The end of the year is open-enrollment time for many 401(k) plans, with employees carefully weighing their investment choices and deferral rates. These are no small decisions; poor choices made today can result in a less prosperous future, as 401(k)s have become the primary retirement vehicle for millions of workers. By recent estimate, investors have nearly $4 trillion in 401(k) plans.
Employers can help new and current participants make the best choices by giving their 401(k) plans a thorough checkup. To help them with this task, we asked experts on defined-contribution plans for their advice on plan goals, fund mix, automatic enrollment, fees and more.
A Pathway to Retirement
“Five or 10 years ago, the attitude among plan sponsors was, we provide a solid plan for our employees, and it’s up to them” to take advantage of it, says Bill McClain, principal and intellectual capital leader for defined contribution at Mercer. “A plan sponsor might say that they have an 85% participation rate, and their deferral rates are above average.
“But ultimately, the real measure of a plan’s success is this: Does it provide employees with a secure financial future? Does it provide a pathway for employees to retire?”
Making sure a 401(k) can deliver adequate retirement income has become the number-one goal of many plan sponsors, says McClain. “There’s a lot of anxiety among employees about their financial future,” he says. “Until you dig a little deeper, you may not realize this. There may be a pocket of employees who aren’t deferring, or who should have started earlier and should be contributing more, or are taking money out for loans.”
Beyond concern for the welfare of their workers, employers have their own bottom-line interests in ensuring that 401(k) plans are performing at the top level. “There are productivity issues and workforce management issues when employees can’t afford to retire,” says McClain. “They incur higher health care costs.” Employees who stay at a company simply because they don’t want to retire are employees who are not engaged in the business, he says.
An Inviting Menu
A balanced 401(k) menu offers a variety of funds: equity and index, fixed-income, balanced, target-date (or life-cycle) and more. But such menus can be quite long in practice, and just as in a restaurant, the sheer number of choices can be overwhelming. The continuing trend in plan design, therefore, has been: keep it simple.
“Study after study has challenged the notion that more choice is better,” says Josh Cohen, defined contribution practice leader at Russell Investments. “Keep it limited to a few of the major asset classes. Research indicates that participants appreciate having a more manageable number of choices to choose from.”