Offering a 401(k) plan is an important component of a competitive employee benefits package. However, simply having a retirement plan in place doesn't necessarily mean it's meeting the needs of your workforce or supporting your organization's long-term goals.
As employee expectations evolve and retirement plan regulations change, employers should periodically assess whether their plans remain competitive, cost-effective and aligned with their employees' financial needs. Here are five key features employers should evaluate when reviewing their 401(k) plans.
1. Employer Matching Contributions
An employer match can be a valuable incentive for employees to participate in a retirement plan. However, the structure of that match matters just as much as whether one is offered.
For example, an employer matching 100% of contributions up to 3% of compensation provides the same maximum contribution as one matching 50% up to 6%. However, the second formula encourages employees to contribute more to receive the full benefit.
Employers should evaluate whether their matching formula encourages meaningful savings while remaining financially sustainable. Comparing contributions with industry benchmarks can also help determine whether the benefit remains competitive.
2. Vesting Schedules
Vesting determines when employees gain full ownership of employer contributions to their retirement accounts. While employee contributions are always fully vested, employer contributions may be subject to a vesting schedule. Some employers offer immediate vesting, while others use graded or cliff vesting schedules to encourage retention.
When evaluating vesting provisions, consider employee turnover, workforce demographics and organizational goals. A more generous vesting schedule may make a plan attractive to prospective employees, while a longer schedule may support retention objectives. Any approach must comply with applicable vesting requirements.
3. Automatic Enrollment and Contribution Increases
Automatic enrollment and automatic contribution escalation can help employees establish consistent retirement savings habits. Automatic enrollment allows eligible employees to participate unless they opt out, while automatic escalation gradually increases their contribution percentages over time.
Employers should evaluate whether default contribution rates are appropriate and whether employees are saving enough to receive the full employer match.
Under SECURE 2.0, certain newly established retirement plans are required to include automatic enrollment and escalation features, making it important to understand which requirements apply.
4. Investment Options and Plan Fees
A competitive retirement plan should offer an appropriate range of investment options while maintaining reasonable costs.
Employers should periodically review investment performance, expense ratios and the overall structure of their investment lineup. Providing too many choices can overwhelm participants, while limited options may not adequately address different investment objectives and risk tolerances.
Plan fees also deserve attention. Administrative, recordkeeping and investment expenses can affect participants' long-term retirement savings. As part of their fiduciary responsibilities, plan sponsors should assess whether fees are reasonable relative to the services provided, rather than focusing exclusively on the lowest-cost option.
5. Employee Engagement and Retirement Readiness
Participation rates alone don't tell the full story of a retirement plan's effectiveness.
Employers should also consider average contribution rates, employer match utilization and employee engagement with available educational resources. For example, a plan may have strong participation but still include a significant number of employees contributing below the level needed to receive the full employer match. Reviewing these metrics can help identify opportunities to improve communication, financial education and plan design.
Make Your Retirement Plan Work Harder
A competitive 401(k) plan requires more than periodic regulatory updates. Evaluating plan design, costs and employee participation can help employers identify improvements that benefit both their organization and their workforce. Contact our team to learn how we can help you assess your current retirement plan and identify opportunities for improvement.