As a program leader for The Plan Sponsor University (TPSU), I get to meet hundreds of retirement plan sponsors and advisors. Many of the attendees to the 60 or so University events (mostly plan sponsors) come because they want to learn what others are doing regarding plan design and how they may gain insight to the nuances of managing a defined contribution plan.
In addition to learning about Plan Design, sponsors are concerned about compliance and fiduciary issues, especially in light of the new Department of Labor Fiduciary rule. There are a host of other reasons to come to a TPSU event, but the major motivation is to hear and observe what others are doing right…and wrong. Plan sponsors are predominantly comprised of human resource professionals that have little formal finance training and managing the company defined contribution plan is usually just one of many responsibilities they hold on a day-to-day basis.
Once the sponsor gets past the fiduciary and administrative duties (no small task), the issue of plan design takes center stage. Plan design is the essence of why a company offers a defined contribution plan. And as if all that was not enough, sponsors along with their advisors must try to give specific attention to each individual participant to the greatest extent possible.
According to Eric Droblyen, President and COO of Employee Fiduciary, “401k plan design is a big deal that shouldn’t be undervalued by 401k fiduciaries – there is no such thing as a one-size-fits-all 401k plan. It’s not uncommon for a small business to save tens of thousands of employer contribution dollars by choosing one 401k plan design over another and yet still meet their 401k plan goals.”
Employee Fiduciary manages over $2.6 billion in assets servicing thousands of plans over the years. Droblyen recently wrote a column on his company blog that analyzes some trends across his company’s book of business and he shares his observations. “I studied the 2,767 401k plans for which we provide ERISA compliance services – plan document maintenance, nondiscrimination testing and Form 5500 reporting,” says Droblyen.
The following is a case study provided by Droblyen and his company to illustrate the effectiveness of plan design. Employee Fiduciary is in business to offer plan design services and while I do not offer endorsement of any company as a matter of policy, he has certainly illustrated a strong case in favor of thoughtful plan design.
The following was originally published by Eric Droblyen on the Employee Fiduciary Blog:
| Safe Harbor Design | Additional Features | ||||||||
| # | Auto Enroll | % | Roth | % | Non-SHMatch | % | Profit Sharing | % | |
| Basic Match | 923 | Yes
No |
4.77%
95.23% |
Yes
No |
69.88%
30.12% |
Yes
No |
58.18%
41.82% |
Pro Rata
Integrated New Comp Other None |
35.54%
25.35% 23.94% 0.43% 14.73% |
| Enhanced Match | 288 | Yes
No |
4.17%
95.83% |
Yes
No |
68.75%
31.25% |
Yes
No |
51.04%
48.96% |
Pro Rata
Integrated New Comp Other None |
44.44%
23.61% 23.61% 0.69% 7.64% |
| 3% Non-elective | 575 | Yes
No |
6.09%
93.91% |
Yes
No |
64.87%
35.13% |
Yes
No |
61.22%
38.78% |
Pro Rata
Integrated New Comp Other None |
22.96%
16.52% 53.57% 0.52% 6.43% |
| “Maybe” 3% non-elective | 38 | Yes
No |
7.89%
92.11% |
Yes
No |
71.05%
28.95% |
Yes
No |
76.32%
23.68% |
Pro Rata
Integrated New Comp Other None |
7.89%
13.16% 78.95% 0.00% 0.00% |
| QACA Match | 53 | Yes
No |
100%
0.00% |
Yes
No |
90.57%
9.43% |
Yes
No |
54.72%
45.28% |
Pro Rata
Integrated New Comp Other None |
28.30%
13.21% 39.62% 1.89% 16.98% |
| Non-Safe Harbor (Traditional 401k) | 890 | Yes
No |
10.56%
89.44% |
Yes
No |
60.00%
40.00% |
Yes
No |
77.19%
22.81% |
Pro Rata
Integrated New Comp Other None |
45.51%
13.03% 19.55% 0.22% 14.73% |
Key Findings:
- 68% of plans use a safe harbor 401k plan design to avoid annual ADP/ACP and top heavy
- Only 8.71% of plans automatically enroll employees that fail to make an affirmative enrollment election.
- 65.96% of plans permit after-tax Roth 401k contributions.
- 64.37% of plans permit non-safe harbor employer matching contributions.
- 85.65% of plans permit employer profit sharing contributions.
- A new comparability profit sharing contribution is most commonly combined with a safe harbor 3% nonelective plan design.
- Pro rata and integrated profit sharing contributions are most commonly combined with the 3 match-based safe harbor 401k plan designs.
A plan design case study
Skeptical of the power of plan design? A case study can help demonstrate its value. Assume the following fact pattern for a hypothetical company:
- Employee demographics – 2 owners, 2 non-owner highly-compensated employees (HCEs), and 10 rank-and-file file employees. One owner is over 50 years old, making them catch-up 401k
- Plan design goal – maximize owner contributions, while minimizing other HCE and rank-and file contributions
Three design options for this company can be found here. The employer contribution expenses for these designs range from $88.8k to $159.7k. That’s a huge difference! Proper 401k plan design can save a company big bucks annually.
