Like most things in financial life, there’s an art to a great 401(k). Most are average or poor. But a handful stand out.
The companies doing right by their employees have a few things in common. The first guiding principle is to help employees save as much as possible. The second is to make this process effortless.
A recent survey by Employee Benefit News and the consulting firm miEdge took an incisive look at what some of the biggest plans in the country were doing right. Here’s what they found:
— A High Percentage Of Employees Participate. Since 401(k)s are voluntary, you don’t have to contribute, nor do employers have to offer them. But the best plans do everything they can to get employees saving. The fourth-best plan in the survey — the $25 billion AT&T plan — has boosted its participation rate to 91% by offering a “financial wellness” program that focuses on employees’ financial situation. These programs attempt to identify and resolve other financial maladies such as debt and spending.
— A Generous Employer Match. The $50 billion Boeing plan, rated first in the EBN survey, matches 75% of the first 8% of base pay. Generally, the higher the match, the greater incentive to save. While company matches vary, the idea is to use the company’s money to boost your contributions. Remember that a company match is “free” money. Your return on the match is 100%.
— Automatic Contributions. If you don’t have to think about contributing, you’ll save more. Numerous academic studies have proven that this “auto-pilot” feature works. Boeing employees, for example, are automatically enrolled contributing 4% of their base pay. That means they are saving on the first day on the job. The best plans do this.
— After-Tax Contributions. While all 401(k) contributions are exempt from federal and state tax, you can boost your kitty by making after-tax contributions, which could fund a Roth 401(k), which offer tax-free withdrawals. Employees in the $45 billion IBM plan, for example, can contribute up to 10% of their eligible pay on an after-tax basis.
— Keeping Fees Low. The best plans pick up most middlemen fees, which cover administration and bookkeeping. But they won’t cover investment management fees, or “expense ratios” on the the mutual funds within their plans.
The top plans keep an eye on fund expenses. The best plans offer funds that charge 0.20% or lower in annual management fees. Here’s a simple rule: The lower the middlemen fees, the more you can save.
What if you think your employer isn’t providing the best-possible 401(k) plan? You can ask your plan administrator to improve it. Remember that their money is in the plan as well, so they have a big inventive to make it better.