The Modern 401(k): Options You Didn’t Know You Had

Navigating the constantly evolving 401(k) landscape while trying to meet employee expectations can be daunting for HR (especially when 401(k)s are only one piece of the HR puzzle). What’s more, the war for talent makes it more important than ever before for employers to offer a compelling and enticing benefits package.

But before employers and employees alike can gain any value out of a 401(k) plan, HR needs to make sure it’s not only relevant to employees’ financial goals, but also effective when it comes to accomplishing HR goals like recruitment, retention, and risk management.

With changes in employee expectations, financial regulations, and HR trends, modern plans have improved transparent fee structures for employees, provide varied options for vesting, and capitalize on innovation in the industry. These advances and improvements empower HR teams to ensure that the company’s retirement plan is a win-win initiative. As open enrollment period approaches, let’s look into how 401(k)s have evolved, and explore the various options you may not know you had.

Transparent fees for employees

In the past, employees were able to make their own 401(k) investment decisions, but the overall approach was less interactive, and information was not readily available. This all changed when the Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule in 2012 focused on helping employees manage and invest the money they contribute to their 401(k)-type retirement plans by providing them with more information.

This ruling resulted in improved access to information about fees, which ultimately better equips employees to understand the costs that can positively or negatively impact their overall returns. This is an important factor for many employees who struggle with fears about potentially wasting or even losing money by investing in their company-sponsored retirement plans.

When employees are educated about their investments, including the many associated fees, they are more likely to not only gain an understanding of how their investments are working for them, but are also more likely to gain confidence that their funds are being invested wisely.

The hope for employers is that with access to information regarding these fees, participants will make knowledgeable decisions and contribute more regularly, especially when combined with financial literacy training or guidance. While on the employer side, HR can be confident that the ROI on this particular employee benefit is high, and employees are feeling empowered with access to more information.

Options for match vesting and eligibility

In the past, employees may have had to wait several years to have their employer matches fully vest, or to be eligible to contribute to their 401(k)s at all. Given higher job turnover and expectations on access to employee benefits, the modern 401(k) should be more employee-friendly and have fewer barriers to entry.

In its How America Saves report from 2017, the financial firm Vanguard said 67% of its plans offer immediate eligibility for employee contributions, up from 58% in 2012. Today’s savvy HR leaders have found these approaches to their plan design may be used to entice employees in different ways:

  • Immediate vesting: All employer contributions are immediately released to the employee, an attractive feature that may encourage top candidates to accept job offers.
  • Graded or cliff vesting: Employer contributions are released to the employee on a gradual scale, or after a specific length of time (ex: a “cliff” after 1 year of work). This can serve as a reward and incentive for employees to stay with the company and can address turnover issues by encouraging employees to wait until they are vested.
  • Open eligibility: No restrictions on number of hours worked; no age requirement. This is especially attractive to interns and part-time employees. Employer-sponsored retirement benefits for this demographic are rare and can make your organization more competitive.

One especially innovative approach, recently endorsed by the IRS, is to use an employee’s student loan payments as the “match” for the employer’s 401(k) contribution. This win-win approach can be especially attractive to young employees burdened by heavy student debt who would otherwise have to postpone saving for retirement.

Fintech trends

The modern 401(k) is making the most of what technology has to offer by meeting the needs of employees who want to be able to access, manage and receive advice about their retirement investment accounts 24/7, as opposed to receiving a statement in the mail once a year.

For millennial employees, it’s especially important that organizations meet their expectations when it comes to retirement planning. Millennials’ technological expectations have caused many industries to innovate and provide online solutions, from applying to jobs to banking or finding a doctor, they want to be able to have online access around the clock – and this extends to retirement planning. What’s more, millennials are extremely motivated to invest in their futures and save for retirement. In recruiting, a robust 401(k) plan can be an added incentive to choose your company. That’s why it’s more important than ever before to offer a 401(k) plan that provides an accessible, easy-to-use solution for participants to manage their investments.

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There are numerous automated features in the modern 401(k), and it’s critical that plans leverage the ability for employees to have online access to their 401(k)s, personalized investment advice via robo-advisers, and an automatic rebalancing option. Today’s 401(k)s offer these options to participants and each one helps the employee take control of their investment strategy:

  • Online access — With online access and educational resources, employees can sign up on their own time and make changes to their investments on their own, without having to make a call or mail a form.
  • Robo-advising — A robo-advisor designed for 401(k)s can help cut fees and expenses, guide employees with creating the best investment portfolio for their needs, and provide automated rebalancing.
  • Automatic rebalancing — With automatic rebalancing, participants opt to have their account automatically sell stocks and buy bonds to return to their intended investment allocations. This type of “401(k) homework” is something that should be done a few times a year. By having their portfolios automatically adjusted, participants can maintain their target allocations and achieve solid, entry-level retirement investment management without having to be a finance expert.

The best retirement products and services are equipped to help participants pick the right benefits based on the information they provide and offer insight based on key milestones (e.g., buying a home or paying for college tuition). The bottom line is that automating these components and providing additional information helps decrease manual HR work by putting ownership in the employee’s corner. By embracing innovation in the industry, HR leaders can ensure they are meeting the demands of today’s modern workforce and implementing the best 401(k) program to meet their employees’ investment needs.

Over the last 40 years, 401(k) plans have evolved in ways that we never could have imagined. Plan providers have made huge strides in managing these important benefits, aiming to take the hassle out of the day-to-day operations of managing retirement investment plans. Starting to invest in a 401(k) can be confusing for employers and employees alike, but today’s programs are simplifying the process and making investing easier to understand. Today’s companies can confidently provide their employees with an innovative and modern 401(k) experience, allowing them to feel in control of their retirement savings plans.

Roger Lee

Roger Lee is the CEO of Human Interest (formerly known as Captain401). Based in San Francisco, Human Interest helps small businesses all over the country offer 401(k)s to their employees. Roger and his team focus on increasing 401(k) access through a high-quality, affordable solution that lowers the administrative burden for businesses and prioritizes employee experience and education. He was formerly a co-founder at Thunder and holds a degree in Applied Mathematics from Harvard University.