For more than 30 years, I have worked with companies of all sizes and from a variety of industries to design 401k plans that meet the companies’ goals and maximize their employees’ probability of achieving financial independence. I have observed that the best plans always seem to possess the following common traits:
A plan does not have to be among the lowest-cost in its peer group, but it definitely shouldn’t be in the highest quartile. Plan sponsors should feel comfortable if their plan is somewhere near the average.
The Department of Labor is ok with paying more for services. Plan sponsors just need to have a reason for doing so. Some good reasons would be: having better service, access to more services, added fiduciary services, and a provider who is able to understand the plan’s complexity. The provider is a friend (or relative) of the CEO, the sponsor has always worked with them, or senior management likes the semi-annual golf outing at the fancy country club are not good reasons.
A Lot of Employees Have Account Balances
The best plans have at least 90 percent of employees with account balances. How do you achieve 90 percent participation? Auto-enrollment and annual auto re-enrollment.
A High Percentage of Employees Contribute
Participation can also be measured by the percentage of employees who are making meaningful contributions. The best plans have at least 85 percent of employees contributing. This can be achieved with Auto-enrollment and Auto-escalation.
New Employees Roll Money into the Plan, Departing Employees Leave Their Balances
The best plans provide access to investment opportunities that just aren’t available anywhere else. The management truly cares about the financial well-being of employees. Very few employees who leave the company roll their money out of the plan. This not only speaks to the quality of the plan, but it also means that employees trust management. Employees who work for companies where management is an enemy rather than a friend take their balances out of the plan as soon as they are able.
Employees Understand the Plan
The best 401k plans are well understood by their plan participants. They tend to have straight-forward plan designs and a management team that can easily explain the plan. For example, when I conduct education sessions I often hear employees say to each other, “You need to be in the 401k plan and you need to contribute at least X percent to receive the maximum company match. It’s that simple.”
Plan sponsors need to recognize that if employees don’t understand the plan, they won’t contribute the amounts necessary to build retirement-ready balances.
A Fund Line Up for Everyone
There are four types of 401k plan investors: Core Funds Investors who like to be well-diversified over the core funds lineup; Index Investors who want to invest predominantly or exclusively in index funds; Specialty Investors who look for unique investment opportunities to diversify their overall portfolio; and finally, “Do It For Me” Investors, who make up the vast majority of participants and prefer to invest in balanced investment options—like target date funds.
The investment menu needs to be broad enough for all types of investors.
Leaders of the Company 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 other attributes that successful 401k plans share. However, I have consistently found these to be the most important.