BrightScope, a provider of retirement plan ratings, recently announced its "Top 30 401(k) Plans of 2013." By learning about the characteristics of the best plans, we can determine what makes a great 401(k) and see how our plans stack up.
Here are some characteristics of the best 401(k) plans.
High employee participation
The most important step in saving for retirement is participating in your 401(k). Amazingly, the average participation rate for the Top 30 401(k) Plans of 2013 is 96%. That signifies a huge number of employees at these companies prioritizing retirement planning. Plans within BrightScope's 2013 Top 30 list average more than $12,500 in salary deferrals per worker. For an employee pulling in $100,000 annually, that equals a 12.5% salary deferral. By comparison, the average worker contributes about half that percentage.
But employees aren't the only ones making retirement saving a priority. Companies with top plans are also encouraging their employees to save. For example, Google (NASDAQ:GOOGL) raised its default automatic deferral percentage to 10% in 2013, up from 6% in 2012. The tech giant ranked No. 12 on BrightScope's Top 30 401(k) Plans of 2013, down one spot from last year.
According to BrightScope, Google's 401(k) plan, which has nearly 30,000 active participants and more than $2.4 billion in plan assets, is in the top 15% of plans for salary deferral, account balances, company generosity, and total plan cost. The average account balance is $86,000. Google likely offers its employees a top plan in order to retain the most desirable employees in a fast-moving, competitive sector.
Sizable employer contributions
A big component of the top plans is company contributions. The average company match or profit-sharing for the Top 30 plans was $11,600 in 2013. Southwest Airlines (NYSE:LUV) and United Continental Holdings' (NASDAQ:UAL) United Airlines, this year's No. 3 and No. 5 plans, respectively,had some of the most generous plans on the list.
Southwest's 401(k) plan, which has 42,000 participants with an average account balance of $82,000, ranks in the top 15% for account balances. Employer contributions were up more than 15% for Southwest's plan in 2012.
United Airlines' plan, which has the highest rating in its peer group, is in the top 15% of plans for account balances, company generosity, participation rate, salary deferral, and total plan cost. The average account balance is $460,000, and the plan boasts a self-directed brokerage account as well as 99 investment options (compared to the average of 24).
Many participants take full advantage of their employers' match, but not everyone does. Roughly three-quarters of all 401(k) participants contribute enough to maximize their employers' match -- after all, not contributing enough money to receive the full match is leaving free money on the table. A typical employer matches dollar-for-dollar up to 3% of salary.
While your 401(k) salary deferral contributions are completely yours from the get-go, contributions made by your employer are not usually 100% yours from day one. They're often tied to an employer-selected vesting schedule, meaning you're required to stay with your company for a certain number of years before the employer-granted funds are 100% yours. Amazingly, 21 of the Top 30 plans offer immediate vesting of employer contributions. This means more money in employees' 401(k)s is theirs to keep from day one.
Plan costs can significantly alter your 401(k) account balance. The average annual plan cost for the Top 30 plans is 0.28%. This includes investment expense ratios and plan administrative fees. By comparison, the average 401(k) plan costs 0.78% per year. Typically, 401(k) plan participants -- not employers -- pay for most plan fees.
Low-cost investment options, like index funds and target-date funds, drive plan costs down. The percentage of both index and target-date funds increased this year over 2012 for the Top 30 Plans. Index funds account for 33% of assets in the Top 30 Plans of 2013, up from 29% of last year's assets. Meanwhile, target-date funds, which provide instant asset allocation based on your projected retirement date, account for 5.4% of assets in the Top 30 Plans of 2013, up from 4.9% of last year's assets.
Go to BrightScope and see how your 401(k) stacks up against the best. If you aren't familiar with your plan's features, ask your HR department for a copy of your summary plan description, a plain-English document that provides you with the ins and outs of your 401(k) plan. Advocate for a better plan if yours falls short. Use this form letter to get the dialogue started.