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5 Most Common 401(k) Plan Red Flags

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There are five red flags defined contribution plan sponsors should watch for when evaluating their plan performance, according to research by Judy Diamond Associates, who provides sales prospecting and plan analysis tools for benefits brokers, financial advisors, plan providers and carriers serving the employee benefits and retirement markets.

The flags indicate whether a plan is underperforming, is poorly designed or has reached certain thresholds that suggest it may need new services.

“Identifying the most common problems and challenges facing the almost 600,000 401(k) plans nationwide can empower financial advisors to address the concerns that are keeping their clients up at night,” said Eric Ryles, managing director of Judy Diamond Associates. “In that way, our subscribers are able to better prepare their clients for the future and cement their own status as a consultant and valued partner, rather than ‘just’ a 401(k) vendor.”

Judy Diamond Associates based its research on the most recent 401(k) plan disclosure documents released by the Department of Labor.

Red flags are key indicators of a plan’s general health and are valuable as a sales prospect for an advisor or other provider. 

The five most common 401(k) plan red flags (in reverse order) are:

401(k) red flag #5: Corrective distributions issued

5. Corrective distributions issued: Judy Diamond found 63,349 plans that fell into this category. Plans that issue corrective distributions may be experiencing flaws in the way their plans were designed or rolled out. Participation rates and employee contribution levels at these plans may be lacking and they may be receptive to better advice, education and products from new providers.

401(k) red flag #4: Reduced employer contributions

4. Reduced employer contributions: Judy Diamond found 63,694 plans that reduced their contributions. Plans that reduce their employer contributions may benefit from better plan design.

401(k) red flag #3: Plan recently terminated

3. Plan recently terminated: Judy Diamond found 68,222 plans that fell into this category. Recently terminated plans may offer advisors opportunities to roll participants over into individual retirement accounts.

 401(k) red flag #2: High average account balance

2. High average account balance: Judy Diamond found 109,287 401(k) plans that fell into this category. Having a high average account balance per participant indicates that there may be participants who are nearing retirement and approaching the need for new, individual financial advice.

1. Bottom 10% in employer contributions

1. Bottom 10% in employer contributions: In its research Judy Diamond identified 184,442 plans that fall into this category. The bottom 10% is calculated based on the value of the contribution, not the number of plans offering each value. That means that a clustering of plans around certain values, especially zero, can result in more than 10% of plans offering employer contributions ranked in the bottom 10% by value.

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