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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.
