Mid-Year Considerations for 401(k) Plan Sponsors

Summer is in full swing! While spending time at the beach or taking a long-awaited vacation may be foremost on everyone’s minds, now is as good a time as ever for those who are plan sponsors to evaluate the health of their company’s retirement plan. Conducting a mid-year review allows plan sponsors to catch small issues early, avoid expensive compliance problems later, and prepare for a smoother year-end. Read on for a breakdown of possible areas to focus on during a mid-year review.

Plan Design Evaluation

The plan design should not only align with the company’s goals and objectives, but also with the needs of the employees. Offering a plan with the right features can be a game-changer. By incorporating tools like automatic enrollment and automatic escalation, plan sponsors are removing some of the biggest obstacles that keep employees from saving. These features help individuals start saving earlier and allow them to increase their contributions over time, which naturally boosts participation and deferral rates. Plan sponsors should also consider what their employees need (e.g., Roth options, generous employer matching and profit-sharing contributions, favorable vesting schedules, and earlier entry). These offerings will likely increase engagement and satisfaction.

Are Fiduciary Responsibilities Being Met?

The fiduciaries of a plan are required to act in the best interests of the employees and their beneficiaries and to manage the plan with care, skill, prudence, and diligence. Has a plan or administrative committee been established that takes overall responsibility for the plan? Ensure that the committee is meeting regularly and that minutes of meetings are being maintained. Plan sponsors should also confirm that the investment policy is being followed and that the investment options are sound and well-diversified. After all, the fund lineup is key to safeguarding and supporting the long-term financial security of the participants. Lastly, plan sponsors should review the plan administrative fees for reasonableness. Conducting a benchmarking exercise mid-year will allow you to evaluate whether current fees are competitive and whether vendors are delivering sufficient value. If changes are needed, starting now gives you the time to act without rushing through decisions before year-end. See additional guidance on fiduciary responsibilities from the IRS and DOL.

Assess Plan Participation and Performance

Metrics play an important role in determining whether a plan is operating effectively and keeping participants on track for a secure retirement. Consider the following metrics when evaluating the health of a plan:

• Participation Rate – Reveals how many eligible employees are actively contributing to the plan. A participation rate above 70% is generally considered to be favorable and indicates strong employee engagement. If participation is on the low side, features such as automatic enrollment and targeted education may make a difference.
• Contribution and Deferral Rates – These metrics reflect how much employees are saving. Industry standards suggest contribution and deferral rates between 10-15%. If the numbers in one’s plan are not within this range, it may mean employees are not saving enough. Strategies such as auto-escalation or personalized communication may help.
• Target Date Fund (TDF) Utilization – TDFs are designed to automatically adjust a participant’s asset allocation as they approach retirement, becoming more conservative over time. High utilization of TDFs can signify a well-designed, well-communicated plan.

Employee Education

Plan sponsors can never spend too much time on employee education. The ultimate goal, after all, is to empower employees to make informed decisions about their retirement savings. Most employees prefer a strong personal approach, such as one-on-one guidance, supplemented by written materials, enrollment meetings, seminars, toll-free help lines, and web sites. However, at the end of the day, the key is to provide an effective educational program with personalized insights to show employees exactly where they stand and what they can do to improve. A mid-year review may reveal the need to revamp one’s approach to better meet the needs and goals of their employees.

All too often, plan sponsors wait until the end of the year to address plan issues – when time is tight, and options are limited. A review performed several months before year-end allows more time to assess plan performance, review participant data, and ensure that key compliance requirements are on track.

Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.

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