As an Employer, How Often Should I Review My 401(k) Advisor? 

Adding the benefit of a 401(k) plan for your employees can do wonders for morale and retention, but simply setting up a plan isn’t all that is required. The landscape of retirement planning and investment options is constantly evolving, making it crucial to stay informed and ensure that your 401(k) plan is optimized. To be assured that the plan and 401(k) plan advisor are providing the best possible outcomes for participants, employers should routinely conduct a 401(k) plan review.

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Regularly reviewing your 401(k) advisor’s diligence is essential for the success of your retirement plan and the financial well-being of your employees. This article will explore the importance of annually reviewing 401(k) advisors, focusing on the key areas to monitor such as plan participation rates, deferral rates, investment diversification, and employee participation based on compensation. 

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The Importance of Reviewing Your 401(k) Advisors Annually 

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Annual reviews of your 401(k) advisors are crucial for several reasons: 

• Plan Performance: By reviewing your advisors annually, you can assess their performance in managing your employee's retirement. This includes evaluating the returns of investment options, comparing them to market benchmarks, and determining if any adjustments or changes are necessary. 
• Compliance and Regulatory Requirements: Regular reviews help ensure that your plan remains in compliance with applicable laws and regulations, such as the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Service (IRS) Code. This includes verifying that your advisors are fulfilling their fiduciary duties and meeting the required reporting, documentation, and financial standards. 
• Participant Satisfaction: Reviewing your advisors annually allows you to gauge participant satisfaction with the plan's features, services, and investment options. Gathering feedback from employees can help identify areas for improvement and ensure that the plan is fulfilling (or exceeding) their needs and expectations. 
• Changing Market Conditions: Financial markets are dynamic, and investment opportunities and risks can change over time. Regular reviews of your advisors enable you to stay informed about market trends, assess the performance of your plan's investment options (against the overall market), and make necessary adjustments to optimize returns, manage risk, and help your employees best prepare for their retirement. 

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Review Your 401(k) Plan's Participation Rate 

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One important aspect to evaluate during your annual review is your plan's participation rate. This measures the percentage of eligible employees who are actively contributing to the 401(k) plan. A low participation rate may indicate a lack of employee engagement, awareness of the plan's benefits, their view of the plan, or whether the 401(k) advisor is providing them with enough education regarding their ability to save for retirement.

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Improving Low Participation Rates 

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If your plan's participation rate is low, consider taking the following actions: 

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• Education and Communication: Provide comprehensive education and communication initiatives to promote the benefits of the 401(k) plan. Conduct regular employee meetings, workshops, and webinars to explain the plan's features, investment options, and retirement planning strategies. A good 401(k) plan advisor should provide the education or materials for these events.
• Automatic Enrollment: Consider implementing automatic enrollment, which enrolls eligible employees in the plan by default unless they choose to opt out. Automatic enrollment has been shown to significantly increase plan participation rates. 
• Matching Contributions: Offer employer matching contributions to incentivize employees to participate in the plan. This provides an immediate financial benefit, encourages employees to save for retirement, and may help to reduce certain employer tax burdens.
• Simplified Enrollment Process: Ensure that the enrollment process is user-friendly and straightforward. Minimize paperwork and make it easy for employees to enroll, understand their options, and make their investment choices. 

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Review Your 401(k) Deferral Rates 

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In addition to participation rates, it is essential to review your plan's deferral rates. Deferral rates refer to the percentage of an employee's salary that they contribute to their 401(k) account. Low deferral rates may indicate a need for additional education or encouragement to save more for retirement. 

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Encouraging Higher Deferral Rates 

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• Education and Financial Wellness Programs: Provide ongoing education and financial wellness programs to help employees understand the importance of saving for retirement and the benefits of allocating (deferring) more of their paycheck to retirement savings. 
• Automatic Escalation: Implement automatic escalation features that gradually increase an employee's contribution rate over time. This helps employees gradually increase their savings without a significant impact on their take-home pay. 

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Reviewing 401(k) Investment Diversification 

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Investment diversification is a critical aspect of a well-designed 401(k) plan. During your annual review, assess the diversification and performance of the investment options offered to participants. Consider the following: 

• Asset Allocation: Evaluate the mix of investment options available to participants, including stocks, bonds, mutual funds, index funds, and target-date funds. Ensure that there is a suitable range of options to accommodate different risk tolerances and investment objectives. 
• Investment Performance: Compare the performance of the plan's investment options against relevant market benchmarks. Identify underperforming options and explore potential replacements or alternatives. 
• Investment Policy Statement (IPS): Review the plan's IPS to ensure that it aligns with your fiduciary responsibilities and investment objectives. Update the IPS as needed to reflect any changes in investment strategy or risk tolerance. 

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Highly Compensated (HCE) vs. Non-Highly Compensated Employee (NHCE) Participation 

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During your annual review, assess the participation rates of highly compensated employees (HCEs) versus non-highly compensated employees (NHCEs). Ensure that the plan does not discriminate in favor of HCEs, as this can lead to compliance issues. 

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To address any disparities: 

• Safe Harbor Provisions: Consider adopting safe harbor provisions, which automatically satisfy certain nondiscrimination requirements. Safe harbor provisions provide a match or non-elective contribution to NHCEs, encouraging their participation and helping to meet compliance standards. 
• Employee Education: Focus on educating NHCEs about the benefits of participating in the plan and the impact on their retirement savings. Provide targeted communication and educational initiatives to promote NHCE participation. 

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The Bottom Line 

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As an employer, conducting an annual review of your 401(k) advisors is crucial for maintaining a successful retirement plan. In doing so, you should evaluate the plan’s participation rates, deferral rates, investment diversification, and employee participation based on compensation. It can be helpful to identify areas for potential improvement, implement strategies to enhance participation, and stay on top of keeping the plan’s performance optimized.

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Regular reviews ensure compliance, participant satisfaction, and the ability to adapt to changing market conditions, ultimately helping employees achieve their retirement goals.  A good 401(k) plan can provide benefits for both the employer and employees. Performing an annual 401(K) plan review can ensure that the plan and its advisor are providing the best possible outcomes to the plan participants.