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Your Bank > Education and Advice > CNB University

Reviewing Your 401(k) Plan Design

C Johnson
Charlene S.  Johnson, CPC is Retirement Services Officer and can be reached at CJohnson@CNBank.com or 585-419-0670 x50690.

A 401(k) plan’s design can have a significant influence on both participation and contributions. One way you can evaluate the effectiveness of your plan’s features is to use a benchmark, such as the Profit Sharing/401(k) Council of America’s (PSCA) Annual Survey of Profit Sharing and 401(k) Plans.* Here are some of the PSCA’s most recent findings.

Look at Contributions and Participation

The first things an employer should consider are the plan’s participation and participant deferral rates. The PSCA survey’s average participation rate for all 401(k) plans is 82.7%. Participation is greatest in plans that offer both a safe harbor and discretionary match (90.1% average participation rate) and — not surprisingly — lowest in plans with no employer contribution (67.2%). The average deferral of lower paid participants, as the ADP tests define them, is 5.5% of pretax pay, while higher paid participants defer an average of 6.6%.

Employer 401(k) contributions average 3% of pay for companies that do not also offer a defined benefit plan (5.6% in combination profit sharing/401(k) plans). The most common matching formula is a fixed match only. The most common fixed-match contribution (29%) is 50 cents per dollar of the first 6% of pay deferred. A 50-cents-per-dollar match of up to 3% of pay is the choice for 7.6% of plans, and 7% offer a dollar-for-dollar match of the first 6% deferred.

If you find your participation and participant deferral rates vary significantly from other similarly sized 401(k) plans, you may want to investigate why. A good place to start is by looking at the rates and plan features offered by similarly sized plans (see the table).

Review Plan Investments

The number of funds that plans offer appears to be leveling out after many years of steady increase. Plans offer an average of 18 funds for both participant and company contributions. Among all plans, the most common investment option offered for participant contributions is actively managed domestic equity funds (81.3%). Actively managed international equity funds are second (78.5%), and indexed domestic equity funds (70.2%) are third. Actively managed domestic bond funds are a close fourth at 70% of plans.

For plans surveyed that offer automatic enrollment, the most popular default investment choice is a target retirement date fund (59.7%), followed by lifestyle funds (17.9%), balanced funds (13%), and professionally managed accounts (2.9%).

Examine Plan Loan Policies

The vast majority of 401(k) plans (87.7%) allow loans. Most charge some type of loan fee to participants — loan origination fees being the most common. Slightly fewer than half of all plans allow multiple loans, and nearly all have a minimum loan amount. In 84.4% of plans, the minimum is between $500 and $1,000.

How CNB Can Help

The members of our Retirement Plan Services Team average more than 20 years of experience in assisting with 401(k) plan design. Please contact us with any questions you have at 585-419-0670.

* Includes larger sized plans

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.

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