There is no one single plan design for achieving retirement success—the only absolute is that any plan design succeeds or fails based on savings or contribution amounts. Ultimately, the retirement plan industry has learned from the decades of saving in defined contribution (DC) plans that there are some best practices for helping participants properly amass savings. However, best-practice plan design may not always be pioneering plan design—there are many successful retirement plans that use proven design elements to keep people deferring enough, and staying invested long enough, to build a nest egg.
Two years ago, PLANSPONSOR introduced its “Best in Class 401(k) Plan” designation, given to 401(k) retirement plan sponsors that meet a standard of excellence as defined by the PLANSPONSOR research and editorial teams. The 34 recognized this year were selected from the nearly 3,400 401(k) plans that responded to the 2016 PLANSPONSOR Defined Contribution Survey.
What does it take to qualify as a Best in Class 401(k) Plan? The requirements reflect what we at PLANSPONSOR view as industry best practices for offering employees a 401(k) plan. The plan sponsor should be committed to strong oversight and governance practices; produce positive outcomes related to helping employees prepare for retirement—e.g., high participation and/or deferral rates—and use features that make it easier, not harder, for participants to achieve their retirement savings goals.
The Best in Class plans are determined using a combination of a fixed and a sliding scale across a range of criteria. Readers familiar with our annual DC survey know the breadth of the topics covered in the questionnaire.
Best in Class plans are determined based on a number of plan design and governance variables, the presence of which lead to higher outcomes. The graphs “Best in Class vs. Other Plans,” beginning below, highlight some of the differences.
Again this year, there were two “knockout” criteria for designation: having an investment committee and having an investment policy statement (IPS). While some might argue that having an IPS is not required by the Employee Retirement Income Security Act (ERISA), it is widely accepted as a best practice, with support from many across the retirement plan industry for all plan sponsors to adopt one. Therefore, the requirement that a plan have a group of people committed to reviewing investments, and a set of guidelines for how said investments should be evaluated, is a logical one.
The other criteria are not mandatory but are scored in a way that allows any plan to potentially receive points. Some points are given for achieving certain levels of success—for example, high participation and deferral rates. High employer contributions also have the potential to earn a company a significant number of points, and 74% of the firms in this year’s Best in Class 401(k) Plan group have an effective match or employer contribution of more than 3% of employee pay.
Plans are rewarded for allowing participants to enjoy the benefits of their plan quickly, with more points available to those that offer immediate or short eligibility—for participation, access to the match, and vesting. In fact, all plans on this year’s list have eligibility within three months and offer automatic escalation. None of that is pioneering, but these are generally accepted best practices of plan design.
On the other hand, some more innovative elements were also included: Plans received points for true-up match contributions, fee equalization and provision for loan payments post-separation, for example. These criteria and scoring methodologies will be reviewed annually and changed as necessary to properly reflect current industry standards—and it is likely something else will be added to the list or given more weight next year.
This variability allows a range of plan sizes and industries to vie for designation—although admittedly, while those chosen range from micro plans to megas, they tend to be on the larger end of the spectrum. For example, while plans of all sizes and in all industries benefit from having an IPS and investment committee, design features such as auto-enrollment may be more common at large plans. Similarly, high employer contributions are not offered in all industries, so having either variable as a “must” would have eliminated nearly all small and micro plans, or certain industries, from Best in Class contention.
Again this year, the plans we recognize as Best in Class represent diverse industries and participant demographics, and the different plan-size categories show the range of plan design options that can produce positive retirement outcomes. Overall, this diversity should seem promising to plan sponsors looking to improve their plan’s results for their workers or to help attract and retain talent. It affirms that any organization, regardless of size or resources, can have a great 401(k).
PLANSPONSOR is pleased to share this year’s “class”—our third—of companies receiving its Best in Class 401(k) Plan designation and to offer snapshots of each. As plans may be recognized only once, this year’s group adds to the 55 already on the list, and we congratulate them all.