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The Keys to an Effective 401(k) Plan Design, According to Wells Fargo

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How can retirement plan sponsors and the advisors who work with them design plans that maximize participation, contributions and investment diversification?

Those are the key characteristics of a healthy 401(k) plan, according to Wells Fargo Institutional Retirement and Trust, which just released its 2018 Driving Plan Health report, based on analysis of more than 2,000 plans representing more than 4 million eligible employers.

The analysis found that participation, contributions and diversification have increased among the plans it studied but more needs to be done if employees will be able to replace 80% of their current income in retirement, which is the minimum goal.

The key is to have “more [plan] participants doing all they can to increase the likelihood for 80% income replacement,” says Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust. That, says Hooker, can be accomplished through plan design.

The Wells Fargo analysis found that 16 features generated the best outcomes and four of them had the most influence on those outcomes:

  • Automatic enrollment with a default of 6% or more
  • An opt-out option to increase the default percentage to 10% or higher
  • Diversified investment offerings, including target date funds
  • Above-average company match of at least 5%, or profit sharing

“Plan design when utilized most effectively changes outcomes for employees,” Hooker tells ThinkAdvisor, noting that many features can help reverse the inertia that gets in the way of an employee maximizing retirement savings.

Other features that are characteristic of what Wells Fargo calls “high-influence plans” include automatic rebalancing, limits on employer stock and 401(k) participant loans and annual re-enrollment, which includes automatic enrollment of all non-participant eligible employees every year and could also include re-enrollment for even participant employees who have never updated their investment options.

A middle-aged participant who started with the plan 15 years ago and remained fully invested in a single stable value fund, for example, could be re-enrolled in a more diversified target date fund, says Hooker.

Targeted communication campaigns, enhanced by emailed messages and including enrollment kits sent by mail is another feature of the best-designed 401(k) plans, according to Wells Fargo.

The retirement plan report found that between 2012 and 2017 employee participation in the 401(k) plans studied rose from 55% to 65%, the percentage of participants contributing 10% of more rose from 35% to 39% and percentage of participants invested in diversified portfolios rose from 71% to 80%.

In terms of generational differences, the report found that boomers are the least likely to take advantage of all-in-one investments like target date funds, although they are more likely than millennials to contribute 10% or more. Millennials tend to be more diversified in their investments, preferring all-in-one investments, compared with older generations: 63% vs. 41% and 46% for Gen Xers and baby boomers, respectively, use this type of investing strategy.


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