Today’s economic challenges have every employer actively trying to make do with less. Revenues have declined and budgets have shrunk. Employees have increased responsibilities, often with less pay. How can an employer attract and retain good talent in this sort of environment? One overlooked tool at their disposal is the company’s 401k plan.
Most comprehensive compensation packages now include an option to participate in the company’s retirement plan. In fact, it has come to be an expected benefit. But for those actually tasked with setting up the company’s retirement plan, usually a 401k plan, it is often treated as a necessary burden, overwhelming in its detail, paperwork, and fiduciary responsibility. It is no wonder that the purpose of the 401k gets watered down, and a prime opportunity to provide a valued benefit to current and future employees is lost.
What Is The Purpose of a 401k?
Many employers think that the purpose for a company 401k is to provide for their employees’ retirement, which is certainly true. But since other types of retirement plans can also do this, we would argue that the real purpose of a 401k is to provide a recognized, understandable benefit that employees appreciate. It should give them another reason why they are glad to be part of your organization, demonstrate that you care about their future, and contribute to a positive corporate culture.
The fact is that there is a great deal of flexibility in designing a 401k plan to meet the specific needs of your employees. You are in control and have an opportunity to create a benefit that contributes to higher morale and lower turnover.
Design Elements of a 401k
While various 401k providers (typically a bank, mutual fund, insurance, or brokerage company) offer great flexibility in designing a plan, others offer a one-size-fits-all approach. Accordingly, 401k plans vary in features and costs. Please keep in mind there are nuances to all of the following, but this should serve as a general checklist of the variables you control in order to design a 401k that fits your needs:
- · Eligibility
- · Enrollment frequency
- · Employee contributions
- · Matching contributions
- · Rollover contributions
- · Vesting schedule
- · Investment options
- · Loans
- · Hardship withdrawals
Some of these 401k variables have minimum and/or maximum restrictions determined by the government. But within each category, you still have the ability to customize the features based on what best fits your situation. In addition to these variables, there are some other issues to address:
- · How to avoid anti-discrimination regulations (highly compensated issues)
- · Whether to bundle or unbundle plan components (investment options and administration)
- · How to control costs (set-up & annual costs, investment expenses, deferred sales charges)
- · Who pays these costs (employer or participant)
Remember that the primary purpose of the 401k is to provide a real benefit that employees recognize as such. If your employees are confused or intimidated by the 401k, they will not see it as a benefit and they won’t participate to the fullest extent. In short, you will not have achieved your primary objective.
On the other hand, if your employees are comfortable with the plan and the options they have, and if they are confident in the decisions they make regarding contribution level and investment selection, they will view the 401k plan as a tremendous benefit.
Helping participants actually make decisions about how much to contribute and how to invest those contributions in the plan is vital to high plan participation. Unfortunately it is something that most 401k providers won’t do. You have to decide whether you can do this without assistance, whether your provider will perform adequately in this area, or whether you might want to hire a financial consultant who will provide this service by making clear and specific recommendations to your employees based on their individual situations.
The 401k plan should be an easily understood and appreciated benefit. Those who do their due diligence can design a plan that is tailor-made to fit their corporate needs. Although this article doesn’t address all the variations that are available, there are ways to structure 401k plans to meet the different needs of different classes of employees within the same company.
The bottom line is that you are in control of how good your 401k plan is and how well it is received. A well-designed plan coupled with on-going participant education and investment advice will communicate value and go far to meet the felt needs of all employees.