Good Plan Design Means a Better 401(k)

As the 401(k) has become the major “workplace retirement plan” for most Americans, employers will want to focus more closely on the way in which their plan is designed; in other words, the way in which their plan documents are written. Good plan design can mean a better 401(k). Design options can protect the ability of owners and top executives to make IRS maximum-allowable tax deferred contributions. They can incentivize employees to increase contributions and thus improve their readiness for retirement. They can include safeguards to reduce the potential liability of plan sponsor fiduciaries. And more.

What’s the best way to make sure a company 401(k) includes the best features? Good plan design should start when a retirement plan is first created and should be continued when providers are changed and through regular reviews – annually is a best practice. We recommend that plan sponsors make sure their service providers – Third Party Administrator and Advisor – are equipped and willing to help them define retirement plan objectives that are appropriate for their organization and then help sponsors adopt in their plan the features that are most likely to help them reach those objectives. Regular plan review can help determine whether additional plan design changes are optimum.

Terms such as Qualified Default Investment Alternative, Safe Harbor Non-elective Contribution, Stretch Match, Qualified Automatic Contribution Arrangement, 404(c), Automatic Escalation, Vesting Schedule are all plan design features that a TPA and Advisor should review with an employer. The discussion should be both to help the employer understand what the terms mean and whether they offer a means to improve the organization’s 401(k).

Plan design can be overlooked amid the details of setting up or managing a 401(k). Some small plan providers only offer a one-size-fits-all plan. That’s unnecessary today given the ease of working with prototype plans that offer multiple design options. Whether you’re considering establishing a 401(k) or your plan was launched 20 years ago, thoughtful and effective plan design can result in a better experience for employer and participants alike.

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