Small can be big in 401(k) plans

Employer generosity is important, but that's not the only factor in designing a successful retirement plan

Dec 18, 2013 @ 1:56 pm

By Darla Mercado

Companies that are flush with cash have the wherewithal to provide the best in 401(k) savings to their workers, but that doesn't mean smaller retirement plans can't be generous.

BrightScope Inc., a financial data firm, this week released its ranking of the top 30 retirement plans with more than $1 billion in assets. The top-rated retirement plans included a number of heavy hitters when it comes to the size and prominence of the employers.

The NFL Player Second Career Savings Plan ranked No. 1 this year, followed by The Savings Plan of Saudi Arabian Oil Co. in second, and the Southwest Airlines Pilots' Retirement Savings Plan in third.

BrightScope analyzed some 200 data points to reach its conclusions, including fees, participation rates, account balances and employer generosity. When it came to the NFL's plan, “their generosity was significant,” said Brooks Herman, head of data and research at BrightScope. “The account balances are very high.”

“Demographically speaking, it's a good thing,” he added, noting that players' careers last only a few years. “Players have a defined period of when they're performing and they need to save money while they can.”

Mr. Herman noted that there are some industries that consistently fare well, and that's reflected in the resources they pour into their retirement plans. Such was the case for the Saudi Arabian Oil Co. “You see highly compensated industries pass that generosity to their 401(k), and these are industries where the workers are highly paid and educated,” Mr. Herman added.

“The methodology puts a meaningful amount of weight on the plan sponsor's ability to be generous: To let people into the plan immediately and give them a bunch of company money and plan features that a lot of smaller companies can't afford,” said Michael Francis, president of Francis Investment Counsel. “Sure, I'd like to work for a company that puts away 15% of my compensation into my 401(k). But how realistic is that? Not really.”

While it's easier to have a great 401(k) plan when you're working for an employer that's loaded, plans with fewer assets aren't necessarily precluded from maximizing their 401(k) offerings and helping workers boost their savings. Small to midsize plans can still borrow tactics that their larger counterparts put to work: Automatic enrollment and escalation features, as well as starting default enrollment levels at a significant rate.

Ed Lynch, chief retirement officer with Dietz & Lynch Capital, suggests enrolling workers automatically at a meaningful level, with an auto escalation. “A 3% [default contribution rate] is common, but it's on the low side,” he said. “Still, raise them by 2% each year and get them up to 12%.”

“Being effective begins with plan design,” Mr. Lynch said. “This is true for every plan, and certainly the small ones with few resources.”

Mr. Francis has been encouraging plan clients to use a Roth 401(k) as an automatic investment vehicle, in combination with a default deferral rate of 6% and a 1% annual automatic escalation — all the way up to 15%.

Smaller salaries — especially for new workers — shouldn't be a deterrent from effective retirement savings. “You start working right out of college or high school; do what we tell you to do, and based on the structure of this plan, you will reach retirement age able to afford to stop working,” Mr. Francis said. “Personally, I wish they had the Roth when I was 22 years old.”

Another place to save? Encourage employees to save more money before they can qualify for a matching contribution: Perhaps with a 50% match on a 6% contribution, for instance.

Cost consciousness when it comes to plan investment selections is also sensible. Mr. Herman noted that index funds account for 33% of assets in BrightScope's list of top 30 retirement plans.

“The big plans set the tone in this space, and it takes a while for these trends to pick up,” he added.

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