He also likes to see auto-enrollment offered to eligible non-participating employees if plan sponsors are able to handle the administrative demands. Here, “Auto-enrollment can be a double-edged sword and a complete disaster for employers because of regulatory requirements,” he says. Plans need a vendor who is very good at integrating with payroll to track eligibility and mail eligibility disclosure notices to employees, he says.
Ken Hoffman, a managing director with HSW Advisors, a private wealth management boutique in New York City, suggests clients include auto-enrollment and auto-escalation features in their plans. “Auto-enrollment is all psychology,” he says. He points to a study showing that Germany, which has only an opt-in system for organ donation, has a low 12% donor rate while Austria, which has an opt-out system, boasts a donor rate of more than 99%.
Auto-escalation, which automatically increases employee deferral rates, is “a harder push,” Hoffman says. Yet according to a 2015 study from Empower Institute, employees whose plans offer auto-escalation are on track to replace 92% of their working income in retirement, while those whose plans don’t offer this feature will replace only 73%.
Employees also require more education on target-date funds and need to know, says Hoffman, “Is this taking me to retirement or through retirement?”
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Hoffman encourages clients to create 401(k) non-elective safe harbor plans that offer an employer match to non-highly compensated employees (those earning less than $115,000 in 2014). These plans enable highly compensated employees to defer more income and are exempt from IRS nondiscrimination tests (which ensure that benefits provided to highly compensated employees are proportional to those provided to non-highly compensated employees).
He is also a fan of the “combo” plan, which adds a cash balance plan atop a safe harbor 401(k) plan containing a profit-sharing component. The IRS limits the maximum someone can put away under a 401(k)/profit-sharing plan to $53,000 for those under age 50 or $59,000 for those 50 and older. By adding a cash balance plan, key employees can typically save an additional $75,000 to $250,000, he says. Actuaries calculate this figure using each person’s age and salary.
Brian Holmes, president and CEO of Los Angeles-based Signature Estate & Investment Advisors (SEIA), which manages $200 million in 401(k) assets across 35 plans, says employer matching contributions have a strong correlation to employee participation and deferral rates.
Additionally, “If the employer is constantly emphasizing the importance of retirement readiness, education, communication, and takes an active role in the administration of the retirement plan, we see a vast increase in the participation rates and contribution rates of employees versus employer plans that are not implementing those add-ons,” he says. “The idea of ‘retirement readiness’ truly begins at the employer level.”
Holmes is also seeing more adoption of auto-enrollment. Adding this feature has significantly boosted plan participation among manufacturing clients with low-wage employees, he says.
When SEIA digs into existing and proposed plans to discuss layered fees, “we peel back the onion in all five areas,” says Holmes, referring to the fees for the custodian, record-keeper, administrator, advisor and funds. If a client’s plan hasn’t been updated in a couple of years, moving its lineup into index funds, ETFs and less expensive class shares typically saves 20 to 50 basis points in overall fund expenses, he says.