401k Plan Design Drives Best Outcomes
401k plan design options can make a big impact on participant outcomes. Employers should be thinking about ways to improve their 401k plan design. Participants in plans that offer features like a generous employer match typically have higher projected income replacement rates, and these plans tend to have better participation rates overall. These are both desirable outcomes for employers considering ways to use 401k plan design to improve plan performance. In short, 401k plan design matters when it comes to offering a competitive workplace retirement plan benefit for employees and helping them to get on a path to a financially comfortable future.
When looking at 401k plan design features that work, new research from Wells Fargo cited by Employee Benefit News (EBN), finds that the strongest plans offer at least a 5% match or profit sharing. These plans also offer a diversified investment lineup and automatic enrollment at a default contribution rate of 6%. The strongest 401k plan design includes automatic annual re-enrollment and provides an opt-out option to increase the default rate to 10% or more.
Wells Fargo calls these “high influence” plans, where participants are on track to replace 80% of their pre-retirement income in their post-work years and expect to live quite well. 401k plan design makes all the difference in so-called high influence plans because employers have the opportunity to create a strong benefit that positively impacts workers’ outcomes in retirement. Wells Fargo deemed “high influence” just 10% of the more than 2,000 plans it evaluated. According to EBN, reporting on the survey findings, participants in high influence plans were found to have an average projected income replacement of 64%, while those in low influence plans had an average income replacement of just 48%. Again, 401k plan design was the key differentiator.
Moreover, participation rates soared to 89% in high influence plans, compared to 39% for low influence plans. In high influence plans, more than 55% contributed 10% or more, including the company match. By contrast, only about 34% of participants contributed 10% or more in low influence plans.
Current 401k plan design best practices include:
- Automatic enrollment, with default contribution rates of 5-6% (up from 3%)
- Auto-escalation, from 1% per year to 10% (typically goes hand-in-hand with auto-enrollment)
- Immediate eligibility for both pre-tax and Roth (post-tax) contributions
- A stretched employer match, which goes beyond the traditional formula of 50% on the first 6% of employee deferrals (a 3% employer match) to provide a 3% match over a broader employer deferral, i.e., 25% of the first 12%
- A Roth 401k option that provides employees the flexibility to make after-tax contributions
- Professional investment advice for participants
- A professionally managed balanced option, such as a target date series
While 401k plan design is key, employers should also offer advanced digital tools to help employees boost their savings. One example cited in the EBN article was a peer comparison tool where employees could raise their deferrals with the click of a button — a simple action that can boost contribution rates by an average of five percentage points. When it comes to building savings to create a sustainable retirement income, every uptick in employee contributions counts.
401k plan design is critical to creating successful employee outcomes and improving plan performance. Plan sponsors who want to boost participation and deferral rates and put employees on a path to replace a significant portion of their pre-retirement income should consider the above-mentioned best practices in 401k plan design. Additionally, employers should think about exploring 401k plan design opportunities related to innovative, companion-benefit offerings like health savings accounts (HSAs) and student loan repayment programs, which can help employees get a better handle on their finances today, so they can save more for tomorrow. Talk to your plan service providers and your plan advisor and discuss what is possible. You’ll likely discover 401k plan design ideas to help your employees build wealth and thrive, both now and in retirement.