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Benchmarking your 401K Plan

 

As humans age, we age with complexity and it’s a priority that we make frequent visits to the doctor. Normally, we all go to the doctor for yearly checkups; checkups can include adjusting of daily supplements like a multivitamin, or even getting regularly checked for signs of cancer or bigger risk health issues. No one will make us go see a doctor, but it’s important to prioritize monitoring and checking up on our health.

 

In the 401(k) industry, it is becoming more apparent that plans need to be reviewed at least yearly and more thoroughly in order to adequately address fiduciary responsibility and duties. However, many companies haven’t made benchmarking a priority even with recent 401(k) lawsuits. If you have not yet made benchmarking a priority, here are four reasons to highlight why it needs to be made one.

 

1.     Benchmarking can help reduce your personal liability as an employer as well as company liability. Yes, under ERISA, you as the employer can be personally liable because every sponsor has a fiduciary duty to its participants. Not only that, but ERISA wants to see that you are documenting your actions.

 

2.     Saving money for your plan participants, and of course, the company. ERISA requires a sponsor to ensure that fees are reasonable, and a benchmark is a great way to do that.[1]  Here are some questions to answer in your effort to reduce costs: [2]

     
     How much are participants paying in investment fees?

            How much is the company paying in admin fees?

            How many providers are being paid on the plan?

            What service does each provider offer the plan?

            What are plans of similar sizes paying?

 

3.     Not all providers are created equal: Look into improving your service providers. There are many factors that play into analyzing service offerings; some have high service models, advanced technology, or simply just get the job done. Additionally, it’s important to look into factors such as participants getting access to customer support or investment advice, if the provider is responsive, if they “sign and act” in fiduciary roles, and even how much work is passed to you, the plan sponsor, in administering the plan.

 

4.     Sticking to your plan and focusing on improving it. Make it a priority to find out if your existing plan document, plan structure, and plan design are meeting your goals.[3]

So, how often should plan sponsors benchmark their plan?[4]

91.7% of plan sponsors benchmark once per year, while 8.3% only benchmark every 5 years.

 

What are some of the most valuable benchmarking metrics?[5]

 

Investment expenses compared with peer plans – 100% say very important

 

Administrative expenses compared with peer plans – 91.7% say very important

 

Average employee participation rate – 81.8% say very important

 

Average deferral percent – 81.8% say very important

 

Percentage of participants getting the full match – 63.6% say very important

 

Benchmarking is a key component of a plan sponsor's fiduciary due diligence.  By looking back at these four reasons to benchmark your 401(k) plan, we hope we have addressed why it is important and why many plan sponsors benchmark their plan on a regular and consistent basis. 

 

 

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

 

 

Sean Cooney

3 Eves Dr, Ste 300 Marlton NJ 08053

856-988-0688

www.cooneyadvisors.com

 



[1] Barclay, Spencer. “Why Benchmarking Your 401(k) Plan Should be a Top Priority” BenefitGuard. July 8, 2015

https://benefitguard.com/why-benchmarking-your-401k-plan-should-be-a-top-priority/    

[2] Barclay, Spencer. “Why Benchmarking Your 401(k) Plan Should be a Top Priority” BenefitGuard. July 8, 2015

https://benefitguard.com/why-benchmarking-your-401k-plan-should-be-a-top-priority/

[3] Barclay, Spencer. “Why Benchmarking Your 401(k) Plan Should be a Top Priority” BenefitGuard. July 8, 2015

https://benefitguard.com/why-benchmarking-your-401k-plan-should-be-a-top-priority/

[4] Moore, Rebecca. “Plan Benchmarking Measures.” PLANSPONSOR. Feb 2015

http://www.plansponsor.com/MagazineArticle.aspx?id=6442513743

[5] Moore, Rebecca. “Plan Benchmarking Measures.” PLANSPONSOR. Feb 2015

http://www.plansponsor.com/MagazineArticle.aspx?id=6442513743

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401K Auto Features

 

ARE AUTO FEATURES THE FUTURE OF 401(k)?

Everything these days seems to be automated from reminders for doctors’ appointments, to bill paying, to (something clever). And why not?! Automation is the future, but does this apply to retirement planning as well? Auto-features are gaining traction and participants are more open to them than originally expected. A 2016 survey by American Century found that 70% of participants were:

·         in favor of automatic enrollment

·         showed interest in regular, incremental automatic increases

·         support plan investment re-enrollment into target-date solutions.[1]

Automatic features may help ease plan sponsor woes such as poor participation and low deferral rates.

POOR PARTICIPATION

Left to our own devices Americans are not the most diligent savers. When you consider retirement savings, the outlook is even more bleak. Although 8 out of 10 full time employees have access to an employer-sponsored plan, only 64% participate.[2] To help increase enrollment more and more companies are adopting auto-enroll. This plan design feature enrolls eligible employees into the retirement plan by default, participants are then given the chance to opt out. Auto-enrollment has shown to increase participation from 42% to 91%.[3]

A NEW WAY

The traditional 3% deferral rate is not quite cutting it these days —in fact, 30.2% of companies adopted a 6% or higher default deferral rate by the end of 2015.[4] Employers and participants alike seem to acknowledge that low deferral rates will not provide enough savings to make their retirement aspirations a reality.

DEFERRALS RISING

Struggling to help your participants save more? Auto-escalation could help. This plan design feature may help employees overcome inertia by automatically increasing their 401k contribution at regular intervals, typically 1% a year, until it reaches a preset maximum (typically 10%).  One percent may not seem like a lot, but together with compound interest, when the time comes to retire, it can make a huge difference! The graph shows how even 1% can affect your nest egg. In the hypothetical example shown below, at the end of 20 years of saving, a participant contributing at 3% would have $65,800 whereas the participant utilizing auto-escalation would have $171,700.[5] That’s over $105,000 difference! Which do you believe would better poise your employees to retire?

 

TIME FOR ACTION

Employer hesitancy toward adopting auto features is understandable, however, not implementing these advanced features could be short-sighted. Automatic enrollment paired with auto-escalation can help more employees increase their savings and help them achieve their retirement goals. If you have been reluctant to explore these options in the past, maybe it is time to revisit the conversation; after all, the point of offering a company sponsored retirement plan is to help your employees retire successfully.



[1] American Century Investments. “Fourth Annual Plan Participant Study Results.” August 2016.

[2] Bureau of Labor Statistics. "Employee Benefits in the United States." March 2015.

[3] ASPPA Net Staff. “More Jump on Auto Enrollment Bandwagon, but Not Everyone.” January 2015.  

[4] T.Rowe Price. “Reference Point Annual Survey.” April 2016.

[5] Based on Annual salary of $50,000 and 7% return. Deferral rate of 3% vs. 3% starting 1% annual increase up to 10%.

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