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Known: How Your 401(k) Can Make the Leap from Good to Great (First of Two Articles)

09/04/2018
By Jack Towarnicky

Last May, Laraine McKinnon, LMC17, presented at PSCA’s 70th Annual National Conference.  Her presentation was titled: “Known: How to Create a Great 401(k)" and based on her book of the same name. 

The word “great” immediately triggered an allusion to Jim Collins’ seminal management text, “Good to Great: Why Some Companies Make the Leap…and Others Don’t.”  So, forgive me Laraine, if I title this: Known: How Your 401(k) Can Make the Leap from Good to Great.

This is a book for benefits leaders as plan sponsors.  Laraine’s text is a how-to guide that answers  “why you should” make the leap from good to great.  Her “why you should” explanations capture a number of my own 31 years of plan sponsor design experiences.  More than once, she puts into persuasive prose what I was perhaps unconsciously thinking.   

Many suggested changes are consistent with what others call 401(k) “best practices” or the “ideal” 401(k) plan.  But, unlike the unexplained certainty professed by others, Laraine confirms “why you should” make certain changes.   

Laraine suggests that many plans have not made the leap because of organizational behavior and individual decision-making biases.  In this article, I will address plan management and plan design.  In my next article, I will share Laraine’s insight into certain behavioral economics concepts.  

Good to Great – 401(k) Management
Jim Collins confirms that the leap from good to great is a process of build-up followed by breakthrough. In a 401(k) context, the build-up might start with two of Collins’ seven characteristics:

  • Level 5 Leadership: Start with a 401(k)-management structure and a team composed of individuals who have a goal of building a great plan for the enterprise and also for plan participants, namely active employees, term vested and retirees.  
  • First Who: Get the right leaders on the 401(k) bus, and then make sure they are in the right seats – either in settlor functions or as fiduciaries, but not both.  

Laraine illustrates why management should make the leap- how an employer who sponsors a plan can benefit through improved engagement by:   

  • Branding and marketing the plan as superior in design so it becomes a recognized and appreciated benefit (perhaps pursuing award-winning industry recognition, such as PSCA’s Signature Award),
  • Communicating that this superior plan, and specifically, how the employer’s financial support (matching contributions, non-elective contributions, etc.) illustrates company interest in each employees' financial wellness, and
  • Highlighting the special aspects of the plan that make it useful and impactful for the diverse set of participants and their diverse needs.    

Good to Great - 401(k) Plan Design 
Laraine also links Great 401(k) plan design to three other characteristics in Collins’ Good to Great transformation:

  • Confront the Brutal Facts: Participants who aren‘t saving at all are unlikely to start saving on their own; a participant who is saving at 3% is likely to keep saving at 3%; a participant defaulted into a fund is likely to remain in that fund; a participant who selects a specific allocation when joining the plan is likely to remain in those allocations; and a participant who intends to save more tomorrow is likely to keep deferring to tomorrow. 
  • Technology Accelerators: Automatic features including enrollment, escalation, investment and asset retention are all staples in many of today’s 401(k) plans.  Plan design should make saving easy and efficient for all who are eligible.  
  • The Flywheel: Persistently pushing the flywheel builds momentum, eventually hitting a point of breakthrough. In addition to typical automatic features, Laraine suggests backsweeping: automatic re-enrollment for those who were not automatically enrolled at hire or those who have opted out.  She also suggests “investment re-enrollment” to ensure longtime participants consider a new qualified default investment alternative when added.  

Along with repeated marketing and communications, this repetitive process recognizes the need to remind, encourage and re-enroll participants as their personal or financial circumstances change.  

It is time for action if you see yourself and your plan in Laraine’s explanations of “why you should” make changes. I certainly agree with her ultimate conclusion, “Changes to the 401(k) today can make a huge difference for participants tomorrow.”

Perhaps someday, Laraine will write a sequel, titled, “Journey into the Unknown: Making Your 401(k) Greater Still.”

P.S.:  I can’t leave it unsaid that my plan sponsor experiences are in conflict with two of Laraine’s assertions:

  • First, loans are not leakage, unless they are not repaid. Her text suggests plan sponsors should curtail access via plan loans in favor of hardship withdrawals, mistakenly suggesting, “A hardship withdrawal requires no penalty.” Penalties for hardship withdrawals typically include a six-month suspension in contributions and a 10% penalty tax for premature distribution. But, more importantly, she fails to encourage plan sponsors to make plan design changes that would incorporate 21st Century best practice banking features designed to ensure loans are repaid.
  • Second, she notes the need for action today is due in part to a “looming extinction of pension plans.”  However, most employers never sponsored a defined benefit pension plan and most never will.  Further, many, perhaps a majority, of workers who participated in defined benefit pension plans never vested in their accrued benefit. The suggestion that lucrative defined benefit pension plans (non-contributory, immediate eligibility, early vesting, generous final average pay formula, with post-retirement automatic cost of living adjustments) were once ubiquitous among private sector employers is a myth (see previous blogs on this topic here and here).
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