It’s Labor Day—Is Your 401(k) Working Hard?

Since 1894, the first Monday in September has been reserved as a federal holiday to recognize the contributions of American workers. Labor Day has traditionally celebrated the hard work, dedication and innovation that Americans in all occupations have shown in making our country what it is today. It seems a fitting time to ask: Is your 401(k) working hard for your employees?

One of the most important benefits available to American workers today is the workplace retirement plan. Both defined benefit and defined contribution plans are valuable tools in helping employees save and plan for a more secure financial future.

As we recognize hard work on this upcoming Labor Day, it’s a good opportunity to give your 401(k) a performance review to determine how well it is performing for your plan participants. Put on your human resources manager hat and score your 401(k) plan on these performance characteristics:

1. Participation—How many eligible employees are participating in your company’s retirement plan? The Department of Labor found that on average only 70% of eligible employees participate in their company’s 401(k). Any improvement is good, but these numbers show many plans still have a way to go. Plan features such as automatic enrollment are proving to be effective in boosting plan participation.

2. Investment choices—How do you rate your process for selecting and monitoring the funds in your plan’s investment menu? A process of prudence can help ensure you are evaluating the investment options with the best interests of participants in mind.Also, do your employees have the opportunity to choose investments that are appropriate for their risk tolerance and time horizon? Balanced funds and target date options help make asset allocation easy for plan participants. New employees seem to like the simplicity of these funds—two-thirds of recently hired employees hold a balanced or target-date fund in their 401(k) portfolio, according to an analysis by the Employee Benefit Research Institute.

3. Fee structure—Is the fee structure for your plan’s investments and services working for or against plan participants? Excessive fees reduce the returns they ultimately achieve, meaning their investments have to work even harder to help participants get to the retirement they are planning for themselves.Frequent review of the fees and expenses charged by investment and service providers is an essential part of a process of prudence.
4. Education—Are your plan’s participants getting the information they need to make sound and suitable investment decisions? Financial knowledge is becoming more critical for success in planning for retirement. Yet, the majority of Americans lack understanding of basic investment principles.A FINRA study found only 37% of individuals could correctly answer at least four questions on a five-question test of standard financial knowledge. Your plan can offer participants the opportunity to boost their financial literacy with a robust education program.

How did you score the performance of your 401(k) plan? Even if you found your plan is lacking in some areas, you can put changes in place that can improve the quality of the retirement planning benefits you offer to employees.

You don’t need to wait until next Labor Day to review your plan again. Make a performance review a routine part of your plan management responsibilities, to ensure your 401(k) continues to work as hard as your company’s employees do.