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Retirement Planning > Saving for Retirement > 401(k) Plans

Which Industries Offer the Best 401(k)s? You May Be Surprised.

By John Manganaro

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Defined contribution retirement plans are in a state of flux, thanks to an evolving regulatory framework and the lingering workforce impacts of the COVID-19 pandemic, but they remain powerful wealth-creation vehicles for middle-class and mass affluent Americans.

As demonstrated in the latest 401(k) benchmark report published by Judy Diamond Associates, a business unit of ThinkAdvisor’s parent company, ALM, the rate of contributions to DC plans declined slightly in 2021 — but this is actually a positive sign with respect to retirement readiness in the United States.

That is, the rate of 401(k) plan contributions fell in 2021 on a per participant basis due to a significant influx of more than 4 million new participants entering or reentering the system. Generally, new employees and job changers contribute fewer dollars per paycheck than established workers.

In fact, according to Judy Diamond Associates’s latest report — sponsored by Mutual of America — the largest increase in new participants relative to any other year in the last decade took place in plan year 2021, signifying the return of those who had been forced out of the system due to COVID-19-related layoffs and business closures.

Year over year, total 401(k) contributions rose by $42 billion to a total of $502 billion during 2021 — the latest year for which comprehensive plan data is available via Form 5500 disclosures — while total 401(k) assets increased by $900 billion to eclipse $8 trillion.

The Best Benefits

In addition to its top-level participation and contribution analysis, the new Judy Diamond report also provides an in-depth look at 27 different industrial groupings across eight company sizes.

More than 600,000 active 401(k) plans covering 96 million workers were analyzed to create what the authors call a “unique and comprehensive look” at America’s primary retirement vehicle.

Beyond analyzing each industry’s DC plan characteristics, the report also ranks them across a number of metrics, with the goal of identifying which industries provide the most generous and best-structured retirement plans.

According to the analysis, the best plans are offered by certified public accounting firms, financial advisor shops, investment managers, law firms, doctors’ offices and dentists.

The worst plans are offered by employers in the retail, waste management, arts, recreation, educational services, transportation, warehousing, accommodation and food services industries.

Industries with middle marks include the banking sector, mining enterprises, utilities, wholesale operations and media companies.

Industries with higher marks stand out for having greater average account balances and participation rates. For example, the CPA industry boasts an average account balance of nearly $146,000 and a median participation rate of 100%. Top-rated plans also feature high deferral rates among employees and generous matches by employers.

According to the Judy Diamond analysis, it should come as no surprise that firms with the best retirement benefits also enjoy some of the longest tenured employees, while firms with worse benefits tend to see higher turnover. This underscores the importance of retirement benefits to Americans’ choices about where to work.

Learning From the Worst

As noted in the new report, 2021 marked the third consecutive plan year in which the accommodation and food services sector finished dead last in the annual rankings. This employer group placed last in five of the seven key performance metrics measured, and it was last by a significant margin in most of those cases.

As an industrial group, accommodation and food services businesses have historically lacked attractive retirement benefits, and the sector was hit particularly hard by the pandemic, which characterized much of the 2021 plan year.

As the report states, the year-over-year comparisons from 2020 reveal the full story. On average, both employee and employer contributions per participant declined 43% in 2021, while account balances also fell slightly, from $29,415 to $28,032.

When one considers that the S&P 500 returned 26.6% during the calendar year, the implication is that the employees either took hardship withdrawals, borrowed money from their plan, or even withdrew money and got hit with the 10% penalty.

Adding to the performance drag, nearly a third of employers (30%) made no matching contribution.

Plan Returns Lagged

In summarizing their findings, the report’s authors underscore the fact that the rate of return metric is the one that they weigh least heavily, as return is usually a function of market mechanics and has little if anything to do with how “well” a given retirement plan is being run.

This is evidenced by the fact the difference between the very best and very worst returns is only about 2%, with a 13.31% return tallied for bankers and a 15.24% return achieved by workers in financial advice and investment activities.

According to the authors, what’s most “interesting” about the rate of return for 2021 is that the S&P returned a total of 26.61% in 2021, nearly twice what was seen in 401(k) plans across the country.

This is the widest discrepancy measured since Judy Diamond began its annual report, and it implies that plan participants may have adjusted their investment lineup to be more conservative in response to COVID but did not adjust it back quickly enough to participate in 2021’s market rally.

Considerations for Advisors

Publication of the report comes at a time that many wealth management professionals are considering entering the 401(k) plan advisory business, and it may provide useful insight for advisors looking to work with employers and participants.

Experts say working with retirement plans can confer great benefits to any advisory firm with the right approach. The assets in the plan tend to be sticky, and working with any given plan tends to generate substantial wealth planning opportunities stemming from rollovers and by serving the ancillary needs of C-suite executives.

However, there are also many ways that financial advisors can make costly mistakes while entering the defined contribution plan market.

On the one hand, there are stringent and ever-evolving fiduciary standards applying to workplace financial advice. On the other, the lead times for establishing a successful plan relationship can be far longer than a wealth advisor may expect.

Ultimately, the experts warn that dabbling in 401(k) plans is not worth the hassle — either for advisors or clients — but a well-run retirement plan advisory practice can amplify a firm’s reach as well as its bottom line.

(Image: Adobe Stock)

John Manganaro

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