When Ignorance Isn’t Bliss!
February 7, 2019—Plan sponsors: Do you know whether your organization’s 401(k) is as good as it could be?
- Does it include the best possible funds, and are your employees offered professional investment management to help them meet their retirement goals?
- Is your plan designed with the features that make 401(k) plans most valuable both to employees and organizations?
- Have you taken advantage of ERISA safe harbors to reduce your fiduciary risk?
- Is your plan easy to administer and do you understand ERISA’s regulations?
- Are you aware all plan fees and know they are reasonable?
If you can answer each question with a confident YES, then it is likely that you regularly review all aspects of your plan and work with an advisor with broad expertise in 401(k) plan management. Congratulations!
If you’re unsure whether your plan implements best practices – or if you have unanswered questions about your plan – it’s probably time to take a closer look. This is particularly true if you haven’t made any change to your plan or service providers recently.
Ignorance isn’t bliss. The stakes are high when you don’t know the state of your 401(k) plan. You may not be providing employees with the resources that will help them retire on time. Plan fiduciaries may be at greater risk – with potential personal liability – for the decisions they make. And plan administration could be a headache, or worse, vulnerable to regulatory review for noncompliance.
So, make a New Year’s Resolution to review your 401(k) plan! Whether you question your current advisor, schedule an independent review or solicit proposals, we present areas for exploration in this February blog and the March blog to follow.
1. How do I know our funds are good?
- Question your plan’s fund selection criteria. Better funds result when well-thought-out criteria are used. Measuring the potential for future investment return should include more than reviewing past performance. Consider, for example, fund longevity and manager tenure, consistent composition and style, net expenses, and alpha and sharpe ratios.
- Know what funds you can access. Greater access in the mutual fund market leads to greater choice and the potential for better funds. Be aware that proprietary platforms can limit choice to a single fund family or charge extra fees to access non-proprietary funds.
2. How can our employees be best invested to meet their goals?
- Ask about managed accounts. They offer an optimum solution and increasingly are offered to small plans. After completing a questionnaire or consulting with a professional, participants are placed in a model portfolio that is managed for them. Look for providers that don’t charge an extra fee for professional management.
- Question Target Date Funds. While they offer simplicity, Target Date Funds often are a poor match for participants’ goals. All those retiring in 2030, for example, don’t have the same characteristics and needs. And large differences make selecting a Target Date Fund series a potential liability for employers. For example, series vary widely in the percentage of the fund invested in stocks vs. bonds at the target date.
Plan Designs that Make Your Plan Work
1. How can I encourage greater participation?
- Question what percentage of your employees contribute to your 401(k) plan and their savings rates. To improve retirement readiness, behavioral economist Schlomo Benartzi recommends employers review plan statistics annually with the goal of achieving 90 percent participation and average savings of 10 percent of pay.
- Ask about automatic enrollment and automatic escalation. Surveys of employees show support for these plan designs, which automatically enroll and escalate employee savings annually.
- Investigate matching strategies. A wide variety exist to encourage employee savings. Safe Harbor matches – with and without automatic enrollment – allow plans to pass non-discrimination testing. (And Safe Harbor matches linked to auto enrollment can permit vesting for employer contributions.) Stretch matches require employees to contribute a higher percentage of pay than required by a Safe Harbor match in order to receive an employer’s full contribution.
2. How can I target company profit-sharing contributions?
- Be aware that employers have great flexibility in distributing profit-sharing contributions. To reward managers, executive leadership or owners, some plans employ a Cross-Tested or New Comparability plan design feature. A base minimum “gateway” contribution to all employees allows additional contributions to targeted groups in compliance with non-discrimination testing.
- Ask how a 401(k) plan can be both Safe Harbor and Cross-Tested. Safe Harbor non-elective contributions of 3 percent to all eligible participants count toward the “gateway” that allows directed contributions to targeted employee groups.
Undertaking a plan review and asking knowledgeable service providers about best practices – like those in this and next month’s blog – can be eye-opening and lead to significant 401(k) improvements. The beneficiaries will be employee and plan sponsor alike.
Written by Laurie C. Wieder, PPC®, Vice President, Alliant Wealth Advisors, Qualified Plans Division
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.