For more than 25 years I have helped plan sponsors with their 401(k) plans. During that time, I’ve noticed the best plans appear to have the following seven attributes:
1. Reasonable cost. Your plan doesn’t have to be the lowest cost plan in your peer group, but it definitely shouldn't be the highest.
2. Participation – I’m in the plan! The best plans, as you might expect, typically have 80% to 90% of employees with account balances.
3. Contributions – Not only am I in the plan, but I am contributing! Participation can also be measured based on the percentage of employees who are actually contributing. The best plans have a high percentage of employees making contributions (solidly in the 80% to 90% range) as well as a high percentage of employees who have account balances.
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 6%, 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. 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 predominately or exclusively in index funds, the specialty investor who looks for unique investment opportunities in your plan to diversify his/her overall portfolio, and the accidental investor, who comprises the majority of your participants. 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 to find a home.
7. Company leaders 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 another seven 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? Share your thoughts in the comments.
Contributing Editor Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at bob@lawtonrpc.com or 414.828.4015.
