How Does Your 401(k) Plan Stack Up?

A fiduciary must know if its plan is actually helping employees achieve a financially secure retirement.

August 27, 2009

It used to be that simply offering your employees a 401(k) plan with the basic features was enough. But in the post financial crisis era, it’s important to measure your plan’s success and take appropriate action when needed.

How do you measure whether your 401(k) plan is effective? Look at:

  • Services you receive in exchange for plan expenses, such as annual plan or per-participant fees, or asset-based charges;
  • Whether you’re offering a wide variety of well-known investment managers and have the risk-return continuum covered; and
  • Educational resources you make available to help employees understand the plan.

Plan fiduciaries need to analyze and understand each of these items. But recently, expectations have risen to the point where fiduciaries must also know if their plan is actually helping employees achieve financially secure retirement. In that regard, a plan’s outcome is more important than its features.

To determine if your plan sets the stage for a secure retirement for employees, ask: How many of your employees:

  • Who are eligible, are enrolled in the plan? Most large employers report 75% participation. In plans sponsored by smaller employers, 80% to 100% is a reasonable target.
  • Contribute enough to the plan to put them on track to replace an acceptable percentage of their income? Industry experts suggest that, unless you provide a defined benefit plan, 401(k) participants need to contribute 13% to 18% of pay annually (including employer match) over a 30-year working career to replace 80% of their pre-retirement income. It’s even more if employees get a late start saving or want to retire early.
  • Have properly diversified portfolios using a sound asset-allocation strategy? Many 401(k) participants make unsound decisions or don’t update their mix of stocks, bonds, and cash to reflect life changes.
  • Are on track to fund a reasonable standard of living in retirement?

It’s important to know the answers to these questions to determine if your plan benefits eligible employees and if staff are using your plan effectively. CUNA Mutual Group recently developed an innovative plan profile to supply plan sponsors with information and recommended actions if they’re below suggested targets.

Keep in mind that statistics only measure your employees’ decisions. You can’t force someone to make certain decisions. However, the following areas can play a large role in encouraging sound decision-making:

  • Plan design, including an employer-matching contribution and automatic enrollment;
  • Relevant education and plan communication, delivered through multiple channels (online, e-mail, print, Webinar); and
  • A benchmark of your 401(k) plan in terms of participation, contribution rate, asset allocation, and readiness for adequate retirement income. Know where you stand and where you’d like the plan to be.

If you’d like help in determining the effectiveness of your plan, visit our Web site and request an assessment.

SCOTT KNAPP is director of retirement investment strategy at CUNA Mutual Group, Madison, Wis. Contact him at 608-231-8486.