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10 Features Every 401(k) Needs...Today

10 Features Every 401(k) Needs...Today

10 Features Every 401(k) Needs...Today

Don't let your 401(k) plan go stale - use this guide to see where you can add value to your company's plan and make it easier for your employees to save for retirement.

1. Employee contribution limit maxed out to 100%

The IRS allows an employee the lesser of 100% of his/her compensation or $18,000* to be contributed to their 401(k) account. In some instances, 401(k) plans may have been adopted (i.e. started or created) by an employer that limited the parameters of the plan for one reason or another.

In many cases, a salesman looking to close a deal quickly to move on to the next sale would provide a template to unsuspecting employers with little guidance on how flexible 401(k) plans really can be. 

Why is this important?

With the number of dual income homes rising - especially as millennials continue to graduate - one spouse may support the day to day expenses in the home and the other may max out the 401(k) to support long term retirement goals.

Since the IRS sets its own cap on limiting contributions for employees, there's no need to have an additional limit imposed by your firm.

2. Immediate eligibility for employee contributions

Having a probationary period for your 401(k) match is good company policy to control costs. With the responsibility placed on an individual to provide for their own retirement however, a probationary period for allowing new employees to set their own money aside is an outdated policy at best and in my opinion, a potential breach of fiduciary responsibility. 

Improvements in technology have increased the speed of the enrollment process and typically, fees associated with a plan are deducted from participant accounts so the argument that it's too costly to implement doesn't hold much weight. Additionally, even if a participant was hired and left before they became eligible, the TPA is still going to include that individual (i.e. charge a fee) in their reporting for the year.

Why is this important? 

The tax implications of not being able to contribute to a 401(k) penalizes good savers you hire as new employees. It may even encourage ad hoc procedures by an empathetic employee to operate outside the plan parameters which is never a good alternative. Here are two scenarios that you will be able to avoid by allowing immediate employee contributions:

A small bank was looking to hire a second commercial lender to add to their growing division. They didn't have the resources to train someone from the ground up, so they were focusing their search to individuals with 10+ years in that role. After about the 3rd or 4th candidate that declined their offer, I received a phone call from the bank's HR Director that asked a question along the lines of, "We need to hire someone yesterday - no one wants to wait 6 months to become eligible for the 401(k) plan. How can we allow someone into the plan before that?"  After their plan was amended, they hired someone soon after but it wasn't their first, second or even third choice.

Client A is employed at the beginning of the year with Company A and participated in Company A's 401(k) for 8 years. Client A leaves to work for Company B. Company B has a 1-year waiting period for eligibility. Unable to contribute to the IRS limit of $18,000, Client A's tax liability doubled and was not able to contribute more than the IRA limit of $5,500. Since Client A had access to a 401(k) while at Company A and .   By not operating a plan for the best interest of the plan participants & their beneficiaries, it could be argued that Company B's 401(k) plan was in breach of their fiduciary duty - don't be like Company B. 

Very similar to #1, in that there is no disadvantage to allowing an employee have as much flexibility with their own paycheck as they want - especially with the low barriers for allowing such a feature. 

3. Add Roth 401(k)

One more option for employees to have flexibility with where they want their own money. This is another easy function to add to a plan and provides a benefit to a wide range of your employees.

Paired with tax deferred (i.e. delayed) growth on assets that have already been taxed prior to the contribution and tax free distributions  (with a qualified distribution after age 59 1/2) make the Roth option appealing within an IRA as well as a 401(k). There are some slight differences though that make the Roth 401(k) a more favorable option if an individual is given the option. 

Why is this important?

One of the reasons younger employees will benefit more from using the Roth 401(k) is because their time horizon until retirement is longer - the benefits of foregoing a tax benefit today can be more advantageous for the tax benefit in the future.

Think of your highest salaried employees: if their modified adjusted gross income is over $132,000 (single) or $194,000 (married, joint), they are not allowed to contribute to a Roth IRA. With a Roth 401(k), they are allowed since there is no income limitation. 

Not only will you be able to provide access to something they weren't able to use, they can also put in over 3x the regular Roth IRA - $18,000 - which is the 401(k) limit for 2016.

4. Custom target date funds or modeled portfolios

Open architecture 401(k) platforms - which are the "behind-the-scenes technologies" of a 401(k) - allow for a much wider investment pool to choose from.

Instead of using a target date fund (TDF) that is tied to only one mutual fund company, you're able to have much more flexibility and control over your options. 

Target date funds are based on time horizon and modeled portfolios are based on risk level.

A TDF will automatically reduce its exposure to equities - stocks - over time while a model portfolio's risk exposure will be relatively constant over time for the given level or risk selected.  

For example, there may be 5 levels of risk in a modeled portfolio, conservative to aggressive. If an election is made for the aggressive model, that model will always be aggressive - someone would have to change their selection if they wanted less risk.

Each one can be customized by using a 401(k) platform that allows you access to the entire investment world.

Why is this important? 

This is the traditional format of a TDF: Company A Target Date Fund with 25 other Company A mutual funds. Plain and simple. 

Are all 25 of those mutual funds from Company A the right investment option for the category they're supposed to cover? Does Company A manage the "Large US Company" fund just as well as the "Small International Company" fund?

Most likely not. The analogy you could use to describe this in some cases is with the phrase: "Jack of all trades, master of none." 

