How To Boost Participation In Your Company s 401(k)

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1 How To Boost Participation In Your Company s 401(k) Tips to help make your plan a success SMART BUSINESS RETIREMENT SOLUTIONS

2 How To Boost Participation In Your Company s 401(k) There are a lot of good reasons to encourage your employees to participate in your 401(k). The obvious reason is it can play a crucial role in their financial futures. Not only that, low participation among your non-highly compensated employees can make it difficult for your plan to pass nondiscrimination tests, resulting in restricted deferrals by highly compensated employees. And that s a problem because it may prohibit highly compensated employees from attaining their own retirement goals. The Earlier, The Better A basic rule of retirement investing is the earlier your employees start, the better off they ll probably be in the long run. Illustrations like our Early Bird Chart demonstrate the impact of the compounding of plan contributions made during a participant s younger years. Even small increases in plan contributions when employees are young can have a major effect on their plan balances at retirement age. Early Bird Chart Here s what can happen when $25/week is invested in your 401(k) plan starting at different ages. Assumes an 8% hypothetical annual rate of return. This chart is for illustrative purposes only and is not intended to represent any particular fund or investment. COUNTRY Financial does not imply any guarantee of investment performance or retirement benefits. The growth of your assets will be based on actual rates of return earned by the investments you choose. Past performance is not indicative of future results. 1 countryretirementplans.com

3 The chart is impressive and makes a strong case for encouraging participation. Simply showing your young employees a chart like this might get their attention, but by itself it probably won t convince them to enroll or start saving more. The good news is there are other ways to do that, and your plan s design can be a major contributor to your cause. Automatic Enrollment Be it lack of motivation or a lack of understanding, some employees who are eligible to participate in a 401(k) simply don t. In fact, about 30 percent of eligible workers don t. 1 Automatic enrollment is one way you can change that. According to the Department of Labor, automatic enrollment could cut that rate by more than half. How it works With automatic enrollment, pre-set elective deferrals to your 401(k) start as soon as an employee is eligible to participate. The set percent is withheld from the employee s pay and deposited in the plan. The employee does, of course, have the option to opt out of automatic enrollment, but making it automatic increases the likelihood that they ll stay enrolled. Pension Protection Act Incentives If you adopt automatic enrollment, pension law rewards you with some incentives: Nondiscrimination safe harbor 401(k)s have the option to follow certain safe harbor regulations that allow them to avoid top-heavy rules and bypass actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing. Default investments If the plan follows U.S. Department of Labor guidelines regarding default investments, you re protected from fiduciary liability for the investment of contributions made to the plan through automatic enrollment. Prohibitions on withholding Conflicts with state laws on wage withholdings without employee consent are eliminated. countryretirementplans.com 2

4 Increase Your Match People love getting anything free, and the lure of free money is a powerful motivator. Raising your corporate match to 50 cents or more per dollar of employee contribution can have a big impact on participation rates. If you don t want to raise your costs, consider reallocating an existing match so more is allocated to the first 3% or so of employee pay contributed to the plan. Allow Frequent Deferral Elections Allowing participants to change their contribution percentages frequently gives them the ability to adjust their take-home pay to meet expected expenses. When you give them the flexibility to stop and restart contributions more often, your employees may feel more comfortable keeping contributions high during normal times because they know they can cut back if they need the money for other purposes. In most cases, this means higher contributions overall. Add A Profit Sharing Feature You can add a profit sharing feature to your 401(k) in order to allow employees to participate in company profits. You generally make contributions to participating employees accounts from company profits using the method specified in the plan document. For you, a primary benefit of the profit sharing feature is its flexibility. You don t have to make contributions if there aren t any profits in a particular year. In fact, the plan can be structured so that even when there are profits, the annual contribution depends on your assessment of your ability to make the contribution. The effect of profit sharing can be very positive on your competitiveness, profitability, and workers. Employer profit sharing contributions to an existing 401(k) gives employees a personal stake in your company s welfare. Such contributions can: a Boost efficiency because employees feel personally responsible for profits a Limit losses and waste that discontent and carelessness can cause a Help cut employee turnover through rewarding continued service a Help improve employee job satisfaction a Add more financial security for employees retirement a Emphasize management efficiency and encourage personal quality control 3 countryretirementplans.com

