As Congress continues to explore ways of making our retirement system stronger, legislators should consider the fixes outlined below. I have ranked these suggestions from one to 10 (with 10 being a major impact) based upon how I feel the fix would impact participant retirement readiness:
1. Require "auto" features. Auto enrollment and auto escalation work. Employee education does not. Require all 401(k) plans to auto enroll all participants and escalate their contributions annually.
Impact score: 10. We know this works!
2. Require re-enrollment. Annual re-enrollment also works. Legislate this requirement into all 401(k) plans. Those plans that have implemented auto enrollment, auto escalation and annual re-enrollment have participation levels of 90% or more.
Impact score: 10. We know this also works!
3. Eliminate participant loans. Taking a loan from a 401(k) plan is one of the worst financial decisions any plan participant can make. Eliminate them as soon as possible.
Impact score: 5. Many participants who take loans end up defaulting on them when they leave their employer, permanently removing assets from their retirement account. Putting guard rails like this on 401(k) plans both guides and protects participants.
4. Allow unlimited Roth 401(k) contributions. State and federal governments get their tax revenue since these contributions are after-tax while those who didn't contribute enough in their early years have a chance to catch up. The existing $5,500 annual catch-up contribution for those age 50 and older is good, but falls significantly short of what is necessary to help participants catch up.
Impact score: 3. Most plan participants don't have the capacity to make a large contribution each year. However, many of us occasionally have a year when it is possible. Why not have the option available?
5. Require a QDIA in every plan. Participants have shown that they appreciate the do-it-for-me approach in 401(k) plans. Require every 401(k) plan to offer at least one series of life-cycle, target-date or risk-based investments. Participants are accepting do-it-for-me solutions. Are plan sponsors and legislators listening?
Impact score: 8. Employee education does not work. For years, we held employee education sessions where we gave participants the tools, shared how to use them and then watched participants fail when the equity markets crashed in 2008-09. Participants have accepted guided solutions by not opting out of auto options. If their contributions are invested in a QDIA and they are advised to leave it alone until they retire, the impact could be enormous.
6. Require electronic notice distribution. Similar to the other auto features, assume that all participants wish to receive all required notices and documents (including participant statements) in electronic form. This seems to be a no-brainer since most participants probably toss every notice they receive directly into the trash. We need to pull this phase of plan administration into the 21st century. Everyone has an email address or access to the Internet. Believe it or not, there are children in my daughters third grade class who have their own cell phones! Allow those who do want hard copies to opt out of receiving the electronic versions.
Common sense impact score: 10. A huge win for recordkeepers and plan sponsors in terms of cost reduction. This cost savings should find its way to participants as well.
7. Deem every party with a signed contract a fiduciary. This is an incredibly common sense requirement: If you have a signed contract with a qualified retirement plan sponsor to provide administrative, trust, custody, investment advisory, investment education, audit or any other services, you are a fiduciary. Every decision you make must be in the plan participants best interests.
Common sense impact score: 10. Why isn't this the law right now?
8. Get all company stock out of 401(k) plans. Company stock has proved to be a poor investment for many 401(k) plan participants. Senior management is often conflicted in providing advice and guidance about investing in company stock at times when that advice would be most helpful to participants.
Impact score: 4. Fewer and fewer plans will offer company stock investment options as a result of recent court case rulings. However, there is no reason to hold back from eliminating it as an investment option.
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC, an 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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