7 Ways to Tell Your Retirement Plan is “Good.” Would your employees consider your organization’s 401(k) plan to be “good?” How do they, or you, know what constitutes a “good” plan?
Robert C. Lawton, an award-winning retirement plan investment adviser who’s advised companies such as Apple, John Deere, AT&T, Northwestern Mutual and others on their retirement plans for more than three decades, recently penned an article for Forbes dissecting the attributes of the best retirement plans:
- They offer index options on their investment menu: Index funds provide employees a cost-efficient way to invest for retirement. Ideally, Lawton says, “better” 401(k) plans will offer, at minimum, one fixed income index option, three U.S. equity index options, and one international equity index option.
- They offer a cost-effective target date fund series: Not all employees want to, or can, actively manage their own retirement investment portfolios. That’s why target-date funds appeal to so many workers. Those who invest in a target date fund simply need to pick the one that’s closest to their anticipated retirement date and invest in it throughout their entire career. Lawton characterizes a “cost-effective” target date series as one that costs close to the average expense ratio — 53 basis points (.53%), according to planadviser According to Lawton, the highest-rated target date funds also tend to be the lowest cost, and many include index funds in their underlying investments.
- They offer investment advice: Many investment advice options are free and offer algorithm-based advice. Some are available for an extra fee, which employees pay to receive more personalized advice.
- They offer employees feedback on their progress: Quarterly statements should clearly illustrate for employees whether or not they’re on track to meet their retirement income goals, either in the form of an expected replacement ratio (i.e., they’re on track to replace 80% of their earnings), or using some other sort of retirement readiness metric.
- They offer retirement planning calculators and tools: Employees should have access to calculators and basic projection tools to help them determine how much they need to save and the necessary contribution rate to achieve their goals. Employees should also be able to account for Social Security income and other sources that could contribute to their retirement income (spouse’s savings, other 401(k) plan or IRA balances, etc.) so they can estimate their monthly income in their post-working years. According to Lawton, investors who successfully achieve their goals use these types of tools. Your recordkeeper should offer these tools on their website where employees go to access the plan.
- Employees understand the plan: The best 401(k) plans are easily understood by employees, Lawton writes. They have simple, straightforward plan designs, and management can explain them easily. If employees don’t understand the plan and its benefits, Lawton says, they won’t be able to get the most out of it.
- Senior management talks about the plan: To a one, the best plans have the support of senior management — they speak about it at corporate gatherings, and proactively use it as a recruiting and retention tool.
Your employees demand — and deserve — a top-notch 401(k) plan. Based on these seven factors, how would you rate your organization’s retirement plan offering? Does your plan provide these benefits, or is there room for improvement? If it’s the latter, don’t fret. These best practices can provide a roadmap for you to optimize your plan to help your employees achieve their retirement goals.