4 Trends in 401(k) Plans Entrepreneurs Need to Know About
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The 401(k) plan has become the standard of retirement plans. In fact, defined contribution (DC) plan assets make up a significant portion of the nation’s retirement assets, representing more than a quarter of the total retirement market, according to an Investment Company Institute research report released earlier this year.
A company’s benefit offerings not only serve as an incentive for current employees, they also serve as a powerful talent acquisition tool. The key to maintaining a cutting-edge retirement plan that both inspires and attracts employees is to keep up with the times. Here are four emerging trends that people on any side of a 401(k) plan should keep an eye on this year:
1. Increased employer matching.
One trend dominating defined contribution plans is increasing employer contributions. After all, the one surefire way to encourage employees to contribute more to their 401(k) plan is for employers to stretch their matching contribution formulas.
However, according to Deloitte’s Annual Defined Contribution Benchmarking Survey of nearly 300 plan sponsors, only nine percent of plan sponsors made changes to their matching formula in the last year. In light of the fact that almost half (43 percent) of workers in a 2014 Fidelity Investments survey said they’d take a lower paycheck in exchange for a bigger matching contribution, it’s worth looking into this trend.
2. Automated enrollment.
Automating open enrollment seems like a no-brainer, especially considering that the majority (90 percent) of employees opt to keep the same benefits year after year and most (73 percent) don’t understand the changes to their policies each year, according to the 2014 Aflac WorkForces Report. Generating employee interest and engagement in retirement plans starts with a simplified open enrollment process, or in this case, making 401(k) enrollment automatic for all employees.
In addition to automated enrollment, annual re-enrollment is being widely adopted. While employees can choose to opt out of automatic annual re-enrollment, many choose not to, resulting in high plan participation.
3. Roth 401(k) features.
Unlike a traditional 401(k), Roth 401(k) plans require employees to pay taxes upfront so that they can make withdrawals tax-free during retirement, which it seems many employees are happy to do. A 2014 Towers Watson survey of 457 large and midsize U.S. companies on defined contribution plans revealed that more than half (54 percent) of employers currently offer Roth accounts.
What’s more, since it is now possible to convert pre-tax 401(k) accounts into Roth 401(k) after-tax accounts, it’s likely that many more employers (and employees) will jump on the Roth bandwagon.
4. Plan transparency.
A motivated workforce begins with a transparent workplace. When it comes to employee benefits and enrollment, however, too many employees are left in the dark. How important is transparency when it comes to defined contribution plans?
Vanguard’s 2014 Global Trends in DB and DC Plans survey of more than 90 multinational companies found that 79 percent of respondents say that fee transparency is one of the most important considerations when it comes to making benefit-related decisions. And with more than half of employers (58 percent) tossing the recordkeeping costs of their 401(k) plans to participants, as found in the aforementioned Towers Watson survey, fee transparency is more important than ever.
To maintain transparency when it comes to 401(k) plans, it’s important for employers to regularly educate employees and communicate any changes made to their plans, plan options, fees and the like.