5 ways to improve 401k plans
There has been a lot of press recently about how 401(k) plans have failed America’s workers. These articles always include a nostalgic yearning for the “golden age of pension” when all American retired with a company guaranteed pension for life. Never mind that not all companies had pension plans, and unless you were a long tenured employee you got almost nothing. The fact is that 401(k) plans are the best retirement vehicle available to private sector employers.
However, just offering a 401(k) plan and expecting employees to make the right decisions for the next 30 years is not enough. Here are 5 things to consider:
- Plan Design: The last several years have seen widespread adoption of auto-enrollment and auto-escalation features. These have a direct, immediate impact on plan participation and contribution rates. I would argue for applying these features across the entire eligible population, not just newly eligible participants.
- Investments: Widespread adoption of target date funds and risk-based models as QDIA in 401(k) plans has dramatically improved overall investment allocations. This trend will continue. In addition, many plan sponsors are tweaking investment menus, reducing the number of funds It is clear that too many investment options leads to sub-optimal asset allocation.
- Fiduciary Oversight: Between the actions of Jerry Schlichter and the DOL there is a significant increase in attention on best practices for 401(k) plan fiduciaries. While this has been and will continue to be painful for some, strong fiduciary practices can only benefit the industry and plan participants in the long run.
- Retirement Readiness: This is the single most important 401(k) plan performance metric. The challenge isn’t measuring it, but doing something about it. Targeted communication and education will make an impact at the margins, but real improvements require fundamental changes in plan design (auto features, stretch-matching) and increased company contributions.
- Access/Coverage: This is still a significant and important issue to be addressed. It is expensive, time-consuming and confusing for small employers to sponsor 401(k) plans. While emerging FinTech companies may address this gap, we are looking forward to the DOL publishing new regulations authorizing Open Multiple Employer Plans. NWPS works on several large MEPs now with hundreds participating small employers. These small businesses get Fortune 500 quality plans for their employees at an all-in cost of less than 100 bps. Open MEP legislation will allow us (working with our partners) to offer high-quality, low cost plans to many more small employers.
The 401(k) space remains ever-changing and highly competitive, but I think all of these changes are moving in the right direction – making high quality retirement outcomes available to many, many more people.