10 Changes To 401(k)s Employers Should Make Now

There are a lot of easy things that employers could do to improve their 401(k) plans—and the retirement security of their workers. They just need prodding. “We’re encouraging workers to speak up and employers to reach out and talk to their people,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies, a non-profit funded by Transamerica, a subsidiary of financial giant Aegon .

In a new report, Collinson features five things employers can do immediately. Why stop there? I’ve added another five. These are all action items within the reach of employers now. They don’t require regulatory reform or new laws. Many employers are offering some of these features already, but many are not. Large employers tend to be the leaders, and micro employers tend to be the laggards, Collinson says. But pretty much every employer can find some room for improvement.

Here are 10 action items.

Supercharge automatic enrollment. More employers are starting to use automatic enrollment, where they typically enroll employees in the 401(k), setting the salary deferral at 3% of pay. Collinson says that a 6% automatic default rate would be better. Adding an auto escalation feature, where the percentage deferred goes up by one percentage point a year can also help workers save more.

Of course, workers can –and probably should—save even more. Forbes’ Sam Sharf explains how young workers would do well to start saving at 10% of pay here. (Employees can always opt out of the automatic provisions.)

Another promising trend: Some employers are adding auto escalation features as a stand-alone provision, without auto enrollment. That lets everyone put ramping up savings on auto pilot.

Offer advisory services and target-date funds. With 401(k)s, the burden is on employees to manage their retirement plan, and Transamerica found that two-thirds of employees said they want more information and advice from their employers on how to reach their retirement goals. One approach is to offer target date funds, which change investment allocations as employees age, or target risk funds, which address employees specific risk tolerance profiles. Another approach is to offer managed accounts or services where an outside firm provides 401(k) advice, for an annual fee (usually a percentage of assets). For employees inclined to sign up for this, make sure you understand what you’re getting in help, and how much fees can eat into your nest egg.

Add a Roth 401(k) option. All 401(k)s allow pre-tax salary deferrals; that’s the default choice for employees who are automatically enrolled, and employer match money is always pretax. But for those who can’t use a deduction now or expect higher taxes in retirement, making Roth contributions, which are made aftertax, can help build a tax-free retirement kitty. (Roth money grows tax-free and comes out, with earnings, tax-free.) Only half of employers currently offer the Roth option.

Expand eligibility to part-time workers. Transamerica found that only half of 401(k) plans give part-time workers the opportunity to save in the plan. There’s a big disparity between large employers (500-plus employees) who at 80% are twice as likely to offer workplace retirement plans to part-time workers and micro employers (10-99 employees), where only 39% offer plans to their workers. “There is a perception that they think it’s impractical and too costly,” Collinson says. But it’s feasible, she insists, because of all the technological advances and automation in 401(k) administration, costs have gone down.

Start a dialogue with employees. Only one in ten workers has spoken with their supervisor or human resources department about retirement in the past year, according to the Transamerica survey. Get this: 95% of employers say their employees are satisfied, including 63% that say they "strongly agree" but only 80% of workers who are offered plans agree they are satisfied, including only 27% who "strongly agree."

Another major disconnect: Three quarters of employers believe their employees prefer not to think about retirement investing until they get close to their retirement date; yet only 38 percent of workers feel this way.

And now for my five pleas to employers on behalf of employees who are too shy to speak up. (Collinson agreed that these are all great talking points.)

Chip in a bigger match. Transamerica found that during the recession and its aftereffects, many employers suspended or eliminated their matching contributions to employees’ 401(k) accounts. But by this year, 77% of employers offer a match, nearly returning to the 2007 level. What’s key is making sure employees understand the employer match, so they’re not losing out on what’s essentially free retirement plan funding. According to Vanguard’s How America Saves, in 2013 Vanguard administered more than 225 distinct match formulas for plans offering an employer match.

Provide lifetime income illustrations. Some employers do this already, and the Department of Labor, which has been working on rules since 2010, and is expected to issue them next year. The idea is that instead of just seeing your account balance as a lump sum number, you get an idea of in terms of how much you can expect to take out each year when you’re retired. But be aware that there are a lot of variables at work, so the projected income you see could be lower.

Add longevity annuities. The Department of Treasury announced new rules in July giving a green light for employer’s to add longevity annuities—with guaranteed payouts—to 401(k) line-ups. Employees would be able to use up to 25% of their account balance or $125,000 (whichever is less), to buy a longevity annuity without concerns about non-compliance with the age 70.5 minimum distribution requirements. The dollar limit will be adjusted for inflation in $10,000 increments. $125,000 actually goes a long way if you buy when you’re 65 and start the annuity at 80. If your employer doesn’t offer this option, consider a longevity annuity on the commercial market to cover basic living expenses in retirement.

Allow in-plan Roth conversions. Once, the Roth option is available, employees can also allow in-plan Roth conversions, thanks to IRS guidelines out last December. The upside of the Roth 401(k) conversion is years of tax-free –instead of tax-deferred–growth. The downside is you have to pay the income tax on the amount you convert upfront (with a pretax 401(k) you pay income tax when you take the money out in retirement). You can Rothify your whole account, or part of it, and spread the tax bite over years.

Add a traditional aftertax option. In addition to letting employees make pretax and Roth contributions, some employers allow employees to contribute traditional aftertax dollars to the plan. “The beauty of the aftertax contributions is they’re not subject to the dollar limits that 401(k) pretax and Roth are subject to,” says Nancy Gerrie, an employee benefits lawyer with McDermott, Will & Emery in Chicago. These aftertax dollars grow tax-deferred in the plan, but when you take them out you can roll them into a Roth IRA in a move, the aftertax 401(k) rollover, newly sanctioned by the Internal Revenue Service and explained in the 11/3/14 issue of Forbes in Roth Road To Riches.