What advice would you give employers regarding the importance of internal communications to employees relating to their 401(k) plan?
JA – Internal communications plays an important role in promoting understanding of the Plan and its benefits, as well as encouraging participation in the Plan. Employees who hear about the Plan from their managers will know that their employer feels it is an important benefit. It’s easy for employees to get wrapped up in their day-to-day responsibilities and forget to enroll in the Plan or review their current elections to determine if any changes are warranted. This type of inertia prevents employees from saving and preparing for retirement. Internal communications can help prevent this from occurring.
What would constitute a good method of communicating information about 401(k) plans to employees?
JA – Communications should be two-fold: written and verbal. With written communications, employers can provide employees with documentation for them to reach and keep as a reference. Verbal communication, through employee meetings, can provide a forum for the employees to ask questions as well as to hear answers posed by others that might not have occurred to them.
From the employees’ side, what should they be doing to gain the most from their company’s 401(k) plan?
JA – Those individuals whose employers provide a company match should be contributing at least up to the amount that the employers will match in order to gain full advantage. All employees should be increasing their contributions on a yearly basis as their salaries increase.
Are there special caveats you advise employers if their workforce consists of many older employees? Younger employees?
JA – If the Plan is not a safe harbor plan then the make-up of the workforce can make a difference in the outcome of the company’s annual plan testing. Those clients with a larger population of older employees may be looking at a decrease in participation as these employees retire. They will need to ensure communications to newer employees to encourage their participation. Those with a large population of younger employees may struggle to gain employees’ interest in joining the 401(k) plan as younger employees generally are at a lower pay scale. To both of these groups, I would encourage auto-enrollment as a means to get younger workers into the Plan. Communication is also important to ensure that all of the employees understand the importance as well as the benefits of enrolling in a 401(k) Plan.
As we approach year-end, what are some of the steps employers should advise their employees to take regarding their monitoring and maximizing of their 401(k) benefits?
JA – Employees should make sure that they contribute the maximum that they can. If they can reach the annual IRS maximum for the year ($16,500 for 2010) and their employer matches a portion of their contributions each pay period, they should make sure that they do not reach the maximum too early in the year or else they will miss out on employer contributions. For example, if an employer matches 100% of the first 3% that the employee contributes, the employee can reach the annual limit of $16,500 at the end of November and will not receive the employer matching contribution for any paycheck in December. Employees in this situation should level their contributions so that they are spread evenly over all paychecks.
Are there any tax regulations which impact 401(k) plans that employers and/or employees should know?
JA – The Pension Protection Act (PPA) of 2006 made a number of changes to 401(k) Plans that included making permanent many of the EGTRRA provisions that were scheduled to sunset in 2010. These changes are:
- Increasing the 401(a)(17) limit for participant’s annual compensation ($245,000 in 2009 and 2010)
- Increasing the 401(g) elective deferral limit ($16,500 in 2009 and 2010)
- Providing for catch-up contributions up to $5,500 for those who are 50 or older
- Providing the availability of Roth accounts under 401(k) plans
- Providing for a maximum 6-year vesting scheduled for employer matching contributions
The PPA also created a pre-emption to any state law that may prohibit or otherwise conflict with an automatic enrollment feature in a 401(k) Plan thereby allowing Plan Sponsors to add this feature to their Plan without fear of legal issues.
All tax-qualified defined contribution plans must provide participants with diversification rights with respect to amounts invested in publicly-traded employer securities. This diversification rule requires participant notification, and varies according to the employee’s years of service with the company, as well as the type of contributions in the plan (i.e., employee, employer, etc.). Note: This does not apply to the Alcott HR Group 401(k) Plan as there are no employer securities in our Plan.
Additionally, a new distribution rule allows non-spousal beneficiaries to directly roll over money from tax-qualified retirement plans, tax-sheltered annuities and government Section 457 Plans to an IRA.
Any other comments?
JA – If you are a client of Alcott HR Group and feel your employees are not maximizing their participation in our Plan, they should contact Alcott HR Group and speak with me (Jeanne Anderson) to learn how they can more fully utilize the Plan.