Plan Sponsors Ask...

Q: Is it helpful to participants to add an automatic contribution increase feature to our 401(k) plan?

A: The answer is definitely yes, according to analysis by Fidelity Investments.

For a participant in his or her mid-20s, a 1% contribution rate increase, which would be about $33 per month for an employee earning $40,000, could yield an extra $200 to $330 each month in retirement income. An additional $180 to $270 in monthly retirement income could be available to someone in his or her mid-30s earning $60,000. (The 1% increase in this case would be about $50 each month.)

One-third of all participant contribution percentage increases through the end of 2013 were attributed to the automatic increase feature, according to Fidelity’s research.

On average, only about 13% of employees opted out of automatic increases.

Given the potential for a boost in retirement income, adding this plan design component has the potential to be very helpful to participants.

Q: What should we consider as we conduct an annual review of our plan’s investment menu?

A: You may want to keep in mind one of the results of TIAA-CREF’s Investment Options Survey: More than one-third of retirement plan participants said they are not familiar with their plan’s investment options. Further, 36% said they have either too few or too many choices.

The ideal approach is to keep the investment option menu simple, according to the report. It suggests that the number of choices that is probably about right is in the range of five to 10, though there is no magic number that is suitable for all plans.

Plan sponsors have an opportunity to engage participants, since 81% of participants reported that they trust the information and education they receive from their employer. One-on-one advice would be particularly effective, because some investments are complicated and few participants seem willing to raise questions in group sessions.

Go to http://tinyurl.com/TIAAInvOptions to see TIAA-CREF’s survey report.

Q: Are index funds popular with most plan participants?

A: Based on the activity of participants in plans for which Vanguard performs recordkeeping, there has been significant growth in the use of low-cost index funds in recent years, thus confirming that they remain attractive to participants. By the end of 2012, the average participant had 60% of his or her account balance in index funds.

At the same time, there has been a significant drop in the number of participants invested only in actively managed funds. In 2004, almost 40% of participants held only actively managed investments. By 2012, only 19% followed this strategy.

With regard to index funds, only 10% of participants invested only in these funds in 2004. At the end of 2012, that number was 38%.

Perhaps a better indicator of index funds’ popularity relates to current contributions. Between 2004 and 2012, the percentage of contributions invested in index funds rose from 32% to 64%. During the same period, actively managed fund contributions fell from 37% to 20%.

In the case of Vanguard’s participants, at least, plan sponsors’ approach of reducing participants’ costs to invest and reducing exposure to actively managed fund risk has been met with positive reactions from retirement plan savers.

Vanguard’s report is at http://tinyurl.com/VanguardIndex.

For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.

Kmotion, Inc., P.O. Box 1456, Tualatin, OR 97062; 877-306-5055; www.kmotion.com

© 2014 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.