Plan Design is one of the most vital elements of a 401(k) plan and advisors often don’t know enough about the design functions to help their clients craft a 401(k) plan that supports their key objectives. We understand which plan designs will help meet our clients Investment Policy Statement objectives and keep the plan in compliance. A few strategic plan designs that we employ include:
Participant investment advice
Plan Participants need Investment Advice and Plan Education. We make sure that is a key feature in all of our clients 401(K) Plans.
With opt out rates at less than 80%, auto-enrollment has become the 401k plan design solution to low participation. Note that initial auto-enrollment default contribution percentages have increased to 5% or 6% (from 3%).
Plans often use a stagnant rate that does not escalate. We advise a rate equal to the opt-in rate and use an escalation option to increase their overall saving. Participants should consider adding at least 5 - 10% to their 401k accounts each year in order to retire with a retirement ready balance.
Re-enrolling non-participating employees each year, and defaulting their investment choices into target date options, typically increases plan participation to 90% or more and allows plan participants to be more retirement ready.
With strategic use the match can be a great tool for increasing employee deferral rate. In order to encourage a higher level of participant contributions, some employers are stretching their matching contributions over a broader employee deferral. A traditional match may be 50% of the first 6% of employee deferrals (resulting in a 3% employer match). A stretched matching contribution will provide the same 3% employer matching contribution over a larger employee deferral — 25% of the first 12%, for example.
Research has found a direct correlation between limiting the number of investment options in a plan and greater participation.
While in a Defined Contribution plan participants are always 100 percent vested in their own contributions to a plan, and in any subsequent earnings from contributions, the plan sponsor can determine the time period that participants have to work before being vested in the employer’s matching contributions.
Automatic/Negative Enrollment/ Increased Elective Deferral Limits
This plan design features work to facilitate the purpose of the Plan: encourage employees to save for retirement.
Highly Compensated Employees (HCEs)
HCEs are unhappy when they receive a refund of excess 401(k) contributions because their plan failed its discrimination test. The refund means they will owe more income tax for that current tax year. There are plan design elements that can be implemented to help eliminate this problem i.e. limit HCE contributions when they reach a pre-set contribution limit or run a mid-year projection to determine if the plan will fail discrimination testing so that the HCE’s can plan accordingly.
Can be utilized to help the plan pass non-discrimination testing in certain circumstances.
For assistance with your 401(k) plan design, call us at 877-595-0833 or fill
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