PenChecks Blog

The Supported Participant-how 401k Plan Design Can Increase Retirement Savings

This is part three of a 3-part series on Participant Education.

By Carol Buckmann, J.D.

This is part three of a 3-part series on Participant Education.

More than half (54%) of pre-retirees are reported to have less than $150,000 in their 401k accounts. How can they live on that? Plan sponsors need to partner with participants to close the gap between retirement income and expenses.

Part One of this series explained why participant education programs are needed, and part two provided guidance on setting up an effective program. You can and should further assist participants by providing them with a good investment menu and by adopting plan features that help participants save. Here are eight suggestions for how to provide even those who aren’t applying the lessons of the education program with support to accumulate an adequate 401k account:

  1. More is not better. Have a limited number of high-quality investment choices. Employers sometimes think that letting participants choose from a large number of funds protects them from fiduciary liability, but that may not be the case. A large menu will include underperforming funds; therefore, plan sponsors should seek to include only the best funds in their class. Recent litigation has targeted plans with hundreds of investment funds, and it will be interesting to see whether plaintiffs succeed with their claims that this is a fiduciary breach. Regardless of how these cases are resolved, it is not good practice to overwhelm participants with choices, as too many can paralyze their decision-making.
  2. Have a good default investment for participants who don’t choose their own. There has been a herd mentality towards using target date funds – usually the provider’s own funds – as qualified default investments. However, target date funds vary greatly in performance, glide path and fees. Compare and consider other available target date funds as well as balanced funds and managed accounts, which also qualify as safe harbor default investments.
  3. Monitor fees. High fees erode 401k accounts, and plan sponsors have a fiduciary duty to make sure that fees are reasonable in relation to the services provided. Your menu should not include any underperforming, high-fee funds. Also, be sure to include index funds, which have the lowest fees, as investment choices, and negotiate for lower recordkeeping and trustee fees.
  4. Add managed accounts as a choice. Even if you don’t want to make managed accounts your default investment, you can hire a professional investment manager (who should satisfy special ERISA requirements) with trading authority to manage participant accounts under your plan. Participants who want professional management and those who still lack the confidence to make their own investment choices may rely on the manager to make decisions for them. These accounts can even be tailored to different groups or for different participants. Investment managers are fiduciaries, but plan sponsors who hire investment managers remain responsible for prudently selecting the manager and monitoring the manager’s performance.
  5. Implement auto-enrollment and auto-escalation. Studies consistently show that auto-enrollment boosts plan participation because employees typically don’t opt out once they are brought into the plan. To achieve maximum participation, apply auto-enrollment to all employees rather than just new hires. You can increase the default contribution for those who don’t opt out annually up to a set maximum.
  6. Offer lifetime income options. Many 401k plans still provide for payment only in lump sum form. These often get spent right away, or exhausted long before participants die. Consider annuity options that guarantee payments for life, and annual installment options that permit payment over life expectancies.
  7. Limit in-service withdrawals and loans. These are the enemy of retirement accumulation. Hardship distributions and loans can be limited to employee contribution accounts.
  8. Seek professional advice. Professional co-fiduciaries can help create a superior investment menu, which few plan sponsors are equipped to do on their own. Professional attorneys and consultants can assist in evaluating the costs and ways to implement these changes. An ERISA attorney can also draft or review the necessary plan amendments and communications to make sure they satisfy all technical requirements.

These changes are paternalistic in the best sense of the word because they help plan sponsors partner with their participants to fund a secure retirement.

Carol I. Buckmann, JD is the co-founding partner of Cohen & Buckmann, P.C. ( She is one of the top-rated employee benefits and ERISA attorneys in the U.S., and deals with some of the foremost issues in ERISA, including pension plan compliance, fiduciary responsibilities and investment fund formation.

The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust, its subsidiaries or affiliates.

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