There are seven absolutely fantastic 401(k) plan design elements that represent the perfect gift companies can give to their employees. Here they are:
1. Instant eligibility. Employers often put employees “on probation” when it comes to receiving benefits. That makes sense when there's a significant cost to the company (either out-of-pocket or via the accumulation of free-rider employees). But is it necessary in cases where the employee pays for the cost of the benefit? Maybe put a hold on the point when matching kicks in, but let them start saving for retirement from the get-go.
2. Offering a Roth option. Sometimes, the immediate tax deferral is worth less than the long-term tax deferral. That's certainly the case for employees in low tax brackets with decades of compounding returns ahead of them. This is a popular option with millennials.
3. An extended company match. Extending the company match doesn't mean increasing it; it means stretching it out into higher salary deferral percentages. For example, instead of a dollar-for-dollar match on the first 3 percent deferred, extend it by making it a fifty-cents-on-the-dollar match for the first 6 percent deferred. This incentivizes employees to save more.
4. Auto-enrollment. A saving employee at rest tends to stay at rest, and an employee in motion tends to stay in motion. Participation rates increase dramatically when companies reframe the question from “Tell us when you want to save” to “Tell us when you want to stop saving.”
5. Auto-escalation. If you thought auto-enrollment was good, you'll think auto-escalation is great. Employees are less resistant to saving small amounts. They are also less resistant to increasing that savings in small amounts on a regular (usually annual) basis.
6. Auto-backsweeping. Long-time employees are often overlooked and bypassed in these new features. Auto-backsweeping addresses this. For example, auto-enrollment generally applies to new employees. Existing employees therefore can't benefit. But if auto-enrollment applies to all employees annualy, why then you'd have auto-backsweeping.
7. Category-based tiered menu option. While “choice” sounds like a good thing, it tends to lead to choice overload, which stagnates decision making, resulting in less saving. We can “reduce” the choices by spreading them out among different categories.
There you have it! A 401(k) plan with nary a lump of coal.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
