As an industry, we should demand the best from our retirement plans. These are the features we look out for when assessing a 401(k) plan.

Match and match vesting schedule

Plan sponsors often prioritize offering a matching contribution that meets or exceeds the safe harbor minimums, because failing to do so leads to costly regulations and administrative burdens. Under the Employee Retirement Income Security Act (ERISA), 401(k) plans that don’t meet the safe harbor requirements are subject to annual non-discrimination testing, which can be time-consuming and expensive. Additionally, plans that fail to pass these tests may be required to refund excess contributions to highly-compensated employees, which leads to needless confusion and seething for impacted participants.

One would think meeting these requirements would be a no-brainer for plan sponsors. Alas, some employers persevere in trying to save money by offering subpar matches with lengthy vesting schedules. While industry-leading plans offer as much as a 50% match with immediate vesting, others (e.g. Amazon) continue playing games in this area. The difference between a industry-leading match and a terrible match is worth around $10,000 per year, every year. Applicants should take this into account when assessing competing job offers.

Self-directed Brokerage Link

A self-directed brokerage link in a 401(k) plan provides participants with enhanced investment flexibility and control over their retirement savings. This feature allows employees to access a broader range of investment options beyond the standard fund lineup, including individual stocks, bonds, ETFs, and mutual funds not typically offered in the core 401(k) menu. For sophisticated investors or those seeking specific investment strategies, this expanded access can potentially lead to improved portfolio diversification and the ability to tailor investments to personal risk tolerances and financial goals. Additionally, the brokerage link enables participants to respond more dynamically to market conditions and implement more nuanced investment approaches. However, it’s important to note that this feature also requires a higher level of involvement and may involve additional fees, making it most suitable for motivated investors.

Roth contributions

Roth contributions are offered by virtually every plan today.

Megabackdoor Roth

Utilizing a Megabackdoor Roth is the fastest way to end up with large Roth savings, making it a no-brainer for investors seeking tax-free growth and withdrawals in retirement. To learn more, read our in-depth article about the mechanics behind the most important retirement plan innovation of the 21st century.

Fund lineup

The fund lineup in a 401(k) plan is a critical component that can significantly impact the plan’s overall performance and participant outcomes. A well-constructed fund lineup should provide a diverse range of investment options that cater to various risk tolerance levels, investment horizons, and participant preferences. This can be achieved by including a mix of low-cost index funds, actively managed funds, and target date funds (TDFs) that offer a range of asset allocations and investment strategies.

A poorly constructed fund lineup, on the other hand, can lead to suboptimal investment decisions and lower participant returns. This can result from a variety of issues, including excessive fees, poor investment performance, and inadequate diversification. To mitigate these risks, plan sponsors should regularly review and monitor their fund lineup to ensure that it remains competitive and aligned with the plan’s overall investment objectives. This may involve conducting regular fund evaluations, benchmarking fees and performance, and making adjustments to the lineup as needed.

Custodian

In our opinion, this is the least interesting aspect of any plan. While there is often a correlation between fund lineup and custodian (e.g. a plan administered by Fidelity is likely to feature many Fidelity funds), the plan fiduciary (i.e. the company offering the plan) is completely within their rights to demand from the custodian that certain funds be offered. For example, the Amazon plan offers Vanguard Target Retirement Date funds despite being administered by Fidelity.

Nowadays the vast majority of plan fiduciaries understand that it is in everyone’s interest to offer broad and cheap funds to plan participants. Most tech companies already choose industry-leading custodians, so does it really matter whether the S&P500 fund in your plan charges 2 or 5 basis points, or whether their website’s color scheme is pleasing to the eye? Here at Tech401k.fyi we are enthusiastic capitalists who welcome competition, but this is a silly thing to focus on.