Preventive medicine is one of today's fastest growing medical specialties. The theory that a healthy diet and lifestyle plus regular checkups can reduce the likelihood of life-threatening or disabling illnesses has gained almost total acceptance.
The same preventive philosophy can be applied to your 401(k) salary deferral plan and to other employee benefit plans. It makes sense. Regular checkups of various plan features can ensure that your plan continues to function smoothly and effectively.
In general, a 401(k) plan is a retirement plan in which the employee elects to defer receiving — and paying income tax on — a certain percentage of his or her salary. The deferred amounts are placed in the employer's tax-qualified retirement plan. Employer may make matching contributions on behalf of employees.
What features of a 401(k) plan should be checked regularly by the plan sponsor? The following points may give you some ideas.
Education: The more employees are convinced of the wisdom of saving for retirement, the greater the level of employee participation in the plan. And the greater the level of participation in the plan, the more the plan can benefit all employees — including the highly compensated. Regular meetings, newsletters, and handouts are critical means of communicating plan advantages. You should ensure that your education and communication practices are updated and regular.
Matching Contributions: Keeping it simple should underscore your approach. Complex matching formulas have proven to be no more effective in increasing employee participation in a 401(k) plan than simpler matching formulas. Also, simple matching contributions result in lower administrative costs for your plan.
Contribution Size: Surveys and studies show that matching contributions of less than 25 cents per dollar contributed by employees are not very effective in increasing participation in a plan. Also, statistics show that plans with a 50-cent match result in at least 75% or more eligible employees electing to participate. Checking the size of the match and the level of employee participation should be a regular exercise.
Plan Investments: For the majority of employees who have neither the understanding of a wide range of investment vehicles nor the inclination to acquire that understanding, keeping the number of investment choices limited to a few, clearly distinct alternatives makes sense.
Testing for Compliance: Regular testing to ensure the plan is able to pass the many nondiscrimination tests mandated by the tax law is crucial if key employees are to be allowed to maximize their contributions.
Administration: Plan participants want to receive correct and timely statements and benefit payments from the plan trustee. When the administration of the plan is inept, employee participation — and confidence in the plan — can plummet. Do you monitor the timeliness and the correctness of your plan statements and participant benefit payments regularly?
When you take the time to regularly review the basic components of your 401(k) plan, you help ensure that the plan will continue to operate smoothly and confer its many benefits on both employees and employer. If we can help you in your review, please contact us at (585)419-0670.