Designing a Successful 401(k) Plan
Overview
A 401(k) plan is an essential benefit offering that can help you recruit and retain top talent. Though a well-designed 401(k) plan can be an incredible tool, often the value of a 401(k) plan is overlooked. As a plan sponsor, you play a crucial role in designing a successful 401(k) plan to help your employees save for retirement. Here are some best practices to consider when designing your 401(k) plan.
Define the Plan's Objectives
The goal of a 401(k) plan shouldn't be to copy your competitors. Retirement plans must reflect the needs of your company. It's essential to define your objectives. Consider what you hope to accomplish with the 401(k) plan. Your goals will influence the plan's design. For example, a company with a significant salary disparity may limit the amount the high-income earners can contribute if the 401(k) plan isn't safe harbor. Some plan designs may restrict the vesting options. Working with a retirement plan advisor can help you understand your options.
Consider Plan Fees
401(k) plan fees can erode employees' retirement savings. As a plan sponsor, it's crucial to understand the costs associated with your plan. Review your plan fees regularly and obtain an independent benchmark to ensure expenses remain reasonable and competitive. An experienced retirement plan advisor can do this and help negotiate prices with providers.
Keep it Simple
A successful 401(k) plan should be easy for employees to understand and use. Keep your investment options limited and avoid complex investment strategies. To share or outsource the investment fiduciary responsibilities, consider utilizing a 3(21) or 3(38) investment fiduciary, respectively. Remember, having too many investment options is a bad idea. Too many options overwhelm employees and cause them to make poor investment choices. Also, quantity doesn't make up for quality.
Provide Investment Education
Investment education is critical for helping employees make informed decisions about their retirement savings. Investments can get complicated. Some participants delay participation because they are overwhelmed by investment options. Another common issue is employees making poor investment decisions due to biases, emotional impulses, and media narratives. Offering financial education seminars, online resources, or one-on-one meetings with financial advisors can help employees better understand their investment options and how to make the most of them.
Encourage Employee Participation
Your retirement plan has a more significant potential for success when you prioritize it. For example, scheduling time for 401(k) plan education during your employee benefits open enrollment, including 401(k) information in onboarding packets, and adding automatic enrollment provisions can help. In addition, a competitive match and an excellent investment lineup can encourage employees to join the plan.
Monitor the Plan Regularly
Monitoring your 401(k) plan ensures its continued success. Review your plan's investment options and performance regularly to ensure they remain appropriate for your employees' retirement goals. Also, consider conducting periodic plan reviews to ensure compliance with IRS and DOL regulations.
Talk to Experienced Professionals
401(k)s get complicated. A common mistake for plan sponsors is assuming other service providers are responsible for more than they are. Soliciting the service of experienced professionals can help you understand your responsibilities, find blind spots, and make more informed decisions about your 401(k) plan. An experienced 401(k) advisor can add a lot of value.
Conclusion
In conclusion, designing a successful 401(k) plan requires careful planning and attention to detail. By following these best practices, you can create a retirement benefit that helps your employees save for their future while providing valuable benefits to your company. Our 401(k) advising team can help.