Now’s a good time to figure out whether you have an excellent 401(k) plan or if it’s lacking.
That’s because the Supreme Court ruled last week in favor of workers who sued their plan sponsor and fiduciaries over selecting high-cost investments for their 401(k) and for not monitoring those investments — even though the six-year statute of limitations had passed.
So how might you tell? What standards might you use? Well, the Defined Contribution Institutional Investment Association (DCIIA) released this week, just by coincidence, a white paper that highlights what defined-contribution plan sponsors and fiduciaries could put in place to help participants save enough for a comfortable retirement.
The paper, Defined Contribution Plan Success Factors Framework for Plans with an Objective of Retirement Income Adequacy, talks about how 401(k) and similar plans should be designed, the type of investments that ought to be used in a plan, and how the plan should be monitored.
Truth be told, the paper is intended for a professional audience, but we think workers could use the report to compare and contrast how their employer-sponsored retirement plan stacks up against DCIIA’s recommendations.
The first order of business: Evaluate your plan’s design. According to DCIIA, features such as automatic enrollment and automatic contribution escalation can significantly improve retirement readiness by helping to increase participant enrollment and contribution levels.
The report noted, for instance, that workers are unlikely to enroll in their 401(k) plan if they don’t start saving a part of their salary beginning with the first paycheck. And not saving for retirement certainly won’t help you get ready for retirement.
So, to make sure folks start saving as soon as possible, best-in-class plans automatically enroll workers in their 401(k) plan with a starting deferral rate of 3%, or more in some cases. Research shows, however obvious it might sound, that enrollment at a 6% salary deferral rate can result in improved retirement outcomes.
The other important feature for a 401(k) plan to have would be something called “automatic contribution escalation.” According to DCIIA, fiduciaries ought to consider automatically increasing how much participants contribute to their plans by one to two percentage points a year, and at least two percentage points if the default rate is less than 6%. If your plan has this, consider yourself among the fortunate few.
Source: MarketWatch | Robert Powell