Strategies to Boost 401(k) Plan Participation
According to the Department of Labor (DOL), about one-third of eligible employees do not participate in their employer’s 401(k) plan. But, participation in a 401(k) plan benefits both employees and employers. Fortunately, there are strategies to help increase employee participation.
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 in all likelihood, would not allow them to live their desired retirement lifestyle and may prove insufficient to fund basic expenses.
For employers, if more employees contribute to the plan, the larger the plan assets will be, and certain plan investment and operation fees may be reduced.
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) are not participating in the plan to a greater extent than the non-HCEs.
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. So, 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 fixed dollar amount 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 various 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 3% of compensation to start and increase to at least 6% (but no more than 10%) of compensation by the fifth year of participation. Employees always have the option to change the contribution rate. Automatically enrolled employees who do not complete an investment election form will have their contribution placed into a default investment.
Sponsors are required to provide annual notices for QACAs and qualified default investment alternatives. The notices must contain information about the arrangement and the default investment, 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 2½ 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 after the initial enrollment meetings to remind them of the plan’s specific features and the importance of retirement savings.
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.
Adequate investment options. Employers should offer a broad array of investment funds from which to choose.
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.
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