Design Strategies for Administration

4 strategies on retirement plan design and administration to help create successful retirement outcomes

With the 401(k)/403(b) plan becoming the sole retirement strategy for many employees it's more important than ever to take a look at your plan design and ensure that it optimizes the participant's retirement income goals.

Most plans today measure success in terms of how well the plan is able to help participants meet their retirement goals for their financial future success. Real plan effectiveness should be measured in terms of whether planned participants are on track to succeed. Education alone cannot drive participant behavior. That's why it's up to plan sponsors and the advisors that work with plan sponsors to help ensure successful participant outcomes that have progressive plan design that maximizes positive participant behaviors.

Below are four vital strategies around improving plan design and administration which can help create more successful retirement outcomes for participants and plan sponsors.

1. Remember, less is more.

More is not always better as far as options are concerned when it comes to investments. The majority of 401(k)/403(b) plans contain far more equity options that are required to create a diversified equity portfolio. The results sometimes can lead to overload which can leave participants unsure and overwhelmed to the point where they simply default to the most conservative investment option or even worse avoid joining the plan.

At Columbia University, a study on choice overload found that while consumers find a wide range of products initially appealing they can find it difficult to decide on an option. Why not make it easy and simple for participants to choose investment options either through the use of target date funds, model portfolios or risk based investment choices?

2. Make your plan's QDIA (qualified default investment alternative) is a one fund investment choice.

Through target date funds, risk based funds or model portfolios, participants can find it much easier to select the most appropriate investment vehicle for themselves. Target date funds are a fund of funds. It contains a diversified many of funds, automatically provides rebalancing and diversification features, and as that participant gets older it automatically adjusts to be more conservative thus typically providing a more appropriate age based allocation and a more appropriate investment vehicle for participants as they get older. The same goes for model portfolios whereby a plan may utilize various investment options inside the plan by allocating these various investment options to a model whether it's conservative, moderate, growth or aggressive.

3. Utilize re-enroll.

This is a feature that a plan sponsor can utilize annually, perhaps every two or three years. By requiring participants to re-enroll during this period it gives that participant the ability to get a fresh start on how they're invested, how much they're invested and to help them take a fresh look at their overall retirement strategy. This helps them research what the right portfolio and contribution strategy is effective for them long term.

4. Focus on your effective plan design.

From a plan administration standpoint, an effective plan design can assist plan sponsor in managing all of these different features to help a plan become more efficient. One of those features is outsourcing the administrative responsibilities to the third-party administration company or the record keeper. Having oversight of the administration of the plan is critical. Sometimes there can be many tasks that can be overwhelming for a plan sponsor or plan administrator to make sure the plan is being managed correctly. Having oversight helps prevent any loose ends or compliance missteps.

By reviewing these strategies with your record keeper, your third-party administrator or your advisor, you can begin to explore the different strategies to help decide whether or not they would be effective for your current plan. We recommend reviewing your plan health reports on an annual basis. These are reports that your third-party administrator, your advisor and your record-keeper can provide to plan sponsors with some insightful ideas in order to improve plan performance.

As a plan sponsor, you can begin utilizing a few of these strategies today to help provide beneficial features that will help plan participants prepare for a successful retirement.

The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. No strategy assures success or protects against loss. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.