Is Your 401(k) on Track? Key Elements for the Year-End Plan Review
It’s no secret that when you conduct a retirement plan review, you have a chance to understand the data and trends, which can help your plan be efficient and compliant. To set your plan up for success, it’s important to make the most of this analysis. Here are some key components to focus on.
Can Participation Rates Tell You About the Need for Design Change?
One piece of the plan health puzzle is your current 401(k) participation rate as it is a key signal of the retirement plan’s effectiveness. When paying attention to these metrics, you may gain insights into the level of employee engagement and identify opportunities, especially when you consider the possibilities of implementing automatic features while making other plan design changes and thinking about how employees engage with their 401(k)s.
– Aim for 90% or greater
Are employees saving enough for retirement? Savings rates might hold the answer.
Equally significant are your retirement plan data trends, especially deferral rates, which are crucial for optimizing the financial well-being of plan participants. Understanding deferral rate data helps you know if employees are making informed decisions about their contributions. It also reveals opportunities for more effective education and communication. Much like participation rates, deferral rates can highlight opportunities for plan design modifications.
– Aim for 10% or greater
Are Participant Accounts Invested for Long-Term Success?
Effective asset allocation is another key statistic that plays a pivotal role in the performance of retirement portfolios. By evaluating the asset allocations across participant accounts, you can identify opportunities to align strategies with investment goals and risk tolerance profiles. Analyzing the asset allocation data can reveal opportunities like re-enrollment, which can be a valuable endeavor in the long term.
Re-enrollment allows employees to reselect their investment options or be enrolled in a Qualified Default Investment Alternative (QDIA). This process offers participating employees a fresh chance to look at how they are allocated and consider a more suitable investment strategy.
– Aim for 90% or greater
Auto-enrollment and auto-escalation
Auto-enrollment can be a great streamlining tool to help savers achieve retirement readiness and increase participation in your plan, especially if encouraging employees to take positive actions has traditionally been a challenge. Aside from other benefits to the workforce, auto-enrollment can be an effective tool to improve recruitment and retention, unlock tax credits, and help with compliance testing.
Auto-escalation is an effective feature that incrementally raises plan contributions over time (e.g., increasing by 1% annually up to a maximum of 15% annual deferral). This approach not only has the potential to lower payroll taxes but also, akin to auto-enrollment, facilitates employee retention by overcoming the usual roadblocks of getting employees to take positive action.
SECURE 2.0 – New Rules Take Affect in 2025
Several provisions in SECURE 2.0 legislation take effect in 2025. A year-end 401(k) Plan Review is an opportune time to consider new options. The regulatory implications of SECURE 2.0 are significant.
For more SECURE 2.0 details, contact us to discuss your plan.
Want to learn more about 401(k) plan design changes?
It is important to discuss implementation dates before the tax year comes to a close. As businesses prepare for growth in the upcoming year, an evaluation of plan metrics could enhance the employee benefits package, and boost employee satisfaction, leading to stronger employee retention.
Victor Hicks II, CFP®, AIF® is a Wealth Advisor at Perigon Wealth Management LLC.
Since 1995, he has specialized in workplace retirement plans for small businesses. Victor has advised clients on issues related to plan design, employee education, investments, and fiduciary compliance.
Contact Victor directly at: Victor.Hicks@PerigonWealth.com | (248) 936-9380
PERIGON WEALTH MANAGEMENT LLC, 2000 Town Center, Ste. 1825, Southfield, MI 48075
Important
Perigon Wealth Management, LLC (“Perigon”) is a Registered Investment Advisor (“RIA”), located in the State of California. Perigon provides investment advisory and related services for clients nationally. Perigon will maintain all applicable registration and licenses as required by the various states in which Perigon conducts business, as applicable. Perigon renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
