July 5, 2019 – Today’s 401(k) plans offer employers a world of options. A mid-year plan review positions sponsors to identify areas where improvements are possible. Adopting new plan design features can significantly improve a 401(k) plan to meet organization needs and help employees build toward a secure financial future. Since many plan design changes require notice to participants 30 days before the beginning of a new plan year, now is a good time to schedule a review of plans with a December 31 year-end date.
Considering what’s important to your organization is a great way to start your review. Are you in a tight labor market and need a competitive 401(k) plan to recruit and retain employees? Do you offer profit-sharing contributions in the 401(k) plan to incentivize performance? Do you want greater profit-sharing allocations to employee groups that play a significant role in your organization? And, importantly, do employees optimally use your 401(k) plan?
A next step is to assemble available reports and plan documents. These can include reports generated by your plan recordkeeper, your third party administrator’s annual plan testing and contributions report, and your Summary Plan Description and/or Adoption Agreement.
Recordkeeping Reports to Assess Retirement Preparedness
Increasingly, 401(k) recordkeepers generate plan reports that measure rates of participation and savings and show where participants are invested. Often this information is broken into age bands, with additional sections allowing plan sponsors to compare their plan’s macro rates of participation and savings against those of similar plans.
Shlomo Benartzi, author of Save More Tomorrow, suggests the following are benchmarks of a successful plan: a 90 percent rate of participation, participants saving 10 percent of their salary, and 90 percent of participants properly invested. As employers compare their plan’s data against these benchmarks, they can consider opportunities for improvement as they later review their plan design features. Working with their plan advisor, employers can also identify new opportunities to provide guidance on appropriate investment choices.
All employers – even those that sponsor safe harbor plans exempt from plan testing – will benefit from reviewing results of the Average Deferral Percentage or ADP test, the Average Contribution Percentage or ACP test and the top heavy test. Such information allows employers to decide whether non-safe harbor plan designs that allow different contributions levels are possible. Sponsors making a profit-sharing contribution may also want to look at the distribution of those contributions to different organization groups.
401(k) Plan Design
Keeping in mind organization priorities, considering recordkeeping and administrative data, and working with a knowledgeable plan advisor, employers can review key aspects of their plan’s design to determine if there’s a good fit and whether change could improve the 401(k) plan. Here are some key areas for exploration
- Eligibility, Entry Dates – What are your eligibility service requirements and entry dates? Is your industry one where new hires seek entry soon after hire? Or do you have high rates of turnover that make it wise to require longer terms of service before eligibility? Does a short eligibility period for full-time workers and a longer eligibility period for part-time workers make sense for your firm?
- Employer Contributions – What kind of contribution, if any, does your organization make to participants? Do you incentivize employees with profit-sharing contributions? Are there employee groups that you want to provide a greater benefit to reflect their important role? Or do you want to incentivize employee deferrals by matching them? And, which of the many matching strategies (including a stretch match) best fits your organization’s ability to contribute?
- Safe Harbor Protection – Is your plan a safe harbor plan? Does it need to operate as one so that highly compensated employees can make maximum allowable contributions? Does your firm’s safe harbor contribution (profit-sharing or match) fit your organization’s goals?
- Vesting – Are employer contributions immediately vested? Do you reward longevity with a vesting schedule for discretionary contributions? Did you know that certain safe harbor contributions can be subject to a vesting schedule?
- The Autos – Do you offer automatic enrollment and escalation to help employees more easily begin saving for retirement and build to an optimum level? Do your defaults lead to adequate retirement savings?
- Hardships, Loans – Do you permit hardship distributions and/or loans? Do you offer these options to encourage employees to increase deferrals? Do you limit possible withdrawals to protect retirement savings?
- Other Options – Do you offer other flexible options for your employees, such as ROTH accounts, the ability to roll over contributions from other 401k plans or IRAs, or an option to convert in-plan pre-tax savings to ROTH?
Conducting your mid-year plan review can reveal valuable insights so that your organization and its employees can receive the greatest benefit from your 401(k) plan.
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.