What's Next for 401(k) Plans?

Among employee benefit programs, it's probably fair to say that 401(k) plans stand in a class by themselves in terms of upheaval in the wake of the global economic crisis. Despite the stabilization of financial markets and, in some cases, welcome gains, employers and plan participants are asking all kinds of tough questions that essentially boil down to this: Where do we go from here?

Now in fact may be a good time for companies to reexamine their 401(k) plans within the broader context of crafting more effective reward programs that can resonate with employees while continuing to help them save for retirement. In fact, 401(k) plans remain central to reward strategies because we know employees value economic security more now than they did before. It has become a top priority.

Companies that opt for a strategic overhaul of their 401(k) plans with an understanding of the linkages to workforce management and reward strategies can find themselves better equipped when the economy recovers. However, questions that plan sponsors need to address go beyond the obvious ones — such as what to do about the company match and overall cost levels.

Product Options

To their credit, providers have brought more sophisticated products into the marketplace to help protect plan participants from market volatility and from making bad decisions. Target date funds are one example, although even these fell short in the economic downturn. For more on this topic, see our Investment Perspectives.

There is also growing interest among employers in putting annuities in 401(k) plans as an investment option or making an annuity distribution option available through a product that employees can buy for themselves.

Fees and Vendor Management

New products and plan design changes are only part of the story, however. Plan sponsors continue to seek help in finding out if the fees they're paying vendors are reasonable — both the investment management fees and the 12.B.1 fees paid to the recordkeepers. These fees can be confusing, and often they're not readily apparent, complicating the task of vendor management. Plan sponsors also have to be careful in this area because of their fiduciary responsibilities and because participants ultimately bear the cost of plan administration through different types of arrangements with the vendors.  

Options for Longer-Term Objectives

For companies willing to explore longer-term objectives focused on attracting and retaining talent, 401(k) plans offer some interesting opportunities. Three areas that we believe worth exploring are:

• Linking employer matches to profitability. The suspension of matching contributions by many companies as a result of the recession has revealed that there is a clear, but implicit, link between profits and matches. A more direct link could serve as powerful incentive when times are good while offering companies protection when times are tough.
• Redefining total retirement adequacy. At many companies, the 401(k) plan has become the primary path for employees to accumulate adequate capital for retirement. Should companies provide a portion of their contribution independent of an employee's own contributions? Another possibility is to reallocate some money to retiree health care benefits to help employees meet their post-retirement needs.
• Linking health and wealth. Other ideas on the table include using a portion of the 401(k) match to seed individual health savings accounts or health plan incentive payments to support desired behavior changes.

To discuss your organization's 401(k) plan and how it might be changed to support a more effective reward program that suits your organization's long-term goals, contact us via e-mail or contact your local Towers Perrin office.