Good ideas for 401k plans that don’t get enough attention

In my article from August of 2020, “401k plan concerns – from the auditor perspective” https://www.linkedin.com/posts/bradleybartellscpa_401kaudit-401kplan-activity-6701862818611888128-j7kx I focused on common issues I see in my 401k plan audits which leave Plan Sponsors and fiduciaries exposed in the current environment to litigation and regulatory scrutiny.

I want to shift gears today and highlight some features which can benefit participants in 401k plans which I just don’t see used enough. 401k plans are an employee benefit plan, right? So employers and plan sponsors should consider adding these features to their plans to provide additional benefits to their employees.

Immediate eligibility

Why make new employees wait three, six or twelve months to start saving for retirement? Plan sponsors need to let their new employees start saving for retirement from day one. Too often I see plans that require employees to wait to start contributing. This causes employees to lose out on valuable contributions and earnings. Every month counts when it comes to building that retirement nest egg. Plans that have immediate eligibility to participate make the Company that much more attractive to work for.

Allow a Roth contribution option

This is becoming a popular feature for younger employees who are in a low tax bracket and can take a tax hit on retirement savings today, in exchange for tax-free earnings and withdrawals at retirement. However many employers seem to be hesitant to offer a Roth feature in their 401k plans.  Providing a Roth option to your employees today allows them to increase their retirement benefits in the future.

The “Auto” features

Automatic enrollment, automatic deferral escalation, and auto re-enrollment. The fact that these are “automatic” once a plan implements them make them a no-brainer for plan sponsors to include in their 401k plans. I just don’t see plan sponsors taking advantage of these features very often.

Auto enrollment is a simple way for plan sponsors to increase participation in their 401k plan and make it easy for their employees to save for retirement. The employee is automatically enrolled at a set deferral rate. Very simple. Employees have to make the decision to “opt out”, as opposed to deciding to “opt in” to the plan. This increases participation in 401k plans. A June 2020 article on the ASPPA website https://www.asppa.org/news/auto-features-push-plan-participation-contribution-rates-highest-decade noted that plans with automatic enrollment had average participation rates of 87%.

Automatic deferral escalation is another feature not utilized enough. Plan sponsors can elect to have participants’ deferral rates increase by 1% each year (or any other amount), typically to a maximum of 10% (but could be higher) before the auto escalate feature caps out. This feature allows a participant to slowly increase their retirement savings without thinking about it. An August 2020 article on the NAPA website https://www.napa-net.org/news-info/daily-news/survey-participants-looking-extreme-automatic-401k-plans indicated that an American Century Investments survey noted that two out of three employees believe employers should include an automatic deferral escalation in their 401k plans.

Auto re-enrollment is the third simple feature that is not used enough. There is a good article in 401k Specialist Magazine from August 2017 https://401kspecialistmag.com/7-reasons-re-enroll-401k-participants/ on this topic. Auto re-enrollment allows participants to periodically re-balance their portfolio, make sure the participant is appropriately diversified, and can fix poor investment selections at enrollment. It can be automatically set on an annual basis. Auto re-enrollment also has benefits to the plan sponsor, as it can potentially reduce fiduciary liability. 

Student loan matching provisions

At the end of 2019, student loan debt was over $1.5 trillion dollars. Many employees with student loans are unable to make contributions to a 401k plan, as they need to use that money for loan repayments. These employees are missing out on both their own retirement contributions, as well as potential employer matching contributions. Proving some sort of a student loan payment assistance program is becoming a key feature for attracting and maintaining a workforce. In 2018 the IRS issued a Private Letter Ruling to one taxpayer on this subject, allowing the taxpayer to add a non-elective contribution to an employees retirement account, as long as the employee is making student loan debt payments.  Although a private letter ruling is only applicable to the specific tax payer, it does provide insight as to the IRS position on this topic.

For plan sponsors who are interested in providing a student loan payment assistance option, there is a company called Tuition.io https://www.tuition.io/ who assists companies in setting up plans to provide student loan payment benefits to their employees.

Plan sponsors should talk to their third-party administrators about the potential impact of adding student loan repayment provision to their 401k plans, as these provisions will potentially impact the year-end compliance testing.

Bottom line is… these plans are for the benefit of your company’s employees. By adding the above features to your company 401k plan, you will be putting your employees in the best possible financial position for their retirement.