Next Generation 401(k) Plans — Better for Your Employees, and Better for Your Company

Do you know someone who is retired now and collects a pension? Maybe they were in the military, worked for a railroad, city government, a large corporation, or were a teacher. You don’t see them as much today as you used to, but they are out there.

How did these people build up a retirement nest egg that now pays them a monthly amount? What did they have to do? How much did they have to save? How did they invest it?

The answer may surprise you, as they didn’t have to do anything except show up for work, and do their job for a long time. These types of plans (known as Defined Benefit plans) don’t require any voluntary action or involvement by the employee — except showing up for work.

In such plans, employees are automatically enrolled into these plans after a certain amount of service with their employer. In most cases, the assets are invested by a professional manager, and employees are not provided access to the money as long as they are still employed. No loans, no hardship withdrawals, no access to the money whatsoever. Also, there’s no worrying about how to invest it, or how much to contribute. Consequently, they’re left with a lifetime income stream once the benefit terms are met and the employee retires.

Similarly, 401(k) retirement plans are a great solution to help people save for retirement. But there is one problem with their design. They require action and involvement by the employees. The employee has to answer questions like: How much should I save? How should I invest the money? And, will I have enough to retire on?

When faced with these types of questions, many employees take the path of least resistance and either don’t contribute at all, or contribute too little. From an investment standpoint, it’s almost as if employees are required to be a professional investor. Yet very few possess the education or experience to make the proper decisions.

It is for these reasons that you will continue to see 401(k) plans evolve for the better. More automatic features are being added, such as:  Automatic enrollment into the plan; Auto-escalation of contributions; and, professionally managed accounts. The goal of these features is to automate retirement saving so it becomes more like a pension plan. And requires less involvement by the employees.

In recent times, many business owners and executives have indicated frustration at the low participation rates from employees in the company’s 401(k) plan. Common concerns include: employees don’t save enough; too many millennials are investing too conservatively; or, employees treat their 401(k) like a bank savings account.

These problems can be solved by developing a creative plan design that evolves your current retirement program into a “next generation 401(k) plan.” The key is to avoid taking a passive role in the Retirement Readiness of your employees, as that not only hurts your employees but can negatively effect your company’s bottom line, as well.