At a recent group study session held by The Retirement Advisor University (TRAU) in Boston, advisor and provider C(k)P candidates were asked to create the ideal 401(k) plan as part of their case study work. While they were given the freedom to ignore current regulations, they had to deal with the economic realities affecting employers and the government.
So what does the ideal 401(k) plan look like? Like this:
Auto Plan
Though auto-enrollment seemed like a no brainer, without auto escalation, it would be like peanut butter without jelly (a phrase made famous by an LPL advisor). Deferrals would start at 5% and escalate to 10% automatically over 5 years.
Match
Fifty percent of 10% — but start at 2.5% of the first 5% deferral and escalate to 10%, so the effective rate is actually less than 10%. (Note that current regulations may prohibit this.)
Safe Harbor
As plans become “healthier,” employers get greater safe harbor protection and lower liability. Measures could include participation and deferral rates – and ultimately, income replacement ratios.
Investments
Default would be TDFs with risk based and managed accounts for those willing to fill out online surveys, along with do-it-yourself options.
Pricing
Transparent, unbundled pricing with level comp paid by participants paid using flat, fee-per-head charges for participants with account balances over a certain size; for example, $100 per participant for account balances over $50,000. This would have to be calculated based on the economics of the plan.
Education
Focus on financial literacy, emphasizing the importance of saving early and the power of compounding interest. Rather than teaching about investments, review the various packaged product options, from TDF to managed accounts. Participants who want to do it themselves should take an opt-out literacy test and then make a decision. (Outside the group study session, one advisor suggested rewarding participants who pass a financial literacy test with a one-time $100 contribution if they pass — made by the employer, the provider or perhaps even the advisor.)
Loans and Early Withdrawals
Plan loans hurt, but the study group was concerned about eliminating them entirely. They suggested age-based step-down penalties for early withdrawals.
Health Care
Though health care was not part of the program, it was suggested that employers make a contribution to the HSA of an employee who opts out of the company’s plan and elects to be covered under a spouse’s plan instead.
The Boston group of 25 TRAU students included advisors Emmett Dupas from Northwestern Mutual, Stephen Cunha from Baystate Financial and Eaton Vance’s regional director Brian Blair. Look for future articles based on the two TRAU Group Study Sessions remaining in 2012.
How would you improve 401(k) plans? Just submit a comment below.
