2016 was quite a year! What’s up next? Check out this post instead: 401(k) Trends in 2017
“An alternative is to adopt automatic enrollment. Here’s how it works. When an employee first becomes eligible, she receives a form indicating that she will be enrolled in the 401(k) plan, unless she actively fills out a form asking to opt out.” ~Nudge, Thaler and Sunstein, p. 111
In their groundbreaking text, Nudge, author’s Thaler and Sunstein explain how making it easier to “do the right thing” can improve many aspects of society. The above quote describes one of the most important current trends in 401(k) plans today: auto-enrollment. New employees, consumed with transitioning into a new job and the reams of onboarding paperwork frequently put signing up for the company 401(k) on the back burner. In some cases, even with the offer of free employer matching contributions (free money!) these employees defer, or worse, avoid signing up for the 401(k) plan. This one decision can cost them tens of thousands of dollars or more over a lifetime.
Other trends in 401(k) plans include lowering fees, offering easier access to investment advice, and delivering technology assisted investing solutions.
Trend 1: Auto-enroll for 401(k) Signups
Today, many employers are adopting automatic enrollment for new employees into a 401(k) plan. This allows employees the option of opting out, as opposed to remembering to consciously opt in. For employers who want to make sure they’re getting the most bang for their buck as well as helping their employees save as much as possible for the future, this is an appealing approach. In a 2013 WorldatWork member survey, in partnership with the American Benefits institute, 56% of responding companies offered some type of auto enrollment into the 401(k) plan. Of those respondents, a little less than half also included auto escalation, increasing employee contributions automatically over time.
This alternative alone can mean the difference between a financially secure retirement and one fraught with financial instability.
Trend 2: Investment Advice
The previously mentioned 2013 WorldatWork member survey found that of the 53% of companies who provide employees investment advice, 67% offer independent financial advisory guidance. This is an increase of approximately 20% since 2008.
The trend of offering investment advice to employees is a step in the direction of creating more informed consumers. When the advisors are independent of the plan, their credibility is improved as well. There’s little doubt that a more informed consumer will make better investment decisions.
Trend 3: Lower 401(k) Fees
As companies consider investments for their employees, a top consideration was fees, and 401(k) providers are listening. The WorldatWork survey found that 75% of the respondents listed fees as their top metric when choosing a 401(k) plan. The trend toward lower fees also bodes well for 401(k) providers incorporating technology enhanced or robo-advisors into their plan.
Certainly, employers want a program that keeps their costs down. But educated employees are beginning to understand that the difference between a low fee Vanguard ETF and a higher fee actively managed mutual fund can mean thousands of dollars of retirement spending going to the mutual fund company. Consider the final benefit of 30 years investing in an ETF with a 0.09% annual fee over one with a 1.09% fee on a $100,000 (average size) investment account. The lower fee ETF will be worth an additional $34,000 than the high fee actively managed mutual fund after 30 years.
Employers are always looking for ways to boost employee retention, and benefits have been shown to help, especially with millennials, and in competitive industries for hiring like technology. Robert Lawton of Lawton Retirement Plan Consultants suggests this strategy in the “Top Five 401(k) Plan Trends for 2015” on the EmployeeBenefitAdvisor.com site.
In the past, a common employer 401(k) match was 50% of the first 6% of employee contributions. Now, many employers are revising their formula to match 25% of the first 12% of employees’ contributions. This doesn’t cost the employer any additional money and encourages employees to contribute more of their salaries to strengthen their future retirement.
Trend 6: Re-enroll Every Employee Annually
This 401(k) plan tweak is a version of the auto-enroll policy for new employees. Lawton stated that plans with auto-enrollment, auto escalation and annual re-enrollment into target date funds demonstrate employee 401(k) plan participation rates close to 90%.
Annual re-enrollment is an add-on to the initial automatic enrollment and automatically re-enrolls every employee into the 401(k) plan. Certainly, workers can opt out of the re-enrollment, but as Thaler and Sunstein state in Nudge, we tend to be on the lazy side and take the path of least resistance. Thus, it requires some effort to go through the process of un-enrolling in the 401(k) plan annually and most employees don’t go through the added exertion.
Trend 7: Improved Employee Retirement Education
My daughter recently started work with a large corporation. When reviewing the 401(k) plan sign-up portal, she found a wealth of financial education materials. There were videos and short articles attempting to educate the employees about retirement planning. These types of easily consumable bites of financial literacy resources are becoming more prevalent as employers strive to help workers become better financially prepared for the future. People are also discovering alternative retirement options, like early retirement and semi-retirement, and planning accordingly.
Trend 8: Offering Roth 401(k) Options
A typical 401(k) has similar characteristics to a traditional IRA, although with larger contribution limits. The 401(k) monies are subject to the required minimum distributions (RMD) when the account owner becomes age 70 ½. These RMD amounts are calculated based upon lifetime annuity tables designed to obligate the retiree to withdraw, and pay tax on, their entire 401(k) account by the time they die. Since contributions are made into the plan with pre-tax dollars, this is how the accounts are ultimately taxed.
A post-tax 401(k), also known as a Roth 401(k) is funded with after tax dollars. This means that the employee doesn’t receive the immediate tax break that they do with a traditional 401(k). In spite of the immediate tax consequences, there are many long term benefits of a Roth 401(k). The employee can contribute up to $18,500 in 2018 plus an additional $6,000 into the Roth 401(k). Additionally, there are never any RMD’s thus the contributions can compound for many more years than a 401k or traditional IRA and be passed down to heirs as well. Ultimately, the proceeds of qualified distributions may be withdrawn tax-free. This may be better for younger employees who foresee that they are currently in a lower tax bracket (relative to their tax bracket in later years as they progress in their careers).
The new trends in 401(k) plans will help employers and employees retire well and understand their financial decisions.
Employers; Choose an affordable 401(k) provider that gives your employees the best low-fee investment choices.>>>
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