5 Enrollment Meetings You might consider requiring employees to attend a meeting immediately before they re eligible to participate. If an employee declines, arrange for participation at another meeting. This helps keep the retirement savings message fresh in the minds of non-participants. Remember, the more opportunities employees have to enroll, the more apt they are to join. If possible, let employees attend meetings on company time rather than personal time to help improve attendance. Some employees may be resentful if they have to give up personal time to attend a company meeting. Education Counts According to the Profit Sharing/401(k) Council of America (PSCA), 78.6% of plan sponsors surveyed said one reason they offer employee education is to increase participation. 2 The PSCA study found that the most commonly used types of education materials are: Retirement Plan Education Material % Use by Plan Sponsors Enrollment kits 70.2% In-person seminars/workshops 63.5% Internet/Intranet sites 59.3% 52.5% Newsletters 48.9% Fund performance sheets 44.0% Individually targeted communication 40.4% Most of the sponsors responding to the PSCA s survey rely on their plan providers for employee retirement education. Investment Options If you have a participant-directed plan, be sure you have a good mix of diversified investment options for your participants. Periodic updates about those investment options can demonstrate you re on top of this important part of the plan. countryretirementplans.com 4

6 How Participants Decide How to Invest Retirement Plan Assets 3 Method Used by Participants to Select Investments % Participants Using Method Live meetings 58% Information read/downloaded from plan website 58% Interactive module on plan website with investment advice 18% Sell The Benefits Of The Plan Regularly Employers usually promote their 401(k) in a big way during initial enrollment. That s great, but all too often that s the one and only push for the plan. As a result, employee interest may falter. Consider providing an ongoing message through a periodic participant newsletter. Or, offering mini-seminars about topics related to your 401(k) can help eliminate some of the confusion surrounding the plan. Having a grasp of basic investing principles and how the plan works can go a long way toward improving attitudes about it. You might make a special effort to encourage employees to contribute more when they have more money. For example, when they get a raise, provide supervisors with contribution change forms to give to the employee during favorable salary reviews. Retirement Income Try to emphasize retirement income how much more income an employee s account might provide during retirement with just a 1% increase in contribution. This approach may have more meaning for a lot of employees rather than smiply emphasizing asset accumulation. 1 Automatic Enrollment 401(k) Plan for Small Businesses. Department of Labor, PSCA s 54th Annual Survey of Profit Sharing and 401(k) Plans 3 Spectrem Group, countryretirementplans.com

7 What a Difference a Percent Can Make! Take a look at the difference you could realize in your annual retirement income by making just a 1% increase to your 401(k) today. (see chart on next page) Annual Retirement Income From 401(k) Assumptions: Current gross income of $30,000, with an annual salary increase of 3%. Federal tax rate is 25%. Current age is 30 and retirement age is 65. The beginning 401(k) balance at age 30 is $1,000, with an annual rate of return of 6%, and employer match of 50% up to 6%. Annual income at age 65 is based on a 3% salary increase, resulting in a salary of $84,415 at retirement. This is a hypothetical chart to show the potential benefits of increasing your 401(k) contribution. It assumes that the rate of return will continue unchanged for all years. This is not likely to occur, and actual results may be more or less favorable than those shown. Results are for illustrative purposes only and do not represent or imply the actual performance of any specific investment. All investments involve risk and may result in loss of principal amount invested. There is no guarantee that the strategies will produce positive investment results. We Can Help Looking for an easy way to implement these participation boosters? We can help. Give us a call to learn more. countryretirementplans.com 6

8 Not FDIC Insured Investment management, retirement, trust and planning services provided by COUNTRY Trust Bank. No Bank Guarantee May Lose Value 7 countryretirementplans.com