According to the Department of Labor (DOL), about one-third of eligible employees do not participate in their employer’s 401(k) plan. But 401(k) plan participation benefits both employees and employers. Fortunately, there are strategies to help increase participation numbers.
Why Participation Matters
For many employees, their 401(k) plan is their only source of income to supplement Social Security benefits. Those who do not participate in a 401(k) plan may have to depend solely on Social Security, which likely will not allow them to live their desired retirement lifestyle and may not even be enough to fund basic expenses.
Optional 401(k) plan features can offer further employee advantages. For example, 401(k) plans can allow employees to direct their own investments and provide them with access to their funds during times of financial hardship.
A traditional 401(k) contribution helps an employee reduce their current income tax burden, while a Roth 401(k) contribution allows the earnings on contributions to be forever free of income tax even when withdrawn from the plan in retirement. A plan must allow for the Roth options, so employers may want to talk with their plan administrator about adding this feature.
In addition, retirement plan participation can help employers attract and retain high-level employees. Unless the employer makes minimum contributions in a safe harbor 401(k) plan (see “Qualified Automatic Contribution Arrangements” below), a 401(k) plan must pass an annual nondiscrimination test. This test ensures that highly compensated employees (HCEs), such as owners and management, are not participating in the plan to a greater extent than the non-HCEs (rank and file employees).
Usually, the more the non-HCEs contribute to the plan, the more the HCEs can contribute, and the plan will still pass the nondiscrimination test. Encouraging lower-paid employees to participate benefits HCEs each year.
Changes to federal pension laws in 2006 made it easier for 401(k) plans to automatically enroll their employees and for new hires to have a set amount of pay deferred into their retirement plan unless they opt out. According to Aon Hewitt, a global provider of human resources consulting, 401(k) plans with auto-enrollment have average participation rates of more than 85%, compared to 67% for plans without auto-enrollment. Employers have different options when setting up automatic enrollment:
Qualified Automatic Contribution Arrangements (QACAs)
A QACA is an automatic enrollment provision with certain employee and employer contribution requirements that exempt the plan from annual nondiscrimination testing requirements, making it a “safe harbor” plan. The employee deferral rate must be at least three percent of compensation to start and increase to at least six percent of compensation by the fifth year of participation. Employees always have the option to change the contribution rate. Sponsors are required to provide annual notices for QACAs. The notices must contain information about the arrangement and explain an employee’s right to make changes through an affirmative election or to elect not to participate at all.
Eligible Automatic Contribution Arrangement (EACA)
An EACA does not require employer contributions, but it does require an annual notice. Although plans using an EACA are not exempt from nondiscrimination testing, the correction period for a failed test is extended from two-and-a-half months to six months after the end of the plan year.
More Ways to Boost Enrollment
Automatic enrollment is not the only way to boost employee participation in your 401(k) plan. Some other effective ways to boost participation include:
Regular Employee Communications
Employers should provide employees with plan information even after the initial enrollment meetings to remind them of the plan’s specific features and the importance of saving for retirement. Holding periodic enrollment meetings, frequently distributing enrollment forms and materials and sending newsletters along with projected benefit illustrations for each participant can also help. It is important to use both electronic and print media and to make sure the materials are easily understood by the average plan participant. If you have a large group of employees where English in not their primary language consider hiring an interpreter or schedule the meeting when they can invite a non-employee family member to attend.
Frequent Election Periods
If a plan allows participants to discontinue or change their elections frequently, they may be more willing to commit to higher deferral amounts. Plans can offer changes on a monthly basis, or even with each paycheck. However, balance the frequency of election periods against the plan’s administrative burden.
Adequate Investment Options
Employers should offer a broad array of investment funds from which to choose. The opportunity to make frequent changes can create more enthusiasm for the plan.
Get a Boost
Implementing these options can help you beat the DOL statistic and have more than two-thirds of your employees participate in your 401(k) plan. Consult your employee benefits specialist to learn more.
If you have additional questions about creating strategies to boost employee participation in your company’s employee benefit plan, please contact Michael Kovacs at [email protected] or call him at 312.670.7444.