This year marks the 40th birthday of the 401(k). Like the best of us, this retirement staple continues to evolve as it enters its fifth decade. But while the 401(k) still offers lots of options and opportunities for companies and employees, HR leaders who have to manage a plan on behalf of their workforce may be the ones feeling growing pains.
“HR is having to broaden its focus,” says Harry Dalessio, senior vice president and head of full-service solutions for Prudential Retirement in Hartford, Conn. “Many benefits have been in silos, but now things are becoming more holistic. So it’s not just about 401(k)s anymore, but also student loan debt, emergency funds and other aspects of financial wellness.”
Business and legal commitments surrounding defined contribution plans are also shifting. “The 401(k) landscape is changing, fees are changing, compliance is getting tougher,” says Shin Inoue, CEO of ForUsAll, a plan advisor in San Francisco that focuses on small and midsize businesses.
Since Section 401(k) was added to the Internal Revenue Code in 1978, the defined contribution plan has evolved and become a handful to manage: Company leaders want the plan to be cost-effective, employees seek the best investment outcomes, and, oh yes, the lawyers are looking to be sure it complies with the law.
While larger companies often have benefits professionals on staff who are schooled in the intricacies of plan design and management, at many employers HR generalists must take the lead. It’s little wonder practitioners feel overtaxed and overwhelmed.
So what to do? Many companies hire outside advisors, but that doesn’t relieve employers of their fiduciary duty to make sure the plan is properly run. You must know enough about your organization’s 401(k) to effectively oversee it—while relying on well-established processes to get the job done.
With that in mind, we asked a number of benefits experts for tips on how to make sure a plan is running optimally on all fronts. Here’s their advice.
1. Know Your Role and Follow Through
The first step is as basic as it is important. “Take a step back and understand what ‘fiduciary’ really means. Understand what your legal responsibilities actually are,” says Sarah Saradella, senior director of global benefits for Akamai Technologies in Cambridge, Mass. Fiduciaries are obligated to act in the sole interest of plan participants. It’s up to them to make sure that the plan adheres to governing plan documents and the law, offers diversified investments, and has reasonable fees, she says.
That may not be as daunting as it sounds, as long as you’ve got good systems in place. “A lot of it boils down to process,” Saradella says. “You don’t have to be an expert if you maintain good process and compliance. Those are the guardrails to managing the plan.”
Establish procedures to, for example, select and monitor investments, service providers and consultants. You’ll also need to benchmark plan performance and fees, as well as document decisions. These methods should be consistent, says Christine Hawkins, a Bellevue, Wash.-based attorney in Davis Wright Tremaine’s Employment Services Group. “We recommend adopting clear written guidelines regarding expectations, duties and meetings, and then following those guidelines. All decisions should be documented, including the options considered, who was consulted and the reason a decision was reached.” According to the 2018 edition of the 401k Averages Book, a benchmarking guide, for a plan with 100 participants and $5 million in assets, average costs per participant last year were:
Investment management: $600 (1.2 percent of assets per participant).
Record-keeping/administration: $35 (0.07 percent of assets per participant).
Trustee costs: $3.
Plan sponsors should benchmark their plan against those with similar characteristics, given that costs vary based on the number of participants and total assets, decreasing on a per-participant basis for larger plans.
Think of the plan sponsor like a train’s conductor, “making sure everyone—payroll, HR, record keepers and investment managers—are doing their part,” says Amy Reynolds, a partner in Richmond, Va., for consulting firm Mercer. “A lot of data and partners are involved, and each one has its own contribution to make to get to the final destination.”
However you define your role, “you can’t put it on autopilot,” she says. “That’s where things go off the rails.”
“I have a love/hate relationship with 401(k)s,” admits David Gardner, a managing partner at Caliber Wealth Management, a financial advisor in Orem, Utah. “I love them because they’re a good foundation for my practice. I hate them because of all the details involved.”
Those minutiae are why it’s so important to maintain sound practices. When you understand your responsibilities to the plan’s participants and how you can help fulfill your obligations, the complexities become much more manageable. “It’s complicated, but it’s kind of not,” Saradella says.
