Today’s 401(k) plan and recordkeeping solutions are flexible enough that every employer can have a plan that is tailored to their needs while staying within the standardized plan offerings. As a financial advisor, you can add value by educating your plan sponsor clients about their plan design options and illustrating how plan features can drive savings outcomes.
Assessing plan design is not only important when setting up a plan, but as part of the ongoing annual review process. Taking time to evaluate the plan sponsor’s goals each year can help pinpoint features of the plan that are no longer aligned with the current needs of the business. As you design the agenda for your next plan meeting, consider incorporating some of the following plan design discussion items on your agenda.
Review Plan Objectives
Different employers have different reasons for offering a 401(k) plan to their employees. These reasons may vary by company size, industry, workforce, and business owners’ philosophy on helping employees prepare for retirement. You can help employers both identify and prioritize their objectives for their retirement plan. During your discussions, ask about their business culture, the competitive environment, and their financial ability to fund benefits and other plan enhancements. These are all factors that may help you pinpoint the best design options.
Here are some questions to help plan sponsors think seriously about why they’re sponsoring a plan and what they would like the plan to achieve:
- What is the age demographic and tenure of your work force? Has it changed since you first adopted your plan?
- How have your business needs changed since you first selected a plan?
- Is your plan competitive as you seek to hire new talent?
- If you want to focus primarily on rewarding loyal employees, is your plan achieving that goal?
- Are your plan eligibility requirements allowing employees to enter the plan as quickly as they would like?
- Are your older workers saving enough to retire at a typical retirement age?
- Are you achieving the level of plan participation and savings you had hoped with your employees?
- How much are you spending to fund and administer the plan? Is that still an appropriate expenditure for your business?
Review Plan Metrics
When you have reviewed the plan sponsor’s objectives, you can help them assess how their plan is currently performing toward those objectives. If possible, obtain plan metrics from the plan’s recordkeeper or third party administrator, or have the plan sponsor gather this information, before you meet for the plan review. Common metrics to consider are:
- Plan participation rate
- Average deferral rate
- Average participant account balance
- Nondiscrimination testing results
- Loan default rates
- Hardship distribution levels
As you review these metrics with the plan sponsor, ask about any workforce dynamics that might be skewing the plan averages. For example, does the participation rate drop in a certain age or salary group? Digging deeper to assess specific sectors of the workforce can help you fine-tune your plan design solutions.
Benchmark Plan Metrics and Features
Once you have the plan metrics in hand, you can help the plan sponsor gauge how their plan is performing in relation to plans of a similar size or industry. This can help the plan sponsor set realistic goals for the plan and identify specific areas of their plan that need improvement. You can also benchmark the types of plan features selected by your clients against other plans in the same industry or geographical area to help demonstrate whether the company is offering a competitive plan as compared to other employers who are vying for talent in their same area. (See the “Sneak Peek of Our Compensation, Retirement and Benefits Trends Survey” article included in this edition.)
Introduce Plan Design Features that Align with Plan Objectives
After assessing the plan sponsor’s objectives, plan metrics and benchmarking information, you can present potential plan design changes that could drive stronger performance. You don’t have to be a plan design expert to assist in this endeavor. As you identify potential solutions, you can introduce the plan sponsor to third party administrators and other plan design professionals that can create projections to illustrate the costs and potential impact of different plan features based on the plan’s demographic information. These experts can also help explain the document amendment and timing requirements associated with any change in plan features. You can help your clients weigh the benefits and costs of the various options.
Below are some common 401(k) plan design features that are used to help plans meet certain objectives:
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