High Impact Tips for 401(k) Plan Sponsors: Does your plan have enough horsepower?
Before plunking some serious coin on a new car, most people compare things like comfort and convenience features, interior space, fuel economy, reliability, and ownership costs across various makes, models, trim packages, and dealers.
Those who know my gearhead tendencies know that I just go for a horsepower rating that is as close to ludicrous as I can get, while still working within my price range and reliability tolerance. But at least I am still evaluating something.
How in the world does this relate to 401(k) plans?
Benchmark your plan
As I noted, before you bought your car, you probably compared alternatives based on different factors. And afterwards, you start thinking of improving or replacing it when you feel that it is falling behind in areas that you value, such as reliability, performance, and appearance. Maybe you need to fix a few things or get a tune-up.
While retirement is arguably more important than transportation, many fiduciaries do not evaluate their retirement plans on a regular basis. However, much information to do so is available to plan sponsors and providers, some of it at no cost. And if you have an advisor, he or she can help point you in the right direction so you are not starting from scratch, and can also help you add some context.
There are many points on which to benchmark and compare plans. Some examples would be costs, features, employer contribution generosity, participation rates, average account balances, fund performance, etc. The good news is if your plan is not comparing well to other similarly-sized plans in your industry, region, etc., there are steps you can take to get back on track – and it may not mean that you need a new “vehicle.” You may just need to make adjustments to your current one.
One word of caution – if your provider offers to benchmark your plan, make sure they are using some outside sources. Certain areas such as plan costs should definitely be compared to statistics that are not exclusive to your provider. Certain other areas such as matching contribution rates may be OK to compare to your advisor’s other plans, but it will also be helpful to get some statistics from the outside world as well. And while there are some free online sources based on 5500 filings, keep in mind that their data is generally only what is publicly available, so it does not always present the whole picture. Make sure you are using a reasonable, valid comparison in any case.
Look at income replacement ratios
Continuing our discussion, it is important to look not only at where the plan is, but where it has the potential to go. The goal of any retirement plan should be to give your participants the opportunity to preserve a given standard of living through retirement. Because people are generally used to getting a paycheck, most employees think of their retirement income in terms of regular monthly or yearly compensation, not as the lump-sum benefit often offered by 401(k), profit sharing, and 403(b) plans. The old defined benefit (DB) pension plans were usually designed to express retirement compensation as a monthly benefit. It helps to think of a 401(k) or other defined contribution (DC) plan in these same terms.
So continuing our analogy, think of this as your plan’s overall performance. Just like you probably have performance goals for your car, you have a performance goal for the retirement program whether you think you do or not, and that is to replace a reasonable percentage of compensation. Based on your plan’s customary employee and employer contribution rates, performance, etc., will a long-term employee who is contributing at that rate actually get there? If not, what do you need to do to ensure maximum performance is achieved?
With a car, to improve performance, you might add go-faster parts, use better fuel, reduce weight, get better tires, etc. With a plan, do you add automatic features? Increase the match? Provide more education? Look for ways to improve plan returns, such as cutting fund expenses? There are many ways to help improve your participants’ chances of securing a comfortable retirement. You just need the right combination of “parts!”
Keep following us for some more tips in the weeks to come, and our eventual “101 Tips” ebook! You can always find previous posts and tips on our website!