For many of us, a 401k will be the cornerstone of our retirement income plan. With traditional defined benefit pension plans going the way of the pay phone and typewriter – Americans are now charged with making smarter retirement planning decisions – ready or not.
But with a 401k plan it takes two to tango. The Employer (sometimes referred to as “plan sponsor”) which includes all of those involved in decision making. And the “participant” – an employee who is not involved in 401k decision making. We need smart decisions from both employer and participant to make the most of the plan. Here are two things smart employers know about their 401k:
Lower fees = Better Results
Obviously. Markets are unpredictable while costs are forever. And the jury is out: study after study reveals higher costs leads to worse performance. I’m not saying that cost should be the only consideration – or that you should go straight to the lowest cost provider. Nobody makes any purchase decision based only on the price. But in today’s world you can have a great 401k plan for around 1% all in expenses (administration, recordkeeping, investments, advice & fiduciary protection) More than 1.5% is unnecessary and more than 2% is excessive.
Auto enrollment (and escalation) works
The only thing people hate more than making decisions is changing them! That’s why having employees automatically enrolled in your 401k plan is effective.. you’re harnessing the most powerful force in the financial universe… inertia! And while auto enrollment has brought millions of new savers into retirement plans , most employers set the default rate at 3% and because of…. inertia, it stays there!
Which brings us to auto enrollments sister: auto escalation. Here you automatically increase your participants’ contributions to coincide with a raise or possible a work anniversary. But this is a trickier one because many plan sponsors fear that automatic deferral increases will be viewed as “coercive” – which is why less than half of the companies offering auto enrollment in their 401k plans extend to auto escalation. But it still works.
In the next post we will hit “two more” things smart employers know about their 401k plans,