seven attributes:
- Reasonable cost
A plan does not have to be among the lowest-cost in its peer group, but it definitely shouldn’t be in the highest quartile. Plan sponsors should feel comfortable if their plan is somewhere near the average.
Remember, it is OK with the Department of Labor for clients to pay more for services. Plan sponsors just need to have a reason. Better service, access to more services and a provider who is able to understand the plan’s complexity are all good reasons to pay more. The provider is a friend (or relative) of the CEO, the sponsor has always worked with them, or senior management likes attending their annual conference in Florida in February are not good reasons.
I worked with a client that had a large Spanish-speaking workforce. The company had contracted with a recordkeeper with an excellent Spanish-speaking call center and website. Of course, it cost a bit more to provide these services. The vice president of human resources explained it perfectly by saying, “We provide a generous retirement benefit and want to ensure our employees clearly understand it.”
- A lot of employees have account balances
The best plans now have at least 90 percent of employees with account balances. How did they achieve 90 percent participation? Auto-enrollment and annual auto re-enrollment.
- A high percentage of employees contribute
Participation can also be measured by the percentage of employees who are making contributions. The best plans have at least 85 percent of employees contributing.
- New employees roll money into the plan, departing employees leave their balances
The best 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 6 percent, even in this low-interest rate environment. What a deal!
I have clients where very few employees who leave the company roll their money out of the plan. Not only does this speak to the quality of the plan, but it also means that employees trust management. Employees who work for companies where management is an enemy rather than a friend take their balances out of the plan as soon as they are able.
- Employees understand the plan
The best 401k plans are well understood by their plan participants. They tend to have straight-forward plan designs and a management team that can explain the plan easily. For example, at one of my clients, I have heard employees say to each other in employee education sessions, “Look, you need to be in the 401k plan and you need to contribute at least 8 percent to receive the maximum company match. It’s that simple.”
Plan sponsors need to recognize that if employees don’t understand the plan, they won’t contribute the amounts necessary to build retirement-ready balances.
- The fund lineup has a home for everyone
I believe there are four types of 401k plan investors: Core Funds Investors who like to be well-diversified over the core funds lineup; Index Investors who want to invest predominantly or exclusively in index funds; Specialty Investors who look for unique investment opportunities to diversify their overall portfolio; and finally, “Do It For Me” Investors, who make up the vast majority of participants and prefer to invest in balanced investment options—like target date funds.
If your plan sponsor client has a large 401k plan that has thousands of participants, the investment menu needs to be broad enough for all types of investors.
- The leaders in your company talk about your 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 other attributes that successful 401k plans share. However, I have consistently found these seven to be the most important. How would you rate your plan sponsor clients’ 401ks based on these factors?
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.