If you had it to do all over again, how would you do it differently?
No, this isn't one of those questions a life coach would ask you. Rather, a question from someone who has seen the beginning and evolution of 401(k) plans and thinks now is an appropriate time for plan sponsors to reevaluate the extent to which 401(k) plans are accomplishing their objectives.
Why now? Two basic reasons. First, 401(k) plans are - and have been for some time - the only retirement plan that employers are providing, the funding for which is done primarily by employees. For that reason alone, the 401(k) plan can't be less than first-rate.
And second, in my opinion, is because we are in a new economy, one unlike we have ever experienced and worked in before. Maybe it's time to adapt the 401(k) plan to the new economic realities.
So let's pretend that you putting in a 401(k) plan for the first time. And if it is the first time, here are some things you can consider.
What are your objectives?
Plan sponsor objectives are the starting point. Why sponsor a 401(k) plan with all the attendant responsibilities (employer and personal), including time and expense commitments. Are you doing it to:
* Attract, motivate, and retain employees?
* Provide a sense of employer/employee partnership?
* Provide additional compensation without a fixed commitment?
* Maximize benefits for the key employees?
* Offer all of the above or a combination thereof?
Decisions like this are made in the context of what a 401(k) is and isn't, and what stage of the business life cycle your organization is in.
What a 401(k) plan is (and isn't)
A 401(k) plan isn't really a plan at all. It's a section that was added to the Internal Revenue Code in 1978 to allow a qualified profit sharing plan to have the following features:
* Cash or deferred arrangement. The employee can elect to receive the employer's annual contribution (such as a bonus) in cash, or to defer it by having it contributed to the plan.
* Salary reduction. The employee can defer part of his or her compensation by contributing it to the plan through payroll deduction.
From that code section, four basic types of so-called 401(k) plans have evolved.
First, a basic 401(k) plan to which only employee contributions (through salary reductions) are made with no employer contribution.
Second, a matching 401(k) plan to which the employer makes matching contributions for those employees who elect to defer part of their compensation.
Third, a 401(k) profit sharing plan to which the employer makes a discretionary contribution allocated to employees, regardless of whether they defer part of their compensation. Note that profits are not necessary for employer contributions and hence, some nonprofit organizations sponsor 401(k) plans to which they make employer contributions.
Fourth, a 401(k) combination plan to which the employer makes two kinds of contributions, one of which is a matching contribution and the other of which is made on behalf of all eligible employees.
Business lifecycle
But before you can even make decisions about what type of 401(k) plan to sponsor, you should consider the context. That is, in what stage of the business life cycle is your organization? Are you:
* A startup/emerging company? Maybe you'd want to offer a basic 401(k), but possibly offer a match as well. Keep in mind that sometimes "start-ups" aren't really start-ups at all - they are spin-offs from other firms and employees are coming in with rollovers. Lawyers leaving big firms and starting their own boutique firms, for example.
* A growth/expansion company? Consider a basic 401(k) and profit sharing. Despite the continued economic downtown, there are employers who are in what I call 'pockets of prosperity.' For example, those organizations that are providing outsourcing services to allow companies to focus on what they do best.
* A growth/mature company? These are the employers that used to have defined benefit plans in the 'old economy.' Now they might want to consider a safe harbor 401(k), combined with profit sharing allocated on a new comparability basis to favor older owners and other highly compensated employees.
That's the big picture. And now it's just a simple matter of rethinking (if you have a plan) or deciding (if you don't have a plan) design and operational issues such as eligibility, entry dates, vesting, investments, etc.
It's not really that simple, of course, but it's a topic I'll cover in next month's column. -J.K.
Contributing Editor Jerry Kalish is the founder of The Retirement Plan Blog and president of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm.
Workers with 401(k)s more proactive investors
Workers who are offered 401(k) plans, or similar employee-funded arrangements, exhibit more proactive retirement savings behaviors, demonstrate higher levels of knowledge about retirement investing, and are more confident in their ability to retire comfortably, according to a survey by the Transamerica Center for Retirement Studies.
The survey polled nearly 3,600 U.S. workers and found that the availability of a plan is highly correlated to proactive saving behaviors beyond simply providing a vehicle to save. For example, workers who are offered a plan started saving at a median age of 28 (two years before those without plans), allowing more time to contribute and potentially grow their savings.
Of those who are offered a plan, 77% participate in the plan and 66% are saving for retirement outside of the plan provided by their employer. By comparison, only 57% of those not offered a plan are saving outside of work.
Although retirement confidence is lacking among most workers, the survey found that workers who are offered a 401(k) plan or similar arrangement are more likely to agree that they are building a large enough retirement nest egg (45%), compared to those workers who are not offered a plan (27%).
Forty-seven percent of wokers without a plan expect to retire after the age of 70 or not at all, compared to 36% of those with a plan.
