Commentary: Welcome to 2016. I hope you had a joyous and restful holiday season. Now it's back to work!
I believe that every 401(k) plan sponsor should resolve to ensure that their 401(k) plan has the following features in place by the end of this year:
1. Automatic enrollment. According to a report from the Center for Retirement Research at Boston College, 67% of employees in plans without automatic enrollment contribute. In plans that use automatic enrollment, 90%+ of all participants contribute. Right now, less than 50% of all 401(k) plans use the auto-enrollment feature.
Also see: “Automatic enrollment, escalation feed 401(k) success.”
2. Automatic escalation. Currently, about 58% of plans using auto-enrollment auto-escalate participant contribution rates each year, according to the Plan Sponsor Council of America. Most 401(k) plans auto-enroll participants at a contribution rate of 3%. However, retirement experts believe that employees need to add between 12% and 15% to their 401(k) accounts each year to build a retirement-ready balance. Participants that don't want to have their contribution rates raised can opt out of auto-escalation – but typically 80%+ don't!
3. No loans. According to PSCA, more than 87% of 401(k) plans offer participant loans. Taking a participant loan is one of the worst investments a participant can make. Many participant loans are defaulted when participants change jobs. Loan defaults remove assets from participant retirement accounts forever. Defaulted balances are subject to state, federal and penalty taxes that many times approach 50%. Give serious consideration to eliminating your participant loan feature in 2016. If your participants currently can take multiple loans from your plan, consider cutting back to just one.
Also see: “How to reduce employee cravings for 401(k) loans.”
4. Target-date funds. Approximately two-thirds of 401(k) plans offer target-date funds, according to PSCA. Most retirement experts believe that 75% or more of your participants belong in professionally managed investment options, like target-date funds. Choosing a target-date series isn't difficult since three mutual fund families dominate the target-date funds market. Ask the adviser who works with your plan to help you select a target-date series or ensure you are using the right set of funds.
5. Participant investment advice. An emerging benefit in 401(k) plans, participant investment advice will continue to become more prevalent during 2016. Advice services can be obtained from many sources. Fees range from free to very expensive.
Also see: “Everything you need to know about robo-advisers.”
If your 401(k) plan features these five plan design elements it will be considered among the most leading edge 401(k) plans in the country.
I wish you much success in 2016.
Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, a RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at firstname.lastname@example.org or 414.828.4015.
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