There are seven absolutely fantastic 401(k) plan design elements that represent the perfect gift companies can give to their employees. Here they are:

1. Instant eligibility. Employers often put employees “on probation” when it comes to receiving benefits. That makes sense when there's a significant cost to the company (either out-of-pocket or via the accumulation of free-rider employees). But is it necessary in cases where the employee pays for the cost of the benefit? Maybe put a hold on the point when matching kicks in, but let them start saving for retirement from the get-go.

2. Offering a Roth option. Sometimes, the immediate tax deferral is worth less than the long-term tax deferral. That's certainly the case for employees in low tax brackets with decades of compounding returns ahead of them. This is a popular option with millennials.

3. An extended company match. Extending the company match doesn't mean increasing it; it means stretching it out into higher salary deferral percentages. For example, instead of a dollar-for-dollar match on the first 3 percent deferred, extend it by making it a fifty-cents-on-the-dollar match for the first 6 percent deferred. This incentivizes employees to save more.

4. Auto-enrollment. A saving employee at rest tends to stay at rest, and an employee in motion tends to stay in motion. Participation rates increase dramatically when companies reframe the question from “Tell us when you want to save” to “Tell us when you want to stop saving.”

5. Auto-escalation. If you thought auto-enrollment was good, you'll think auto-escalation is great. Employees are less resistant to saving small amounts. They are also less resistant to increasing that savings in small amounts on a regular (usually annual) basis.

6. Auto-backsweeping. Long-time employees are often overlooked and bypassed in these new features. Auto-backsweeping addresses this. For example, auto-enrollment generally applies to new employees. Existing employees therefore can't benefit. But if auto-enrollment applies to all employees annualy, why then you'd have auto-backsweeping.

7. Category-based tiered menu option. While “choice” sounds like a good thing, it tends to lead to choice overload, which stagnates decision making, resulting in less saving. We can “reduce” the choices by spreading them out among different categories.

There you have it! A 401(k) plan with nary a lump of coal.

Instant Insights /

Make 401(k)s a perfect gift for employees

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