Creekbaum: Employee education can effectively boost 401(k) participation
September 3, 2011
I have noticed many employers in the area who sponsor a 401(k) plan are looking for ways to boost employee participation in the plan. One way for companies to raise participation rates is by increasing the company’s matching contribution. However, certain types of employee education may increase participation rates nearly as effectively as matching contributions and at a lower cost.
For a 401(k) plan to maintain its tax-qualified status, the plan must satisfy certain tax law requirements. One of the requirements is that the plan cannot discriminate in favor of highly compensated employees. Highly compensated employees are those employees who were paid more than $110,000 in the past year or own more than a 5 percent interest in the employer in the past year or in the current year. Many employers need to increase the participation rates of their non-highly compensated employees so that their 401(k) plan will pass a special nondiscrimination test that must be performed each year.
Targeted communications can be as effective as an increased company matching contribution in boosting plan participation. Targeted communications include generic newsletters and statements prepared by consulting firms or investment managers that discuss current financial market trends, personal investment strategies, and the economic outlook. Communication materials that are tailored to the company’s plan that give more information about the specific plan and suggest appropriate savings levels are also potential targeted communications.
Employee education can not only increase participation rates, but may also increase the amount employees contribute to the plan and change the way in which participants invest their plan account. This is good news for employers. If your company can’t afford to offer a higher match rate, you might be able to improve results by providing education about investment and savings principles to your employees, at a considerably lower cost. The education may boost your plan enrollment rates while helping employees make the most of the retirement plan.
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