Strategic retirement planning should be a blend of science and art. 401(k) returns are unimpressive, and Americans save far less than our global counterparts. If you want to maintain integrity in your fiduciary relationships, it's time to find the courage to make changes to your plan that will benefit your long-term employees for many years to come:
1. Write a check for your plan administrative and recordkeeping fees.
If your plan offers funds with revenue sharing that eliminate your out-of-pocket administrative expenses, explore whether the revenue sharing can be credited back to a participant's account. Better still, find out if there are share classes with lower expenses and no revenue sharing.
2. Simplify and auto-enroll all employees.
Make auto-enrollment of plan participants meaningful. Set the default deferral rate at a level to maximize the employer match (or more if you desire a profound impact). If auto-enrollment is not feasible, then simplify the enrollment process. More paperwork means more friction during enrollment process, thereby limiting participation. Although disclosures still apply, you can make the paperwork as simple as possible.
3. Auto-increase elective deferrals.
Research tells us that employees are more willing to forgo something in the future than to give something up in the present. Synchronize pay increases with elective deferral increases. An alternative method is to include automatic annual deferral increases. Be as creative as your recordkeeper can accommodate. Consider an increase on the employee's birthday or employment anniversary: "Happy birthday! Your gift is an estimated increase of $X per month at retirement."
4. Raise the percentage match and lower the rate.
If the current match is 100% of the first 3% of pay, reduce the match to 50% and increase the cap to 6% of pay. It's the same net cost to the employer; however, if the plan auto-enrolls at 6%, the result is a total savings rate of 9% instead of what would have been 6%.
5. Simplify the termination process.
An entire career's worth of 401(k) accumulation can go down the drain with "cash outs" at termination of employment. Employees need more simplified and integrated rollover options. The easier it is for employees to roll over their account, the greater the likelihood that they will do the right thing.
6. Reduce the number of investment options.
Consider offering only five risk and five age-based options as the only investment option(s). Also, consider an employer-directed 401(k) plan (yes, there are employer-directed 401(k) plans), or at least one that initially defaults the employee to an age- or risk-based fund based on certain demographics. Too much choice confuses and alienates participants. Exotic investments may be dangerous in the hands of an unsophisticated employee.
7. Eliminating financial hardship and loan provisions.
Admittedly, some employees use these provisions for the right reasons, but most use them as part of a short- or moderate-term savings plan.
8. Eliminate self-directed brokerage accounts.
From a fiduciary standpoint, plan sponsors who offer SDBAs have heightened fiduciary requirements and increased liability. Additionally, administrative costs for these plans are often higher due to the additional recordkeeping requirements.
Vince Giovinazzo is CEO and founder of 401(k) Advisors, an independent retirement plan consulting firm headquartered in Aliso Viejo, Calif.
