THOUGHT LEADERSHIP |  CFO SERIES

Is Your 401(k) Plan Costing More Than It Should?

A practical look at contribution design through a CFO’s lens

By Paul Carl, VP of Retirement Plan Consulting |  HORAN Wealth

Marcus, CFO of a regional manufacturing company with 350 employees, reviewed last year’s employer contribution totals to the 401(k) plan. He noted a year-over-year increase approaching 25%. The company sponsors a safe harbor 401(k) plan using the basic formula that provides a fully vested 4% match for every eligible employee who contributes at least 5% from their pay. Active employee participation had always been good, ranging from 65% to 70%. Beginning last year, the company adopted an auto-enrollment feature at 5% for newly hired employees going forward and had also instituted a one-time re-enrollment for all then-current employees who were contributing at less than 5%. By adopting these two provisions, active participation jumped to 98%.

While Marcus as well as the manufacturing firm’s President and CEO liked offering a good benefit, they found the plan structure challenging since the same percentage of benefits were directed to all employees. They really desired a plan that directed more benefit towards longer-tenured and harder-to-replace engineers and managers. 

Marcus is not unusual.

What Is Actually Happening Here

Most plan sponsors adopt a contribution structure early on and rarely revisit it. A safe harbor match, a non-elective contribution, maybe a profit-sharing layer. It gets baked into the budget and treated as fixed. Often, at initial adoption, one formula that fits in a box is proposed and other potential options are not evaluated. 

Retirement plans are governed by ERISA (the Employee Retirement Income Security Act, as amended). ERISA does not require a one-size-fits-all approach that many plan service providers propose. In fact, thanks to the Internal Revenue Code and ERISA, plan sponsors may have meaningful flexibility in how plan provisions are designed, including the design, testing, and allocation of employer contributions.

While many Human Resource Professionals and CFOs may initiate some Plan provision redesign, many of those changes focus on greater plan participation without an appropriate analysis of how to extend benefits in a meaningful manner without discriminating against certain employees or classes of employees. 

CFOs do not realize that plan design choices made years ago cost more than necessary while delivering less strategic value than they could. Safe harbor designs are simple and eliminate certain testing requirements, but they come with mandatory contribution obligations that apply broadly to all eligible employees. That is not always the most efficient use of plan dollars.

Relating this information back to Marcus’ situation, moving from the basic safe harbor match formula to a safe harbor non-elective could result in the redeployment of employer contributed benefit dollars to those employees that the CFO and President/CEO seek. The safe harbor contribution would be reduced from 4% to 3% of compensation. Highly compensated employees could still defer their maximum desired. With active participation standing at 98% and the likelihood that most employees would not eliminate their deferrals altogether if the match were replaced with an automatic employer contribution, roughly 25% of the safe harbor contribution could potentially be redeployed to benefit the more tenured and harder-to-replace employees through discretionary cross-tested or age-weighted allocation of profit sharing contributions.

Three Questions Worth Asking

1. Are your contribution dollars allocated where they create the most value?

Certain plan designs, including cross-tested profit-sharing formulas and age-weighted allocations, allow employers to direct a higher proportion of employer contributions toward specific employee groups. This can be structured to satisfy IRS nondiscrimination testing while still giving the company more control over where the dollars land. If you are spending significant money on contributions but the benefit feels generic, that is worth examining.

2. Does your safe harbor design still make sense for your workforce?

Safe harbor plans eliminate ADP and ACP testing, which is valuable. But there are several safe harbor designs, including traditional matching formulas, enhanced matching formulas, and non-elective contributions, each with different cost profiles. If your workforce composition has changed, or if your participation rates are already high, you may be paying for simplicity you no longer need.

3. When did you last run a true cost-per-outcome analysis?

Not just total contribution cost, but cost relative to participation, deferral rates, and retirement readiness metrics. Some plan sponsors are spending more per employee than peers and getting modest outcomes. Others have found that a plan design adjustment meaningfully improved both cost efficiency and employee engagement.

About the HORAN Wealth Retirement Plan Consulting Team

The HORAN Wealth Retirement Plan Consulting Team brings over 70 years of combined experience helping employers design, manage, and improve retirement plans. Based in Cincinnati and serving employers regionally and nationally, the team operates as a fiduciary partner to your committee, HR, payroll, and providers, with a practical focus on reducing risk and improving outcomes for both the business and the people behind it.

About HORAN Wealth

For over 75 years, HORAN Wealth has guided businesses, families, and investors through their financial journey, so they can live more abundantly and productively, now and for generations to come. As one of the largest independently owned advisory firms in Cincinnati, HORAN Wealth is a trusted fiduciary with a growing national footprint, overseeing nearly $4 billion in assets under advisement, with offices in Ohio, Kentucky, and Pennsylvania.

If your plan contribution formula were designed from scratch today, with your current workforce, your current retention priorities, and your current budget pressures, would you design it the same way you did five years ago?

DISCLOSURE

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