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Has your 401(k) plan grown stale?

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Be honest. When was the last time you updated your 401k plan design? Five years? 10 Years? 20 Years? Never?

And I’m not talking about rearranging the investment options in your plan menu, I’m talking about the infrastructure of the plan itself.

You know what I mean. Things like your matching strategy, your loan policy, and, yes, even the very framework (i.e., not necessarily the actual investment options) of your investment menu.

If the last time you looked at your plan design the nation was consumed with the debate of what “is” is, then your 401k plan may be due for a major overhaul.

Plenty has changed over the last couple of decades, and we’ve come to discover which plan design elements are stale and which newly discovered plan design elements seem to be the new standard, (see “The Best and the Worst of 401k Plan Design Elements,”, October 27, 2015).

We’re all aware of the need to update plan documents on a periodic basis whenever laws or regulations change.

In fact, the IRS has an on-line document titles “A Plan Sponsor’s Responsibilities” that includes the following direction to plan sponsors: “Review the plan document for law changes and update it as necessary.”

These aren’t the kind of updates I’m referring to.

Rather, the DOL’s on-line document “Meeting Your Fiduciary Responsibilities,” comes closer to my intent when it states “Employers will want to be familiar with their plan document,… and periodically review the document to make sure it remains current.”

“Remaining current” definitely applies to legal and regulatory changes, but – and this is what I want to emphasize–it further suggests a sense of staying up-to-date with commonly accepted “best practices.”

The term “best practices” is often overused. One thing is clear, though – when it comes to 401k plan design elements, best practices is an evolving concept, a “moveable feast” of ideas that ebb and flow in popularity.

Remember when “best practices” meant three investment options, one for stocks, one for bonds, and one for cash?

That quickly melted away into the Morningstar style box approach.

Today, many of the statistics-based artifacts of Modern Portfolio Theory like the style box have fallen by the wayside, having been replaced by empirically driven behavioral models.

Or how about employer matching strategies?

In the beginning, we saw a simple dollar-for-dollar match. This gave way to the percentage match.

In turn, behavioral finance studies moved plan sponsors towards the gradual adoption of the staggered percentage match–either by spreading out a smaller match over a larger deferral range or simply moving the match to high deferral rates.

The IRS certainly hasn’t changed its rules on these matters.

Indeed, the IRS wouldn’t touch the investment menu with a ten-foot pole, save for the most generic of comments.

Even the DOL, which has a history of promoting out-of-date investment memes, has ceded the leading edge to the world of academia.

Regulators, at their best, focus only on making sure the plan sponsor makes good on its promise–whatever that promise might be.

The precise nuts and bolts of plan design, therefore, rest squarely on the shoulders of the plan sponsor. And you know what that means.

That means it’s often up to the plan’s service provider to bring the plan sponsor up to speed when it comes to the “best practices” of 401k plan design elements.

And that means revisiting the plan every few years to insure those best practices are properly incorporated.


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