Ideal 401k Plan Features Brought to the Forefront of 401k Industry
Ideal 401k plan features were brought to the forefront of the 401k industry by, Fred Barstein, Founder and CEO of The Plan sponsor University (TPSU). After delivering 90 Fiduciary Education Programs, TPSU studied the responses of the plan sponsor attendees and subsequently summarized that data into what has become known as ideal 401k plan features. This includes automatic deferrals, automatic increases, a managed account option, and additional features. Knowing that every company cannot participate at the same levels, these features are now suggested as prudent features and practices at TPSU Programs throughout the country.
The intention is to have every participating employee achieve an account balance that will enable them to retire at normal retirement age if they choose to do so.
Full Transcript Here
Greetings, Fred Barstein with Fred Talk. Today I wanted to talk about the ideal plan, the auto plan, and why it’s so obvious and really easy to implement, but why so few plan sponsors that we interact with actually use the entire ideal plan.
So, at every TPSU program that we conduct, half-day programs, we teach the ideal plan, and what happened was in the first 90 programs we said to the plan sponsors at the end, the last session, we said, “If you could create the ideal plan, what would it look like?” And now we just show what that research is.
So, the ideal plan includes automatic enrollment at 6%, and new research is coming out that’s saying 7% is the right number. Not only is it right in terms of the deferral, but we’re really not seeing many people opting out, even at 7%.
Auto-escalation, 1% a year, around raise time, if you can do it actually with the raise, that’s even better, up to a cap of about 12%. And then stretching the match, so, if you do have a match, and let’s say it’s 50% or 60%, then we encourage you to do 25% of 12% on that. And then in terms of the QDIA, or the default option, have it be professionally managed, whether it’s a target date, or what’s coming out now are managed.
And just to go over that, you can’t buy participation by saying, “I’m going to give you a very healthy match.” It really comes through the automatic enrollment, and in terms of the deferral rates, that’s what will buy, or indicate, which … how much people will put away in their plan.
And a lot of plans are very proud to say, “Oh, we have a non-elective match,” which means the company gives money without the employee participating, and that may not be engendering the kind of behavior that you really want. You want them to participate, and the match really does incent them to do that.
So, the benefits of the ideal plan are two to four times the account balance, depending on when it starts in a person’s lifetime. There is no additional liability because there’s a plan design. And it doesn’t have to be more work, although if you don’t have integrated payroll, auto-enrollment can be a little bit tricky on that. That it doesn’t have to cost more, and you can have the participants pay the vast majority.
So, those are not the issues. So what are the resistance? And what are the things that we’ve heard in the plan, or during our TPSU programs, but also, you know, what do we think?
First of all, there can be a cost issue, because if you’re auto-enrolling and you do have a match, it can cost more. And the answer there is, first look and see how much it really does cost, it may not be that much. And if it’s more than the company can afford, lower the match, because you want to do it for the benefit of all, not just a few. With stretching the match, you know, people that are deferring at 6%, for example, and getting the full benefit, would have to go to 12. I don’t think that’s a terrible hardship to incent people to save more.
But what I think are the real reasons, and what we’ve heard … you know, some companies don’t want to be paternalistic with this auto plan, but weren’t defined benefit plans extremely paternalistic? It’s hard to get the attention, a lot of the HR and finance people [inaudible 00:04:12] say it’s hard to get the attention of senior management, and that, I think, gets to the real issue.
Is your senior management engaged in your retirement plan? Do they see it as an important option for them, and an important benefit? Because if they don’t, then they’re just not going to get that involved. But the ideal plan, in and of itself, has incredible benefits and very, very little downside, and I encourage you all to take a look and see if it’s viable for your company or your organization.
Thanks for watching Fred Talks, stay tuned.