The Evolving 401(k): Fees are Down; the Match is Up

Take another look at your 401(k) plan. Some important changes have been put in place and may deserve your consideration.

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If you haven’t looked at your 401(k) plan in a while, you may find it’s changed in some impressive ways. Employers are systematically driving down costs, boosting the company match, and improving investment choices, according to a new report.

These changes recognize that the 401(k) plan as conceived more than three decades ago has largely failed—and yet, imperfect as it is, has become most workers’ primary source of retirement savings. The recent changes are designed to bring more workers into their plan and boost investment returns, primarily through a lower fee structure.

More than 75% of companies have reduced 401(k) plan expenses in the past two years, reports the consulting firm Aon Hewitt. To cut expenses, 62% have switched to lower-cost share classes of the same funds; half have dumped their high-fee funds altogether and replaced them with lower cost funds. Fees are now the top consideration among administrators choosing what funds to offer—ahead of fund performance and investment style.

High expenses, especially among smaller plans, have been among the biggest drawbacks of 401(k) plans for decades. They are often cited as the reason that returns consistently underperform the market and the fund universe in general. Even small fee reductions can have a big impact. Cutting fund fees from 1% to .75% has the same impact as a typical employee contributing an additional .5% of pay, Aon Hewitt found.

Other steps that plan sponsors are taking include greater use of low-cost funds available only to institutions and of managed accounts, which add an inexpensive component of professional advice. Aon Hewitt also found that plan sponsors are offering important new investment options. The share of plan sponsors offering an emerging markets fund has doubled while the share offering a short-term bond fund has risen nearly as much.

These new options come at an opportune moment. Managed accounts generally are attractive to those near retirement and who have a large nest egg. They might benefit from the help of a pro who may consider assets inside and outside the plan. Meanwhile, emerging markets promise more robust returns in the next decade as the developed world crawls along with little growth, and short-term bond funds offer shelter from what might be the start of a long cycle of rising interest rates and falling bond prices.

Here are some other ways your plan may have improved:

  • Better match The most common match is dollar for dollar on up to 6% of employee contributions—up from 50 cents on the dollar a few years ago.
  • Quicker eligibility Companies are doing away with the wait. Now more than 75% allow new hires to start in the plan immediately.
  • Introducing the Roth Over the last six years, the share of employers that allow Roth contributions has increased from 11% to 50%. Nearly a third of plans with a Roth provision accommodate Roth conversions.

So the venerable 401(k), under so much criticism in recent years, is evolving into something that more closely aligns with what it has become: the de facto primary retirement plan for millions of Americans. Lower fees, better options and a more generous match are coming your way.

Further improvement is still needed. Plans need to beef up opportunities to invest for guaranteed lifetime income. More need to auto enroll new hires and auto escalate contributions each year. But the changes that have occurred in recent years are welcome news, and should give anyone not yet enrolled in a 401(k) plan good reason to take another look.