401(k) Plans Can Move to ‘3.0’ Level

Small changes to a company’s 401(k) plan—including decreasing the eligibility waiting period or increasing the match—could encourage employees to set the bar higher.

At the 2012 PLANSPONSOR National Conference in Chicago, Mark Iwry, senior adviser to the secretary and deputy assistant secretary (retirement and health policy), U.S. Department of Treasury, referred to this new level of 401(k) as the “3.0 version.”

The “2.0” version, he said, began in the late 1990s and focused on features like automatic enrollment and target-date funds (TDFs). The next generation of 401(k) plans—the 3.0 version—could take things a step further. 

Increasing the use of automatic enrollment is one way to do so. About half the 401(k) plans in the U.S. still do not have automatic enrollment, and when it is adopted, it is often a “very rudimentary version” with a 3% default contribution, Iwry said.

Iwry suggested several other changes to help achieve the 401(k) plan “3.0.”

  • Restructure employer match. Some plan sponsors have been experimenting with a “stretch the match” approach, Iwry said. Rather than a company matching 50 cents on the dollar for the first 6% of an employee’s pay, employers could stretch the match up to a higher percentage of pay. For example, Iwry said, matching 33 cents on the dollar, but up to 10% of pay.  
  • Give lower-paid employees a higher rate of match. Lower-paid employees, who traditionally save less for retirement, will have more incentive to save. This approach can also help a company with employee retention and recruitment, as well as non-discrimination testing, Iwry said.
  • Decrease eligibility waiting period. If companies have long waiting periods before eligibility because of turnover, Iwry suggested they examine whether they can decrease the waiting period and still be OK. Another option is allowing employees to contribute sooner, but with a delayed employer match.
  • Examine portability. Iwry suggested employers examine whether their 401(k) plans are accepting rollovers to the extent that they can. “[Are they] being overly cautious about rollovers from previous employers or IRAs?” Iwry added.

Iwry also suggested plan sponsors focus on the automatic enrollment of non-new hires, as well as explore the possibility of employees contributing unused vacation or sick pay to their 401(k) plans. Plan sponsors can also extend their automatic escalation rate beyond 10%, he added.

“These are incremental steps,” he said, “but one or two could make a difference.”