Fixing_Your

Fixing Your 401(k) Plan

Does your 401(k) need fixing? While there are many different measures of a successful 401(k) plan, one strong indicator of a healthy 401(k) plan is the level of contributions being made by your key executives and other employees.

Here are a few ideas for increasing contributions to your 401(k) plan.

Employee Education

The logical first step in increasing participation in your 401(k) plan is making sure that each of your employees has adequate information regarding how the plan works and the benefits of long term savings for retirement.

Time and resources for employee training are usually a challenge for the small businesses that are our clients. A few tips to consider for 401(k) education include:

Take full advantage of the employee education provided by the vendors servicing your plan (investment advisor, mutual fund and insurance companies)
Find ways to promote the 401(k) plan in other regularly scheduled employee meetings/events
Offer a 401(k) computer kiosk for employees who have limited access to the internet

Match Formula Revisions

401(k) plans have become the key retirement savings vehicle for most of your employees. As a result they are keenly aware of any money their employers are investing in their retirement accounts. There is no question that the structure of the match contribution has a significant impact on the level of salary deferral contributions to the plan.

This is a good time to review the company’s match contribution formula. An increase either in the match contribution percentage or the percentage of salary deferral contribution eligible for the match contribution provides new incentive for employees to re-consider enrolling in the plan or increasing their salary deferral contributions.

Increased participation means a greater percentage of your employees are moving closer to meeting their retirement savings needs. It also may mean your key executives are able to increase their salary deferral contribution without risk of taxable refunds at the end of the year.

Preliminary Discrimination Testing

Your key employees may hesitate to contribute to the 401(k) plan because they hate getting money refunded after the end of the year. This typically results in the employee being required to amend their tax return and receive an additional tax bill. One way to avoid these refunds is to run a preliminary discrimination test (ADP/ACP test). The preliminary test results would help you determine if your key employees are heading for trouble. If the preliminary test indicates the plan will not pass the test you have a few months remaining in 2008 to work on increasing the overall participation in the plan and/or reduce the contributions for the key employees.

Automatic Salary Deferral Contribution

To combat employees’ tendency to procrastinate on many financial matters, especially saving money for retirement, many employers have elected to add an automatic enrollment feature to their 401(k) plan. Automatic salary deferral enrollment means a newly eligible participant will automatically be enrolled in the 401(k) plan at a rate of salary deferral contribution that is specified in the plan document (normally 3-5%). Unless a participant elects to either increase or decrease their rate of contribution, they automatically begin contributing to the plan.

There is overwhelming evidence that the automatic enrollment feature will increase plan participation. One employer that we recently assisted with the implementation of the automatic enrollment feature found that less than 5% of employees impacted by the auto enrollment actually made any change in their contribution rate.

Qualified Automatic Salary Deferral Contribution Safe Harbor

Beginning in 2008 employers have the option of the modifying their plan’s automatic enrollment feature so the plan no longer is required to pass the annual ADP and ACP test required for 401(k) plans.

The automatic enrollment percentage must start at 3% and increase by 1% for each year the employee is in the plan up to a maximum of 6%. The employer is required to make a match contribution equal to 100% of the first 1% of salary deferral and 50% on the next 5%.

The maximum match contribution required is 3.5%. This is actually lower than the maximum match required under the traditional 401(k) Safe Harbor Plan, which is 4%. Also the match contribution made to satisfy the qualified automatic enrollment safe harbor is subject to a 2 year vesting requirement. Contributions to the traditional 401(k) Safe Harbor Plan are immediately vested.

Retirement Solutions Advisors, LLC is prepared to help you evaluate any of the options discussed in this article. Please feel free to contact either Steve Johnson or Eric Sharon if you would like to discuss any of these ideas in further detail. Steve and Eric’s contact information is as follows:

Steve Johnson steve.johnson@rsadvisorsllc.com (312) 527-2050

Eric Sharon eric.sharon@rsadvisorsllc.com (312) 527-2062