Your 401(k) program is one of the best benefits you can offer your employees. It provides numerous potential advantages to both your business and your workforce. With so much to gain, why is 401(k) participation weak among many companies across the country? If this is the case for your business, it may be time to reevaluate your retirement program to spur some well-deserved excitement for this valuable benefit and get more people on board.
How your company's 401(k) impacts participation
Successful participation in your IRS-qualified 401(k) program is important for both your business and your employees. In some cases, participation may be low enough to make the plan fail the 401(k) Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) nondiscrimination testing. According to the IRS, a plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of owners and managers (also called key employees) is more than 60% of the total value of the plan assets. Key employees (as of 2019) are officers making over $180,000, a 5% owner of the business, or an employee owning 1% of the business and making more than $150,000 for the plan year.
Top-heavy plans not only trigger required contributions from the employer on behalf of "non-key employees" but also signify that many of your employees who might benefit the most aren't participating. To enjoy the advantages of offering a 401(k) plan, your employees need to enroll.
Why don't my employees participate in my 401(k) plan?
Reasons employees don't participate can be multidimensional. When identifying reasons, realize that it may be more than a single element in an employee's personal and financial situation. Consider the following reasons:
- Your employees may think they are too young to think about retirement. For a newly hired employee fresh out of college, hitting retirement age might seem like an eternity away. More immediate needs like student loans and cost-of-living realities are likely culprits of diverting their attention from the importance of long-term saving.
- You offer a limited or no range of benefits. Employees are more engaged with a company that offers a range of benefits. In other words, if you want engagement, you need to give your employees reasons to do so. When they do, they're far less likely to leave your business to search for work elsewhere.
- Your business doesn't match employee contributions. Matching an employee's 401(k) contribution is a significant incentive for employees to enroll and stay with a company. Since your matching contributions are tax-deductible, it's an incentive for you too.
- You haven't adequately communicated the availability of the 401(k). Before an employee can participate in a 401(k) plan, that employee needs to know that one is offered and that it's easy to join. If your employees didn't opt for enrollment when they were hired, they may need reminders, encouragement, or education about enrolling in the future.
Reviewing your business's current 401(k) plan
An annual 401(k) plan review is the best way to make sure you're on track to encourage participation and enjoy the benefits it can offer. Here's what you need to know about 401(k) benchmarks, what benchmarking your plan entails, and what your business could gain from doing it.
What is 401(k) benchmarking?
Benchmarking your 401(k) is the process of reviewing and assessing your current plan to decide whether it needs modifications or is serving its purpose to your employees and your business. Points of reference may include things like 401(k) participation rates, options offered, current tax deductions, potential tax deductions, and more.
Benefits of benchmarking your plan
Systematically going through your company retirement plan is a great way to determine whether it's maximizing its potential to your business and your employees. As your business evolves and regulations change, you may discover improved ways to organize and provide opportunities for your employees to save for retirement. By setting up 401(k) benchmarks, you can:
- Protect your business. Rules and regulations often change, and it's important to know that your plan is staying current with IRS code. As the employer and plan sponsor, it's your responsibility to stay compliant. Conducting an annual retirement plan checkup can help you avoid any expenses associated with noncompliance.
- Turn your 401(k) into a powerful recruiting tool. A retirement plan enables small businesses to compete with bigger companies when trying to attract qualified job candidates. As candidates consider multiple job offers, benefits packages become an important factor.
- Improve retention. Once you hire star talent, keeping your 401(k) updated — along with regularly identifying ways to improve it — can help keep your employees happy. Losing and replacing a good employee is costly, while keeping them improves morale, productivity, and engagement.
- Reduce overall employee stress. Chronic stress affects physical health and productivity in the form of more sick days taken and distracted workers. Anxiety over finances can contribute significantly to chronic stress. Benchmarking your 401(k) program to increase enrollment and help employees maximize their retirement savings benefits can translate into employees enjoying healthier financial well-being and the peace of mind that goes with it.
How to benchmark your 401(k) plan
For business owners, there are a few things to consider when reevaluating a 401(k) program, according to the Association of International Certified Professional Accountants (AICPA). Here is a five-step process for evaluating your retirement strategy:
- Review your options to be sure you're maximizing your tax-deductible savings.
- Look over your current plan costs: The plan costs disclosure 408(b)(2) regulation outlines the costs a provider is required to disclose.
- Think of ways to reward employees by adding options such as profit sharing.
- Examine the provisions in your plan to ensure that it allows you to save enough in its current form. The IRS provides a 401(k) benchmark checklist that serves as a guideline for reviewing the requirements for operating a 401(k) plan.
- Consider offering a Roth 401(k) option, which uses after-tax dollars and allows for tax-free withdrawals during retirement.
Rules around 401(k) plans change annually. Review the cost-of-living adjustments for the current year in the following key areas:
- Increases in the basic salary reduction limit for 401(k) plans.
- Increases in the maximum deductible employer contribution for Simplified Employee Pension (SEP) and profit-sharing plans.
- Increases in the annual maximum benefit for pension plans.
- Changes to the maximum amount of taxable compensation for qualified retirement plans.
Set up some time for a 401(k) plan review with your plan administrator and your financial advisor to discuss adding or changing options that are beneficial to you and your employees.
Encouraging employees to participate in your 401(k) plan
Offering a 401(k) plan makes great business sense. However, it only works when employees participate, and sometimes obstacles get in the way. Whether it's the idea of setting time aside to speak to HR, logging on to a computer and setting up an account, or general anxiety over financial management, employees who are intimidated by the process may need some assistance. Considering the importance of employee benefits, ample 401(k) communication to employees is key. Make use of your benefits administration platform to provide valuable information for your staff. There are several ways to do this:
- Provide detailed materials. Consider providing a range of formats such as hard copy (e.g., flyers, newsletters, or even table toppers for the break room), online interactive methods, video, lunch-and-learn seminars, and even face-to-face Q&A sessions with HR.
- Partner with your plan administrator. Develop materials that explore investment options and provide details about how the investments work.
- Bring a plan expert on-site. Before or during an annual benefits enrollment period, having a person to talk to, provide an overview of 401(k) plans, and answer questions in person could help drive enrollment.
- Make the enrollment process itself easy for employees to complete. Providing seamless online access helps minimize challenges, provide flexibility, and centralize information about plan options (you may even want to host a session where employees work with HR to learn about the retirement plan and enroll on the spot).
- Provide regular updates. After employees are enrolled, providing updates on their investments is an excellent way to keep the interest level up in your program. As their understanding of retirement plans grows, their interest, participation, and overall financial fitness should increase as well.
- Share employee success stories. Communicating successful enrollment stories along with tips on getting the most from the plan can have a positive effect on participation.
Consider taking advantage of your plan administrator to provide regular plan sponsor support and communications. Learn more about how Paychex retirement services can help you get the most from your 401(k) program. Do it for better financial health for you, your business, and your employees.