How to Seize Opportunity With Annual 401k Plan Reviews

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Turn it up.

Today’s 401k plans offer employers a world of options. A mid-year plan review positions sponsors to identify areas where improvements are possible. Adopting new plan design features can significantly improve a 401k plan to meet organization needs and help employees build toward a secure financial future.

Since many plan design changes require notice to participants 30 days before the beginning of a new plan year, now is a good time to schedule a review of plans with a December 31 year-end date.

Considering what’s important to your organization is a great way to start your review.

Are you in a tight labor market and need a competitive 401k plan to recruit and retain employees? Do you offer profit-sharing contributions in the 401k plan to incentivize performance? Do you want greater profit-sharing allocations to employee groups that play a significant role in your organization? And, importantly, do employees optimally use your 401k plan?

A next step is to assemble available reports and plan documents.

These can include reports generated by your plan recordkeeper, your third-party administrator’s annual plan testing and contributions report, and your Summary Plan Description and/or Adoption Agreement.

Recordkeeping reports to assess retirement preparedness

Increasingly, 401k recordkeepers generate plan reports that measure rates of participation and savings and show where participants are invested. Often this information is broken into age bands, with additional sections allowing plan sponsors to compare their plan’s macro rates of participation and savings against those of similar plans.

Shlomo Benartzi, author of Save More Tomorrow, suggests the following are benchmarks of a successful plan: a 90 percent rate of participation, participants saving 10 percent of their salary, and 90 percent of participants properly invested.

As employers compare their plan’s data against these benchmarks, they can consider opportunities for improvement as they later review their plan design features. Working with their plan advisor, employers can also identify new opportunities to provide guidance on appropriate investment choices.

Administrative reports

All employers – even those that sponsor safe harbor plans exempt from plan testing – will benefit from reviewing results of the Average Deferral Percentage or ADP test, the Average Contribution Percentage or ACP test and the top-heavy test.

Such information allows employers to decide whether non-safe harbor plan designs that allow different contributions levels are possible. Sponsors making a profit-sharing contribution may also want to look at the distribution of those contributions to different organization groups.

401k plan design

Keeping in mind organization priorities, considering recordkeeping and administrative data, and working with a knowledgeable plan advisor, employers can review key aspects of their plan’s design to determine if there’s a good fit and whether a change could improve the 401k plan. Here are some key areas for exploration:

Conducting your mid-year plan review can reveal valuable insights so that your organization and its employees can receive the greatest benefit from your 401k plan.

Laurie C. Wieder, PPC®, is Vice President with Virginia-based Alliant Wealth Advisors, Qualified Plans Division.

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