Most companies today offer employees peace of mind when it comesto retirement planning through 401(k)s. But companies don’t have to all bealike in their 401(k) offerings.
Companies today are focusing on ways tomake the traditional 401(k) more attractive,says John G. Jacobson, resource manager/AVP with Capital One Private Client Group in Dallas. And they’re doing that byadding a broader range of flexibility within,and in addition to, the 401(k) itself.
Smart Business spoke with Jacobsonabout what companies can do to sweetentheir 401(k) offerings to employees.
What are some ways a company can make atraditional 401(k) more attractive to itsemployees?
Most companies are focusing on ways ofmaking the ‘traditional’ 401(k) more attractive by adding a broader range of flexibilitywithin, and in addition to, the 401(k) itself.For example, employers are now offeringself-directed brokerage accounts as an ‘addon’ feature. This allows employees to actively participate in a universe of investmentoptions (stocks, bonds, mutual funds,exchange traded funds) at their discretion.
Many 401(k) plans now offer a Roth401(k) option. This allows the employee tocontribute to a retirement plan on an after-tax basis as well as a pre-tax basis. With anafter-tax contribution, the contribution stillgrows tax-free inside of the retirement plan.Employees at the beginning of their careersfind this feature attractive as they’re able todraw monies out tax-free once they’reretirement age.
Additionally, companies are implementing401(k) plans that allow their employeesgreater access to financial advisers duringenrollment periods and on an ongoing basis,which allows employees to make moreinformed investment choices.
Finally, many 401(k) plans are now offering ‘target date’ mutual funds, which allowemployees to select investment funds thatare designed specifically to their own chosen desired retirement date. For example, ifI were planning to retire in 2040, I could simply choose to invest my 401(k) assets insideof a 2040 mutual fund, which would automatically rebalance the investments withthe 2040 retirement date in mind. It wouldstart out with a more aggressive investmentmatrix (primarily stocks with some bondsand cash). The closer I got to my retirementdate of 2040, the more conservative theinvestments inside the fund would become.
How broad should investment offerings beinside a 401(k)?
This will depend on the plan provider acompany chooses. Cost is usually a deciding factor when choosing a plan provider.Most plans typically offer between 15 and30 investment selections. The primaryobjective in choosing what to offer is tomake sure that the main investment sectorsare covered. You want to offer large, smalland midcap company funds, as well assome international funds, bond funds andbalanced funds.
Should a company offer a match, and howmuch?
This depends largely on how much annual volatility the company experiences withregard to profitability and cash flow needs.For smaller companies that are in thebeginning stages of growth and are experiencing years that are either ‘feast orfamine,’ having a discretionary match maymake more sense. This allows employeesto have a retirement plan with a potentialbonus or match in profitable years. It alsoallows the company to retain needed cashin years that are less profitable. A companycan change its plan to a matching one whenit’s a viable option.
Most employees view an employee matchas a true added value. If a company is stableenough to budget for a match, it certainlygoes a long way toward helping retainemployees.
Companies will typically offer a 3 to 6 percent match on a graduated scale with somesort of vesting period. There’s no magicnumber. From an employee’s perspective,more is better. From a budgetary perspective, however, a company should matchwhat it can comfortably afford.
How can a company make sure its employees are properly educated on 401(k) investment options?
The best way a company can make sureits employees are educated is to know thelevel of servicing it can expect from itsfinancial adviser. A business will also wantto make sure that the plan provider itchooses will offer research and support tothe business’s financial adviser and itsemployees. A business should have astrong level of confidence in its planprovider and financial adviser. It can thenutilize these individuals to assist itsemployees with plan enrollment andinvestment selection. Advisers and planproviders should be prepared to offerongoing investment advice to assistemployees. If an adviser or a plan provideris unwilling to support a company and itsemployees with a ‘hands-on’ approach,then that company should be unwilling topartner with that adviser.
JOHN G. JACOBSON is the resource manager/AVP with Capital One Bank Private Client Group in Dallas. Reach him at (469) 261-3148or [email protected].
