Make Your 401(k) Plan Better Than OK

We all know that 401(k) plans are an attractive option for a company's workforce. It allows employees to plan for retirement and promotes financial security, which in turn leads to high morale. They also put employers who offer them in a better position to attract and retain talented employees. But how can these plans be improved for their current and potential employees? Here are five ways:

1. Increase employer contributions.

This is probably the easiest way to attract top job applicants and increase employee morale. There are different ways that an employer can make 401(k) contributions. The standard method is for an employer's contribution amount to be dependent on the amount that an employee contributes. Employers can also make “nonmatching contributions,” which are lump-sum contributions that are not dependent on the amount an employee contributes to the plan.

2. Create an automatic enrollment plan.

According to the U.S. Labor Department, 30 percent of employees who work for an employer with a 401(k) plan do not contribute to it. However, the Labor Department estimates that this number would shrink by half if the employer had an auto-enrollment 401(k) plan. Here's how it works: A small amount of an employee's salary is automatically defaulted into a particular 401(k) investment, and the employee is provided notice and an opportunity to opt out of this automatic enrollment. In practice, few employees opt out of automatic enrollment.

3. Make sure your plan offers target-date funds.

A target-date fund is an investment vehicle with an asset allocation that becomes more conservative as the employee approaches a given target date, usually the employee's desired retirement year. These types of plans are popular, and employers are even using these funds as default investments for automatic enrollment.

4. Shorten or eliminate eligibility periods.

The increasing trend is to eliminate eligibility restrictions and allow employees to start contributing to their 401(k) plans from the first day. This allows the employee to invest earlier and take advantage of tax benefits.

5. Communicate about the plan details.

There can often be many details regarding an employer's 401(k) plan, including the types of investments offered, investment fees and more. Employees appreciate having as much information as possible, and employers who take the time to communicate to their employees about the 401(k) plan will likely see more investment in the plan and more content employees.

Daniel R. Saeedi is an attorney at Taft, Stettinius & Hollister. To comment, email editors@workforce.com.

Tags: 401(k), retirement

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