Offering a genuinely helpful 401(k) plan can be tricky. If you’re tapped out on resources or lack the expertise, it’s hard to keep all of the compliance requirements in order, give employees relevant investment advice and even ensure that the employees are getting the most out of the benefit.
But how are you supposed to run a successful 401(k) plan if you don’t know exactly what success looks like?
While success will ultimately be defined by your team, a good place to start is by looking at industry averages* and the 401(k) best practices your peers are following in their plans and incorporating directly into their plan design, communication strategy, and more. Layer on continual benchmarking practices, and you’re well on the path to success.
Whatever you choose, make sure you’re setting you and your team up for success. It’s not an easy task being the overseer of the company’s 401(k) plan and somewhat in charge of an employee’s retirement readiness, and there are many times when it may make sense to ask for help from a 401(k) expert.
Five best practices for your company’s retirement plan
401(k) Best Practice #1: Integrate your 401(k) plan with your payroll software.
If your 401(k) plan isn’t automatically pulling data from your payroll system, you’re likely missing out on powerful enrollment and retirement savings features like automatic enrollment and automatic savings rate escalation. A secure link between payroll and the 401(k) plan allows you to leave manual calculations behind, and enter a world where employees can be automatically enrolled into plans and have their retirement savings rates increase 1% annually without anyone having to remember to do this.
With this modern approach to plan administration, plan features that were once exclusive to large plans are now growing in popularity with even the smallest plans. For example, over 25% of the nation’s smallest plans (and around 60% overall) now take advantage auto-enrollment. This has largely been made possible through the wonders of 401(k) payroll integration, which also enables your employees to customize their retirement savings elections seamlessly.
401(k) Best Practice #2: Push communication to employees through multiple channels.
Fine tune your 401(k) communication strategy and treat your enrollment programs like a well-oiled marketing campaign. It’s all about getting the right information, in front of the right employees, at the right time.
Campaigns with the highest engagement are often ones that use the employees’ communication methods of choice, be it text message, email, print mail, or phone. Of the gaps in communication strategies, individually targeted communication and mobile applications have the largest gap between the biggest plans with over 5,000 plan participants and those plans with fewer than 100 plan participants. Between 60-80% of plans with over 5,000 plan participants use a more sophisticated mobile-friendly employee communication strategy, while less than 35% of plans with fewer than 100 plan participants are doing the same.
The good news is that a modern 401(k) advisor can easily supply that sophisticated employee comms campaign, without additional cost or work.
401(k) Best Practice #3: Hire expert fiduciary help, outside of your recordkeeper.
If it feels like there are more compliance requirements than ever with your 401(k) plan, you’re right. The great news is the most recent regulations from the Department of Labor are meant to protect you and keep 401(k) service providers in check. This should mean no additional work for you, and more protection for your employees.
However, to keep up with the increasingly complex 401(k) market and the ERISA requirements, many plan sponsors are opting to hire an expert 401(k) advisor to take on fiduciary liability and responsibilities — outside of their current recordkeeper. Again, the largest plans with over 5,000 plan participants are setting the trend with small and medium-sized plans beginning to follow suit.
401(k) Best Practice #4: Give employees smart low-cost, passively managed fund options.
While some, perhaps more vocal, employees will ask for a range of actively-managed funds in the 401(k) plan, not everyone has the time or money to play the market. In fact, 2016 trend reports have shown that most people prefer a passively managed fund option to enjoy the low-cost, low-maintenance benefits of an investment product like a target date fund.
With higher 401(k) fees and no history of an active fund consistently “beating” the market, it’s a hard case to make to fill a 401(k) fund line up with primarily expensive, actively managed funds.
When it comes down to the availability of target date funds in the 401(k) line up, the smaller plans with fewer than 1,000 plan participants can do a better job of making them available. As it stands, only six out of ten plans offered a target date fund in their plan last year. The grim reality is many expensive 401(k) investment advisors won’t necessarily recommend a low-cost target date fund with no commissions or kickbacks to be made from these funds.
Our suggestion? Ask your 401(k) investment advisor to evaluate the portfolio again and include low-cost target date fund recommendations for you to review. There are likely good options out there for your employees, and the substantially lower 401(k) fees will go a long way to optimize each dollar they save for retirement.
401(k) Best Practice #5: Get an independent benchmark to get the best deal in today’s market.
Follow what the largest plans in the country do and benchmark regularly, and enlist a third-party to handle the benchmarking for you so you can get an objective, independent perspective on how your plan is really doing (especially when it comes to whether you’re paying too much in fees).
As for frequency, companies will most commonly benchmark their plan once a year, but about 20% of plan sponsors are overachievers and benchmark their plan quarterly. The best practice here though is to get an independent analysis, just to triple-check that your plan isn’t unfairly lining your advisor’s or recordkeeper’s pockets.
*All following 401(k) plan-related data from 58th Annual PSCA Survey unless otherwise noted.