2. Understand the Impact of Plan Design
As important as it is, grasping your fiduciary role is just a start. You’ll be even more effective if you know the basics of 401(k) plan design.
“HR needs to understand how plan design influences savings behaviors and outcomes,” Dalessio says. Take, for example, the power of automatic enrollment—where employees are, by default, signed up to contribute to the 401(k) unless they opt out. The practice is an extremely effective way to increase employees’ participation and help them focus on their financial priorities.
Akamai’s plan participation grew from 74 percent when auto-enrollment was instituted in 2010 to about 93 percent in 2014 and has hovered around that level ever since, according toSaradella. “It was a radical idea a few years back, but the landscape has changed,” she says. “It doesn’t create the firestorm you think it will.” In fact, her experience has been that people often appreciate the assistance.
Matching contributions also encourage workers to contribute more to their 401(k)s. And, if the matches are generous enough, they can help you to attract and retain talent in a tight labor market. You can also use vesting schedules to encourage retention and reward loyalty.
In addition, consider the primary purpose of your company’s 401(k), as that can vary from plan to plan, Gardner says. Some are set up for the benefit of employees, while others, especially at smaller businesses, are mainly intended to provide tax advantages to the company’s owners. Understanding what’s driving the plan will influence your vendor search and other aspects of its implementation.
[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]
3. Stay on Top of Plan Expenses
One of the most basic fiduciary duties is to make sure plan fees and expenses are reasonable. “This is a hot button for regulators and is just prudent plan management,” Saradella says. Like many other aspects of overseeing the 401(k), it requires regular attention.
Manage expenses and benchmark them regularly, especially if your plan has rapidly changing demographics or fast-growing assets.
One way to trim fees is to shift assets into lower share classes when appropriate, Saradella says. For example, mutual fund C class shares may be less expensive than A class shares but offer limited voting rights. Portfolio managers can minimize costs by holding the right mix of share classes at any given time—A for long-term holdings and C for shorter-term holdings, for example. Your job is to make sure they’re doing just that.
Another tactic is to cap your record keeper’s fees. (The record keeper is the firm that handles the plan’s nuts and bolts, such as processing enrollment, issuing account statements and providing customer service. T. Rowe Price and Fidelity Investments are among the better-known players in this space.) If your fee structure is based on basis points, which measure the value of the plan’s portfolio, your record keeper will make more money as assets grow, even when the number of accounts it manages stays steady. At some point, you’ll probably want to restructure the fees so they’re either based on the number of accounts you have or capped. When assets grow, so does your leverage to lower costs.
Don’t hesitate to renegotiate when circumstances change. “While we have not changed our record keeper, in the last three years we’ve negotiated lower fees four different times,” Saradella says.
How to Review Your Provider
You might love your 401(k) provider, but your fiduciary duties require you to make sure the plan is benefiting employees in the most cost-effective manner. To evaluate performance, organize your review into three parts, suggests Harry Dalessio, senior vice president and head of full-service solutions for Prudential Retirement:
Examine the approach to regulatory and compliance issues to make sure the provider fulfills all obligations.
Consider the quality of operations. How responsive is the call center? How well does the website work? What’s the overall experience like for both the employer and employee?
Review the investment options. Are participants given enough choice or too much? Are the fees involved comparable to others’?
In particular, spend a lot of time understanding fees. “Every three to five years, the market changes enough to warrant a re-evaluation in fees,” says Gregg Levinson, a senior consultant for Willis Towers Watson. By benchmarking firms against one another, you or your consultant should be able to identify reasonable fee structures. “Reasonable,” not “the lowest,” should be the test, he adds.
4. Pay Attention to the Rules
The U.S. Department of Labor (DOL) has increased its audit activity over the past several years, causing both disruption and added expense for plan sponsors working their way through the examination process. You may not be able to avoid an audit, but you can minimize the pain.
Start by keeping your perspective: Receiving notice of an audit isn’t a reason to panic. It’s true, however, that many plan sponsors have struggled with governance requirements in recent years, which is why it may be worth hiring a consultant. They “can check all the boxes,” says Ross Bremen, a partner at Boston-based investment advisor NEPC. “That makes sense if internal resources aren’t focused.”
