Now that we’ve turned over the calendar to 2016, I thought it might be helpful to take a look at current 401(k) and 403(b) trends across the country. The marketplace is continuously changing, and 401(k) and 403(b) sponsors can maintain competitive and low cost plans by keeping current.
Six 401k Trends for 2016:
1) More Participants Are Using Roth Features
Plans may now allow participants to convert pre-tax 401(k) contributions into Roth 401(k) contributions, thanks to a tax law change in 2013.
Adoption of this feature has picked up since then. “In plan” Roth conversions can be a major benefit to participants, since it allows them to build tax diversification with their retirement dollars.
Tax diversification is beneficial to participants when drawing income from their nest egg years down the road. With the choice to draw from taxable or tax free retirement savings, participants can be sure to stay under a specific tax bracket by controlling their income.
2) Online Employee Education is Picking Up
Over the last several years there’s been a significant increase in online resources for participants.
Articles, videos, planning software, and other tools help participants learn about their plan and investing in general.
Since they can access these tools at their leisure, participants often log in from home alongside their spouse or other family members. By learning together, couples often find it easier to communicate about their most important financial issues.
Plus, online resources don’t require the time of plan fiduciaries and service providers. This trend toward technology will certainly increase in pace, both in 2016 and beyond.
3) Plans Are Stretching Employer Matches
If you’re like most plan sponsors, you’d like to increase participation among your employees.
Some sponsors are starting to stretch out their matching contributions.
In order to incentivize employees to save more, employers are starting to favor smaller matching percentages over higher amounts of compensation.
For example, rather than matching 50% of contributions up to 6% of an employee’s compensation, a sponsor might match 25% of contributions up to 12% of compensation. The employer’s out of pocket costs stay the same, but employees tend to increase their contributions in order to maximize the company match.
4) Annual Reenrollment Is Picking Up
Many plans over the last ten years have added auto-enrollment and auto-escalation features.
When new employees are hired, an auto-enrollment feature contributes a certain percentage of their paycheck. Usually the default amount is 3-5%, after which employees can opt out if they choose.
Auto-escalation features increase each participant’s contribution year to year. Again, employees can opt out if they want to.
Recently, auto-reenrollment features have been gaining steam. This feature essentially erases each participant’s investment elections each year, defaulting them into a target date fund or other managed account. Participants are then free to reallocate their funds if they wish.
In the long run, annual reenrollment drastically improves participant outcomes.
Participants tend to misallocate their funds over time, keeping too much in cash or taking too much risk as they near retirement.
Reenrollment helps recalibrate investment allocations, and essentially ensures that participants don’t veer too far off track. While auto-reenrollment hasn’t caught on big yet, it is gaining in popularity.
5) Most Plans Offer At Least One Professionally Managed Option
It’s not uncommon for participants to have little interest in building their own retirement portfolio.
Target date funds and lifestyle focused managed accounts let participants pump all their contributions into one option, rather than try to figure out how much to allocate to each asset class.
This idea isn’t new. What is new is that plans without at least one professionally managed option are quickly becoming extinct.
6) More Fees Are Being Passed On to Employees
Fees to administer 401(k) and 403(b) plans must be paid by someone.
Investment related expenses are generally paid by participants. When it comes to recordkeeping expenses, fees have traditionally been split between the employer and the participants.
Over the last few years, businesses of all sizes have begun to pass more recordkeeping expenses on to participants.
Participants are also becoming more aware of the fee structure within their 401k plan. And whether it’s due to more visibility and transparency or the increasing share that they’re paying, participant litigation is on the rise.
Regardless of how sponsors allocate expenses, they should be sure to understand how their fees line up against competitors. Excessive fees will expose them to potential litigation.
If you have questions about your 401k plan and its expenses, feel free to shoot me a message. I’m happy to point you in the right direction.