Plans use TDFs as a default fund all the time, which is fine, but by defaulting an employee into a TDF that is made up entirely of proprietary mutual funds, you'll want to make sure the due diligence was taken care of the underlying funds that are included in the TDF.

5. Financial Wellness Program

Education and enrollment sessions, meet your new personal trainer: the Financial Wellness program. Aside from engaging, actionable, and top-of-mind, a real financial wellness program is built around more than just investments and retirement.

Budgeting, cash flow, saving for emergencies, what to do about student loan debt, how to evaluate your insurance coverage (auto, home, life), steps to take to having a will for your family written - these are just a sample of topics financial wellness programs offer.

Make sure the financial wellness program, if you decide to implement one, is truly a program with content, a schedule, some sort of a timeline, and a way to track progress.

Why is this important?  

Happy employees are productive employees. By reducing financial stress, you can expect both physical and financial health to increase.  

If employees feel they don't have control over their own finances, they may be more likely to leave for a "higher paying" job, even when they are in a good situation otherwise. Having a financial wellness program can reduce this type of turnover.

Since "Financial Wellness" is new and without a standard definition, some service providers may "offer" financial wellness but in reality, it bears no difference to an annual group meeting. 

It an be veiled as "Enhanced Education" or offering to meet one on one with employees - both of which should be standard practices of service providers with your 401(k).

6. Auto Enrollment with auto increase of 2%

This isn't a new feature available to 401(k) plans by any means, but some employers don't feel comfortable forcing their employees to save money for retirement - it can feel like they are playing the role of "Big Brother."

On the other side of that coin, one could argue that they are still choosing to act as "Big Brother" by not letting them save for retirement automatically.  

Increasing contributions automatically by 2% every year instead of the typical 1% is a way to give your employees a more realistic chance at having enough to retire on time.

Why is this important?

An object in motion stays in motion unless a force is acted upon it or something very similar - the same can be said about not taking action. 

Studies have shown that auto enrollment is good for adding participation but if its not paired with an auto increase, it's not going to make much difference for an individuals account.

Using the same logic for utilizing automatic enrollment - participants follow the path of least resistance even if its detrimental like not saving for retirement - the same could be said for automatically increasing contribution levels. 

7. 28 or less investment options and <10% proprietary funds

Not necessarily a feature and more of a housekeeping item, too many investment options can be daunting for participants as well as the investment committees that keep track of them.

Service providers for 401(k) plans may also have their own mutual funds - if there is a requirement to use their proprietary funds or risk the price going up for those services if you don't, you may want to reconsider your service provider. 

Why is this important?

Proprietary funds can lead to conflicts of interest and put fiduciaries in a position of trying to balance the quality of the investment options, fees, and what's best for participants. 

By limiting the number of proprietary funds, you will be able to at least address the issue and pay attention to potential conflicts of interest.

8. Adding Discretionary Match language to plan documents

Probably the most controversial on this list - but that's ok, it's still something that your plan should have in 2016.

Adding a discretionary match doesn't mean you'll be handing out a match this year. What it does do however, it provides for flexibility during both prosperous or lean stretches of business.

This would be for plans that already have a match or for plans that do not have a match.

Why is this important? 

If your plan documents state that a specific match will be provided (not considering Safe Harbor elections), you can still provide the same match you normally would, but with some flexibility.

What happens if you're decision is between providing the match that was stated in your plan document or shutting operations down or laying people off?

Then there are years where revenue may be way up and you would like to add a match but not commit to more than one year, this is where a discretionary match election would come in handy. 

So much can be customized as well to control costs - you can cap a dollar amount as to how much of a participants salary would be matched or the match could stretch a participants contribution while keeping costs the same. 

For example a $1.00/dollar for $1.00/dollar match up to a 6% would be the same costs to the company as a $.50/cents on the $1.00/dollar match up to 12% - this is great for participant outcomes and expense forecasting.

9. Benchmark of comparable plan size and industry

Do you know how you stack up against others in your industry or even in your geographic region? Are employees leaving for better benefits?

Well, a few years into the Affordable Healthcare Act - Obamacare - the information is still plentiful but not as overwhelming as it was previously. 

Take the extra time this year to have a detailed benchmark completed - they can be painless as you want them to be, depending on how involved (or not involved) you'd like to be.

Note: less is more - delegate this job - you'll be happy you did!

Why is this important?

Benchmarks can be used for assessing new providers or learning about services  that weren't available before. 

The DOL - Department of Labor - suggests you benchmark every 3 years which is a common fiduciary practice. Any more frequent, there is the risk of changing investment selections unnecessarily for your participants, so let this year be the year you start! 

10. Signed Fiduciary Role from your Plan Advisor

If your company has a 401(k) plan, there is no way to completely eliminate your responsibilities to the plan. Bottom line, you are a fiduciary and there's a good chance your plan advisor is too and they may not know it. 

Does your retirement plan advisor help with designing the fund menu? Do they recommend the replacement funds when one is needed? Have they helped select the Target Date Funds for your plan?

Whatever your answers may be, the next question is to ask your retirement plan advisor if they will sign a fiduciary oath, stating that they do in-fact have a fiduciary commitment to you and your plan.

Why is this important?

Fiduciaries are held to a higher standard of care and can legally be held responsible for their actions.

In general, are you comfortable working with any type of vendor or partner thats not willing to accept responsibility for their actions, good or bad? I didn't think so!


Many of these features can be added quickly, without much pain, and in most cases, be added without any type of fee - check with your service provider first to see what their policy is on plan amendments.