The economy is showing plenty of strength as we begin 2018. GDP is stronger than it has been during the majority of the recovery, equity markets worldwide have been robust and unemployment in the U.S. has been falling.
Lower unemployment has resulted in worker shortages in many cities. It’s fair to say that competition for qualified employees will be more intense in 2018. As a result, your competitors will be doing everything they can to make their compensation and benefit packages stand out from the crowd.
In response to the trends driving the 401(k) industry, I’ve identified 11 changes (listed below) that many leading-edge employers will make to their 401(k) plans in 2018. Nearly all of these changes result in little or no cost to plan sponsors. Some will even save plan sponsors money.
1. Inclusion of HSA information in 401(k) employee education sessions
More than 75% of employers in a Plan Sponsor Council of America survey say they consider HSAs to be a retirement benefit (as well as healthcare benefit). Health savings account balances carried into retirement can be used to pay for many expenses, completely tax-free.
Unfortunately, the use of HSA balances in retirement will likely be confined to executives and high wage earners until the amount that can be contributed is increased. A Republican healthcare proposal in early 2017 (which did not pass) doubled the maximum contribution amount. Look for continued pressure on Congress to increase the contribution maximum as HSAs become better understood.
In the meantime, if you offer a high-deductible health plan, make sure you talk about the use of HSAs in your 401(k) employee education sessions since the accounts are important retirement planning tools.
2. Addition of SRI information/investments
Socially Responsible Investing (SRI) considerations are very important to your millennial employees. They want to know about SRI factors in their 401(k) plan investment options. Increase the value of your 401(k) plan to this important group by incorporating SRI information into your 401(k) plan communications program and employee education sessions.
3. Understanding your fiduciary responsibilities
Now that the implementation of the final fiduciary regulations has been delayed, that affects your responsibilities as a fiduciary to your 401(k) plan, right? Nope. Not at all. Your responsibilities remain the same — just as they were when the regulations were first conceived and passed.
To gain peace of mind, elite plan sponsors will continue to try to understand the fiduciary responsibilities their investment advisor/er is taking on. Or in the case of those plan sponsors who work with brokers, bankers and insurance company advisors, the fiduciary responsibilities they are not taking on.
Many plan sponsors will solve the problem by deciding to work with Registered Investment Advisers (RIAs) who sign on as fiduciaries without limitation. Plan sponsors who work with RIAs don't have to worry about whether to sign BICE Agreements or where their adviser’s fiduciary responsibilities stop since RIAs are required by law to sign on to 401(k) plans as fiduciaries without limitations.
4. Incorporation of behavioral economics/finance elements in plan design
Smart plan sponsors are updating their 401(k) plan designs to incorporate behavioral economics/finance elements that use adverse participant behaviors in ways that actually benefit plan participants. This includes taking advantage of participant inertia by auto-enrolling new hires at higher initial contribution percentages (4% to 6%) and auto-escalating them to higher on-going contribution percentages (10% to 12%). Very few participants opt out of these elections, resulting in higher account balances that give them a much better chance of achieving retirement readiness.
5. Addition of annual re-enrollment
With the objective of reaching plan participation rates of 90% or higher, innovative plan sponsors re-enroll non-participating employees into their 401(k) plans each year. Studies show that the vast majority will not opt out. Most plans that re-enroll have participation rates between 92% and 95%.
6. Stretching matching contributions
Continuing the behavioral economics/finance plan design theme, progressive employers are stretching their matching contributions to encourage participants to contribute more to receive the full match. The most common match has been 50% of the first 6%. Many employers will be moving to 25% of 12%, in which case participants would need to contribute 12% to receive the maximum matching contribution of 3%. The objective is to motivate participants to add at least 15% of their compensation each year (participant plus employer contributions) to their 401(k) plan account.
7. New limitations on loans
Taking a participant loan is generally one of the worst decisions a 401(k) participant can make. Leading-edge employers will seek to limit plan leakage (via defaulted loans) by reducing the number of loans that plan participants can take or eliminating loan provisions entirely.
By offering a loan option in your plan, you are indicating to participants that it is OK to take a loan. Many will think, "Why would we have the option if it wasn't a good thing to do?" However, for most participants, it is likely that things will not turn out well.
Those participants who depart from your organization (either because they have found a new job or because you laid them off) will likely default on their loans, permanently removing those balances from their retirement accounts.
8. Selection of the right QDIA
Target date funds, customized target date funds, CIT target date funds, lifestyle funds, risk-based funds, managed account funds, balanced funds — which option is right to use in your 401(k) plan as a QDIA (Qualified Default Investment Alternative)? In recent years, there has been a proliferation of new flavors of professionally managed balanced account options suitable for use as QDIAs.
Count on your investment adviser to help you run through the options to find the best version for your corporate culture. Target date funds have the fewest negative attributes and are the easiest for participants to understand. All the other options have significant limitations.
Savvy plan sponsors will spend the time necessary to make sure they have the right QDIA available at the lowest possible cost. Remember that everyone you are auto-enrolling will be invested in this option.
9. Addition of participant investment advice
This is a continuing trend. Most participants feel they need help allocating their 401(k) account balance to the proper investment funds. Many large recordkeepers now offer basic participant investment advisory services (robo-type, algorithm-based) at no cost.
Quite a few recordkeepers also offer a higher level of participant investment advice at costs ranging from 25 to 100 basis points. In all cases, the provider of the services signs on as a fiduciary. Leading plan sponsors will ensure that their participants have access to some level of investment advisory services in 2018.
10. Use of specialized 401(k) investment advisers
This is another trend that is rising in importance. Sharp plan sponsors have already realized that the easiest way to solve the fiduciary dilemma is to work with an investment adviser employed by an RIA. They further refined their search by considering only those RIAs that work exclusively with 401(k) plans.
These advisers have no conflicts of interest, are able to offer services at the lowest possible cost, and do a much better job of making things simple for you and your plan participants.
If you work with an advisor who has a business that includes individuals, foundations, and institutions, etc., consider switching to an adviser who works only with 401(k) plans. You will receive much better advice.
11. Continuing emphasis on financial wellness education
Merging financial wellness education with 401(k) plan education is a continuing trend as well. If you haven’t discuss basic financial wellness concepts in your education sessions, consider doing so in 2018. Without basic financial knowledge, employees have a hard time understanding more advanced concepts like risk and volatility.
As you finalize your performance plan for 2018, consider how these important trends affect your initiatives. I hope you have a prosperous 2018.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.
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