What top 401(k) plans do differently

It’s no surprise that highly paid workers have better 401(k) plans, but that doesn’t mean advisers can’t help employers improve the odds for all workers across the board.
BrightScope Inc. recently analyzed employers’ Form 5500 data and plan audit documents filed with the Department of Labor to determine which industries have the best 401(k) plans. In scanning the information, the firm studied 200 data points, including the plan design and investment menus of the companies, all of whom have more than $100 million in assets.
Law firms wound up at the top of the list, with a BrightScope rating of 82.60 out of 100. Utilities followed in a close second with 78.15. The mining, quarrying and oil and gas extraction industries came in third at 77.36. Technology was fourth at 75.82, and airlines were fifth with 74.96.
(See a slide show of the ranking: 10 industries with the best 401(k) plans)
The highest-earning industries with the most educated employees tend to remain at the top of the list, noted Brooks Herman, head of data and research at BrightScope. “These are people with advanced degrees, and they’re getting paid enough that they can afford to save for retirement,” he said. “At the bottom of the list, there’s less opportunity to save for retirement. Those employees have other competing needs, including rent and car payments.”
But compensation isn’t everything. Plan design plays a role in retirement security, too. For instance, law firms have generous 401(k) plans, and provide workers with profit-sharing opportunities. “You pass on the wealth of the company to the participants,” said Mr. Herman.
Fees have also become a bigger deal for retirement plans, as index funds have been gaining traction among the top-rated industries. The pilots’ retirement savings plans for the fifth-ranked airline industry are using index funds more this year than last. Previously, 20% of their 401(k) assets were in index funds, and now it’s up to 25%.
Other notable developments include the fact that the health and medicine sector increased its use of target date funds from 25% of assets last year to more than 30%.
Though BrightScope hasn’t been able to determine how many companies are raising their automatic deferral rates beyond the typical 3% level, more companies are adding auto-enrollment features, Mr. Herman said. An analysis of over 600,000 plans’ Form 5500 for 2012 — the most recent year available to the public — showed that 25,817 of these plans are using automatic enrollment. That’s up from 13,370 plans in 2009, which is the year when the Form 5500 added a flag for automatic enrollment.
When it comes to getting workers, particularly lower-earning workers, to save more of their money, the effort goes beyond plan design. Advisers find that it makes sense to talk to them about the saver’s credit, a tax credit for employees that can be as high as 50% of their contribution, depending on their adjusted gross income.
“The saver’s credit is very important in terms of helping them receive more of a benefit for contributing to the plan,” said Joe Connell, an adviser with Retirement Plan Partners Inc. “In many cases, the lower earners work for companies that may not have as strong of a match as the larger companies, so the saver’s credit is the only benefit they get for contributing to the plan.”
At the same time, employers who do match employee contributions are strongly encouraged to tweak their formulas to encourage higher deferrals. “Instead of a 100% match at 3% of salary, there’s 50% at 6% or 30% at 10%,” Mr. Connell said. “If you have a predominance of low earners, it’s a strategy to help people save more.”