Research shows that the number of investment options in a 401(k)-type defined contribution plan is related directly to participation. Plans that offer 10 to 14 funds have the highest participation rates, but as more funds are added, participation rates decline, according to a report by Diversified, a provider of retirement plan services.
While retirement professionals might appreciate the sometimes subtle differences among many investment options, the typical participant does not. "For many participants, more options implies more work," according to the June 2012 report, Effective Communication Begins With Purposeful Plan Design.
The report urges plan sponsors to spend time reviewing their plan’s design before developing new communication or education materials to ensure that all features support the key objectives. Among its other recommendations:
• Implement automatic enrollment at a sufficient rate. More than half of plans that enroll employees automatically use a default rate of 3 percent or less. Instead, consider setting a default rate that is at least as high as the current opt-in rate and integrate automatic escalation to improve participants’ retirement readiness over time.
• Design employer contributions to maximize plan objectives. Despite studies showing the impact of matching contributions on savings rates, many sponsors default to standard formulas such as a 100 percent match up to 3 percent of pay or a 50 percent match up to 6 percent of pay. If increasing the average savings rate is a key goal for the plan, consider extending the match to 25 percent up to 12 percent of pay. In many plans, the rate at which the match is maximized is the most commonly chosen participant contribution rate; therefore, stretching this incentive likely will result in higher savings rates.
• Limit plan loans. Eighty-seven percent of retirement plans offer loans, and 47 percent of plans offer multiple loans. If a plan is falling short on average balances, loan activity is likely to be at least partly to blame. If improving employee retirement readiness is a goal for the plan, consider a change to plan design to limit or eliminate plan loans.
“Effective participant communication is essential to a successful retirement savings plan, but not even great communication can make up for poor plan design,” said Patricia Advaney, senior vice president, participant solutions, at Diversified. “To communicate with purpose and positively impact participant behavior, plan sponsors must review their plans on a regular basis to ensure all features are working in tandem to support key objectives.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Related External Resources:
Having Too Many 401(k) Options Might Be Hurting You, Business Insider, February 2013
Constructing a DC Plan Investment Lineup, The Vanguard Group, September 2012
Related SHRM Articles:
Encourage Employees to Defer Adequate Pay to Their 401(k) , SHRM Online Benefits Discipline, May 2012
401(k) Investment Menus: Actively Managed vs. Passive Funds, SHRM Online Benefits Discipline, August 2011
'Plug the Drain' on 401(k) Plan Leakage, SHRM Online Benefits Discipline, August 2011
Pointers for Designing an 'Ideal' 401(k) Plan, SHRM Online Benefits Discipline, November 2010
Tiers Recommended for 401(k) Investment Menus, SHRM Online Benefits Discipline, October 2010
On the 401(k) Menu: Do More Funds Help Participants?, SHRM Online Benefits Discipline, August 2005
401(k) Plans Add Features to Drive Participation and Savings, SHRM Online Benefits Discipline, September 2011
SHRM Online Benefits DisciplineSHRM Online Retirement Plans Resource Page