The Frugal Fiduciary Blog

401k Plan Design Study: What 2,767 Small Business 401k Plans Are Doing

Posted by Eric Droblyen on Nov 30, 2016

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Small businesses can have dramatically different goals for their 401k plan. While some want to maximize key employee contributions, others want to incentivize rank-and-file contributions.  401k fiduciaries have nearly endless options for meeting these goals – many with very different expenses. The process of matching 401k goals to available options is called 401k plan design.

401k plan design is a big deal that shouldn’t be undervalued by 401k fiduciaries - there is no such thing as a one-size-fits-all 401k plan.  It’s not uncommon for a small business to save tens of thousands of employer contribution dollars by choosing one 401k plan design over another and yet still meet their 401k plan goals.

Over the past 20 years, I’ve designed thousands of 401k plans.  One of the most common questions I receive from small business 401k fiduciaries during the plan design process is “what are other people doing?”  Recently, I studied the 2,767 401k plans for which we provide ERISA compliance services - plan document maintenance, nondiscrimination testing and Form 5500 reporting - to help answer that question.

Safe Harbor Design

 

Additional Features

#

Auto Enroll

%

Roth

%

Non-SH Match

%

Profit Sharing

%

Basic Match

923

Yes

No

4.77%

95.23%

Yes

No

69.88%

30.12%

Yes

No

58.18%

41.82%

Pro Rata

Integrated

New Comp

Other

None

35.54%

25.35%

23.94%

0.43%

14.73%

Enhanced Match

288

Yes

No

4.17%

95.83%

Yes

No

68.75%

31.25%

Yes

No

51.04%

48.96%

Pro Rata

Integrated

New Comp

Other

None

44.44%

23.61%

23.61%

0.69%

7.64%

3% Non-elective

575

Yes

No

6.09%

93.91%

Yes

No

64.87%

35.13%

Yes

No

61.22%

38.78%

Pro Rata

Integrated

New Comp

Other

None

22.96%

16.52%

53.57%

0.52%

6.43%

"Maybe" 3% non-elective

38

Yes

No

7.89%

92.11%

Yes

No

71.05%

28.95%

Yes

No

76.32%

23.68%

Pro Rata

Integrated

New Comp

Other

None

7.89%

13.16%

78.95%

0.00%

0.00%

QACA Match

53

Yes

No

100%

0.00%

Yes

No

90.57%

9.43%

Yes

No

54.72%

45.28%

Pro Rata

Integrated

New Comp

Other

None

28.30%

13.21%

39.62%

1.89%

16.98%

Non-Safe Harbor (Traditional 401k)

890

Yes

No

10.56%

89.44%

Yes

No

60.00%

40.00%

Yes

No

77.19%

22.81%

Pro Rata

Integrated

New Comp

Other

None

45.51%

13.03%

19.55%

0.22%

14.73%

 Key Findings:

  • 68% of plans use a safe harbor 401k plan design to avoid annual ADP/ACP and top heavy
  • Only 8.71% of plans automatically enroll employees that fail to make an affirmative enrollment election.
  • 65.96% of plans permit after-tax Roth 401k contributions.
  • 64.37% of plans permit non-safe harbor employer matching contributions.
  • 85.65% of plans permit employer profit sharing contributions.
  • A new comparability profit sharing contribution is most commonly combined with a safe harbor 3% nonelective plan design.
  • Pro rata and integrated profit sharing contributions are most commonly combined with the 3 match-based safe harbor 401k plan designs.

A plan design case study

Skeptical of the power of plan design?  A case study can help demonstrate its value.  Assume the following fact pattern for a hypothetical company:

  • Employee demographics – 2 owners, 2 non-owner highly-compensated employees (HCEs), and 10 rank-and-file file employees. One owner is over 50 years old, making them catch-up 401k
  • Plan design goal – maximize owner contributions, while minimizing other HCE and rank-and file contributions

Three design options for this company can be found here.  The employer contribution expenses for these designs range from $88.8k to $159.7k.  That’s a huge difference!  Proper 401k plan design can save a company big bucks annually. 

If your 401k provider doesn’t offer 401k plan design, run!

Proper 401k plan design can be done quickly – often, in less than an hour.  This is time well spent when you consider how much a bad plan design can cost a company annually in unnecessary 401k contribution dollars.

However, this process is a consultative one.  Most often, companies don’t know the 401k plan design they want or think they do until they understand their options.  That’s why it’s so important for 401k fiduciaries to speak to an expert before selecting their 401k plan design. 

401k providers that do not offer a consultative plan design process should be avoided.  The consequences of a bad 401k plan design are too great.

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Topics: Plan Design, 401k Studies

Written by: Eric Droblyen

Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.