Human Resources News & Insights

How Obamacare has raised 401(k) plans’ perceived value

Much has been said about the Affordable Care Act’s (ACA) impact on employers’ healthcare plans, but that’s not the only benefit that’s being affected.  

That’s because the appeal of employer-sponsored healthcare benefits has decreased because employees and prospective employees know they can obtain coverage on the exchanges if they need to.

In other words, jobseekers are less likely than they were in the past to take a job they were on the fence about simply for the healthcare benefits.

Because of this, employers’ retirement packages are emerging as a more prominent tool for recruiting and retention, especially for smaller firms.

Because of the ACA

In fact, a recent Harris Poll survey found that small businesses were making the following changes as a direct result of the ACA:

  • Increasing employer retirement plan contributions because the ACA has made health benefits less attractive (cited by 29% of small biz owners)
  • Increasing 401(k) contributions because the ACA has made their 401(k) more important for attraction and retention goals (43%), and
  • Offering retirement benefits — like a 401(k) — for the first time because the ACA has made it important for attraction/retention (23%).

Because of the ACA

So, for small businesses looking to roll out a retirement package for the very first time, what does a standard 401(k) plan actually look like?

As HR Benefits Alert has reported previously, 401khelpcenter put together a report on what a “typical” plan looks like, and it generally consists of these major features:

Instant eligibility

It wasn’t too long ago that virtually every 401(k) plan included a waiting period of six months to a year before new hires could sign up and start contributing. But long waiting periods are the exception rather than the norm nowadays.

In fact, 60% of employers now offer new hires immediate (one month or less at the company) eligibility in the company’s 401(k).

Here are the other top eligibility requirements for 401(k) participation:

  • three months or 90 days (15%)
  • six months or 1000 hours (10%)
  • one year (11%), and
  • other (3%).

In addition to instant eligibility, many plans offer immediate vesting. The study found that almost half (40%) of 401(k)s include immediate vesting for employer contributions, and 23% do so for profit-sharing contributions.

Auto features, target-dates on the rise

Increasingly, employers are relying on plan features like automatic enrollment and escalation to bolster employees’ 401(k) participation and contribution rates.

Of all plans, 38% have an auto-enrollment feature, with 3% being the most common deferral rate employers have this feature set to (the auto-enrollment rate for 58% of plans).  However, auto-enrollment is even more common among large plans. Fifty-four percent of plans with 5,000 or more participants have an auto enrollment feature.

As for investment options, 72% of plan sponsors have life-cycle or target date funds (TDFs) set as their 401(k)’s default investment option. Another 13% have their default option set to balanced or lifestyle funds, the study found.

Most common match formulas

While there are an array of formulas employers use to determine the amount they’ll contribute to workers’ 401(k)s, the two most common were:

  • A $1 for $1 match of up to a certain percentage of workers’ pay — normally around 6% (match formula used by 27% of employers)
  • A $0.50 for $1 match of up to a certain percentage of workers’ pay — normally around 6% (match formula used by 23% of employers).

If you’re wondering how your company’s 401(k) participation compares to the average plan, 87% of eligible employees have money in their employer’s 401(k), on average.

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