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Practice Management

A few changes can make a good 401(k) plan a great one. Here are six improvements to consider to achieve better results.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).
 

Retirement expert Robert Lawton knows that “a few changes can make your good 401(k) plan into a great one.” Here, he presents six potential improvements to institute now which may lead to better results. “Plan sponsors that address these potential 401(k) plan improvements will likely be rewarded with leading-edge 401(k) plans,” he says.

1) Financial wellness education

The hottest of all 401(k) plan improvements is financial wellness education. The greatest source of stress for employees is finances. Forty-three percent of participants in a Purchasing Power survey1 experienced at least some stress from financial issues. The report also indicates that one-third of workers have trouble meeting monthly expenses, while 41% don’t have a budget. The study included bad news for employers: 37% of employees spend time at work dealing with personal finance issues.

2) A guaranteed rate or stable value option

No plan sponsors offer a money market fund in their 401(k) plans anymore, right? You might be surprised at the number of plan sponsors that still do. Not only have prime money market funds become subject to gates and redemption fees, but their NAVs can vary as well. That means it is now possible to lose money in a prime money market fund.

Think a government money market fund is the answer? Those funds have an even lower yield than prime money market funds. Clients' employees deserve the opportunity to invest their money safely, with a low possibility of loss and with a reasonable return.

3) Participant investment advice

Many recordkeeper platforms provide the functionality for plan sponsors to offer investment advice options to 401(k) plan participants. Some offerings are of the robo-type, some are algorithm-based, and others, like financial engines, tend to be expensive for smaller-balance employees.

Providing access to these services is the right thing to do. Costs range from free to expensive. Many recordkeepers provide the option of free services along with a fee-based option, allowing employees to decide which is best for them.

4) Full automation

Auto enrollment and auto escalation work. They are important plan design elements that move employees who would otherwise not participate into 401(k) plans and increase the contributions of those who wouldn’t contribute enough. These features also make life easier from an administration standpoint. Ascensus2 reports that less than 1% of its auto-enrolled participants opt out.

5) At least one balanced investment option

Many plan participants would rather let experts allocate their account balance among equity and fixed-income investments. Employers should provide employees with the option to achieve diversification in their accounts by investing in just a single fund in a plan. Offer a balanced fund or target-date series.

6) The right investment advisor

Employers owe it to their participants to provide them with the best investment options and should ensure they are working with an advisor who has their best interests in mind. This is the most important of all potential 401(k) plan improvements.

Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, a RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities.

 

1 “An Employee Crisis: Financial Literacy” survey, April 2016 by Purchasing Power

"Inside America’s Savings Plans" survey by Asensus

 

NEW-Source-Media

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

The information contained herein has been provided by sources other than Lord Abbett which are believed to be reliable; however Lord Abbett cannot guarantee the accuracy or completeness of this information.

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