By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
With National 401(k) Day scheduled for this week – September 6th, I started thinking about how 401(k) plans have evolved since their beginning. For example, for years business owners gauged the success of their 401(k) plans solely by the number of employees participating in the plan. But increasingly, many 401(k) plans are starting to determine their merits by how successfully their employees are on track for meeting their retirement savings goal. As a result, business owners are starting to incorporate some key strategies and 401(k) plan design features to better position employees to reach their retirement objectives.
So, what exactly do these strategies and plan design features look like? Here are a few examples:
- Automatic enrollment of new employees into the 401(k) plan
- Establishing a default salary deferral rate for new employees (typically between 3 – 6 %)
- Establishing an automatic escalation provision to increase employee salary deferrals to 10% (typically rising by 1% per year)
- Establishing a default investment selection for new employees in a diversified investment option
- Eliminating or restricting plan loans to limit employee ability to access assets before retirement or separation from service (many plans may still offer a hardship withdrawal provision)
Another benefit of these plan design features is they can effectively help employees put their retirement savings on “auto pilot,” creating good financial habits and increasing their opportunity for an improved financial retirement future. Despite the potential benefits of incorporating these best practice plan design features in 401(k)s, there are still many small and mid-sized businesses that have yet to consider these strategies. Reasons can include:
- Inertia – sometimes it’s easier to just continue with the status quo.
- Concern of upset employees – concern that employees will see automatic enrollment, automatic escalation and default investment provisions as overbearing, instead of encouraging.
National 401(k) Day reminds us that, for most business owners, it’s ultimately about helping employees achieve the retirement and financial freedom they deserve. Business owners sponsoring a 401(k) plan should consider incorporating some (or all) of these strategies to increase the odds of having a retirement plan that helps employees attain retirement readiness.
Talk to your retirement plan provider to confirm if these plan design features are available and remember to consult with your legal and/or tax advisors before making any changes.