Commentary: For more than 30 years I have helped plan sponsors with their 401(k) plans. During that time I have noticed that the best plans appear to possess the following seven attributes:
1. Reasonable cost. Your plan does not have to be the lowest cost plan amongst your peer group, but it definitely shouldn't be the highest. Remember, it is OK with the Department of Labor if you pay more for services. You just have to justify why you are paying more.
2. Participation. The best plans now have at least 90% of employees with account balances. How did they achieve 90% participation? Auto-enrollment.
3. Participation and contributions. Participation can also be measured by the percentage of employees who are actually contributing. The best plans have at least 80% of employees making contributions.
4. 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 401(k) plan. Since the fund is subsidized by the company, it continues to pay over 4%, even in this low interest rate environment. What a deal!
5. Employees “get” the plan. The best 401(k) 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. If employees don’t understand the plan, they won’t contribute.
6. The fund line-up has a home for everyone. I believe there are four types of retirement plan investors. The Core Funds Investor who likes to be well-diversified over the entire fund line-up. The Index Fund Investor who wants to invest predominantly or exclusively in index funds. The Specialty Investor who looks for unique investment opportunities to diversify his/her overall portfolio. And finally, the Accidental Investor, who comprises the vast majority of your participants and prefers to invest in professionally managed options – like target date funds. If your retirement plan is attempting to serve a large number of employees (i.e., in the thousands) your investment menu needs to be broad enough for all of these investors.
7. The leaders in your company talk about the 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 more attributes that successful retirement plans share; however, I have consistently found these seven to be the most important. How would you rate your plan on these seven items?
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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