Essentially, regulators want to ensure that the plan and its processes are being managed in compliance with the law. “The DOL doesn’t expect perfection,” Saradella notes. “If they see mistakes and then corrections were made and documented, they’re going to be happy.”
5. Apply the Personal Touch
Communication and education are essential when striving to increase the effectiveness of your company’s 401(k). Help employees understand not only how to work with your record keepers but also how to wisely manage their accounts. While vendors should be held accountable for educating participants, HR professionals can add a personal touch. After all, they have a closer relationship to employees than any outside consultant and can take advantage of that connection to drive home the importance of retirement planning.
“Nothing in vendor e-mails is going to prompt changes in [employees’] behavior,” Gardner says, but the “avenues of personal relationships” available to HR practitioners might. Have face-to-face conversations and utilize other internal communication channels as much as possible.
In addition, keep in mind the importance of personal context. Each worker’s financial situation and goals are unique, and 401(k)s are just one component of financial wellness. Health care spending, student debt payments, mortgages and the like all impact employees’ retirement contributions. Ultimately, your aim is to “get people to come and participate in the process of managing their investments,” Gardner says.
“The best-laid plans are useless unless you can explain them,” says Gregg Levinson, a Philadelphia-based senior consultant for Willis Towers Watson. “Education isn’t a panacea, but it’s important.”
6. Don't Work in a Vacuum
While you might have to spend time in the weeds, never lose sight of the bigger picture. “Retirement savings have to be seen in the context of everything else that’s going on,” Levinson says. Besides considering the impact of health care expenses and other financial obligations on retirement contributions, keep an eye on wider economic issues, too.
“Employers need to be aware of how the economy impacts individual behavior,” Reynolds says. After a downturn, for example, “are [employees] taking out more loans? Are they taking money out of their plans?”
Regularly monitor investments and participant activity for behavior that jeopardizes retirement security. When you sense that people aren’t making the right decisions for their futures, consider offering more-detailed guidance.
Are employees investing too conservatively than their time horizon should allow for?” Saradella asks. “Are deferral rates [employee contributions] low?” Such warning signs, which can be found in the aggregate data record keepers provide, could indicate that it’s time to make adjustments.
“You may need to change your communications or plan design,” Reynolds says.
7. Remember It's an Ongoing Process
Many employers view their duty to manage their 401(k)s as an annual event: Once a year, HR and other company officials—and any consultants hired for the purpose—review the plan’s setup, and then its operation is left to the record keepers and other vendors until the following year. But the job’s not that simple. “You have to monitor things regularly,” Saradella says. “Once a year isn’t enough.”
Track changing demographics. If your workforce is fairly young, your investment strategy will differ from that of a company whose employees are, on average, well into middle age.
Review investment managers every quarter, Reynolds recommends. This typically includes monitoring performance against metrics defined in the investment policy, such as comparisons against benchmarks and peer groups, she says.
Most benefits professionals suggest conducting a full review of your provider every three to five years. Determine whether you can perform an adequate assessment on your own or if you should hire a consultant to cover all the details. Your decision will depend on your capacity. “I’d say it’s certainly easier to bring in some outside help when going out to the market to evaluate 401(k) record keepers, but it’s not impossible to do this work in-house,” Saradella says. Whatever resources you use, most experts believe issuing a request for proposal is the best way to compare providers.
It takes a lot of work to oversee a 401(k), but it’s manageable. It “is all about process, and there’s no perfect,” Bremen says. “Sponsors need to know about tools, practices and sufficient governance process.”
And if the job seems thankless at times, take comfort in knowing your work is helping your company’s bottom line and shaping employees’ financial futures.
Auto-Features Slow to Catch On
Automatically enrolling employees in 401(k)s or boosting their salary deferral amounts by default are among the most powerful strategies employers have for increasing workers' participation and assets in retirement plans, according to benefits experts. But these design features have yet to match the widespread use of employer matches.
76% of employers match employee contributions to 401(k)s and other defined contribution plans.
40% of companies automatically enroll new employees into defined contribution plans.
19% of organizations automatically increase salary deferral amounts to defined contribution plans.
Source: Society for Human Resource Management 2017 Employee Benefits research report.
Mark Feffer is a freelance business writer based in Philadelphia.
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