Since their introduction in the late 1970’s, 401k retirement plans have evolved into the primary retirement planning vehicle for many Americans. Recently there have been a number of developing trends with respect to 401k plans that bear watching as plan sponsors and financial advisors look to provide the most appropriate plan structure to employees.
Plan sponsors are evaluating investment options, monitoring costs and looking to improve the 401k experience for their participants in a variety of ways including the following:
- Institutional funds – Many plan sponsors are making greater use of lower-cost institutional share classes of funds. According to consultancy Aon Hewitt, 62% of companies have switched to the lower-cost share class of the funds in their plans.
- Managed accounts – This feature includes an advice component which is particularly helpful for older participants with larger 401(k) balances as they transition to the retirement stage.
- New investment options – Plans are now offering new investment categories, collective trusts and separate accounts. In addition, index funds that invest across a growing number of asset classes are also being offered.
- Roth 401(k) option – A growing number of plans are allowing intra-plan Roth conversions for participants who would potentially benefit from the tax advantages this conversion offers at time of retirement.
As 401(k) plans continue to evolve and offer many new options, it is important for plan sponsors to evaluate the plan from an employee’s perspective and consider their level of investment expertise. A sampling of plan considerations includes:
- Too many investment options – For many participants, more options can be an advantage but too many choices can be overwhelming and lead to inaction or indecisiveness.
- Simplifying the rollover process – An onerous rollover process can sometimes derail a participant’s savings goal. Increasing the ease of rolling over a 401(k) from one employer plan to another option could reduce cash-outs that may occur when participants change jobs. Simplification would help keep assets intact and serve as a foundation for the new retirement option.
- Automatic contribution escalation – Automatic annual escalation of a participant’s contribution can provide a disciplined way to increase savings over time without having the participant take any action.
As the American population ages and more attention is paid to retirement readiness, 401(k) plans should be flexible and continue evolve to meet the needs of participants. Look for more plan options to come in the years ahead. To learn more about new options that may be available, contact your Alliance Benefit Group Representative.