Common 401(k) Plan Mistakes – Your Plan isn’t Competitive
In today’s labor markets, much is said about offering competitive benefits. As employers compete for talent, retirement benefits have come more to the forefront as a way employers can offer an enhanced compensation package to potential employees or to retain existing ones.
However, some retirement plans have been left to languish in recent years. Maybe it’s been several seasons since a plan has been compared to competitors’ offerings, or perhaps a 401(k) program was set up with little thought other than “you have to offer one.” Since an employee’s savings is generally the biggest driver of retirement benefits, there’s a tendency to just leave it at that, thinking that as long as you are offering something to your employees and that your plan is meeting all the legal requirements, you’re good. But if you are in a competitive hiring environment, that mindset may not cut it – at least not anymore.
And even if recruitment and retention are not your first concerns, there are other good justifications for offering competitive retirement benefits. One reason is to ensure that your employees are actually able to retire someday. While not a widely-considered or easily-quantifiable cost, consider how a substandard retirement plan could impact a plan sponsor in the long-term, when employees either have to keep working when they’d prefer to be scaling back, or end up taking a major reduction in their standard of living when they do leave the workforce – and then they go out and tell the whole community about it. In 401(k) world, of course, a good part of the responsibility for retirement savings is on the employee. But it pays to take a longer view – say 20 or 30 years – for when that employee wants to retire. Did you educate her on how important it was to start saving early? Was your employer contribution sufficient to help him build adequate retirement balances? Did you regularly evaluate and benchmark plan costs so her retirement outcomes weren’t eroded by excessive fees? A participant’s inability to achieve a secure retirement is an indirect cost for sure, but it can be very real and could come back to bite in the form of bad public relations, or reduced productivity in the case of someone who keeps working when he’d rather have retired five years ago.
But what is a “competitive” retirement plan? And how do you figure that out?
Compare your plan to your competitors’ offerings. A logical place to start is your provider, who can most likely tell you what they are seeing with companies of your size and industry, and even in your geographic area. If you have specific competitors to which you want to compare, and they offer retirement plans that cover over 100 employees, it can be very helpful to download their most recent IRS Form 5500 from the U.S. Department of Labor (DOL) web site’s public 5500 database (efast.dol.gov/5500search/). You can then review the attached audit report, which will generally state the level of employer contributions and some other plan features. There are some caveats to this approach, so if you are not familiar with 5500 reporting, you may want to ask your provider for assistance. I have done studies like this for my clients on occasion to confirm where my client stands in relation to competitors, and sometimes this can be very helpful. Also, do you still offer a traditional balance-forward, single trust account plan with no investment choice? Most participants these days want the ability to access their retirement accounts online and choose investments, and if you are not offering a daily-recordkeeping plan but your competitors are, you could be at a disadvantage when recruiting talent.
Ensure your plan is easy to understand. While not intuitively obvious, even if you offer the best employer contribution in the world, it is of no value in the market if your employees don’t understand the benefit. A plan that’s not understood could be as simple as one that’s not properly communicated. Remember, information does not equal communication unless it is received and understood – and the DOL makes you provide volumes of information. Give that information some context. Make sure your providers are able to customize your employee education and communications approach to the needs of your participants. In addition, recognize that simpler is often better. Chances are your employees are not investment experts, and don’t want to have to be. Add plenty of automatic features to get them on a path that will benefit them in the long-term.
Make sure you as the plan sponsor understand what’s under the hood. A less-visible, but very highly-impactful component of how your plan stacks up is the plan’s cost, much of this being tied up in the investments. As fiduciaries, plan sponsors need to be aware of all costs and ensure they are reasonable. But in the context of retirement outcomes, the long-term cost of a plan is a very important determinant of a participant’s success. After saving adequately and earning a competitive employer contribution, access to a low-cost investment menu with adequate opportunities for diversification within and among asset classes is one of your participants’ tickets to long-term retirement success.
Fortunately, all of these things can be accomplished with the right partners working with you. Contact one of our experts today to find out how to make your retirement plan more competitive.