How to plan a 401 (k) tailors you and your employees will like
Designing a 401 (k) plan is like building a house. It takes care, attention and the help of a few skilled professionals to create a plan that works for both you and your employees. Indeed, thoughtful planning can help motivate even reluctant retirees to start investing for their future.
When you begin the 401 (k) design process, there are several options to consider. In this article, we will take you through the most important choices so that you can make a well thought out decision. Since certain preferences may not be available on different price models from a particular provider, make sure you understand your options and the trade-offs you are making.
Let’s get started!
401 (k) Qualifications
When do you want employees to be eligible to participate in the plan? You can choose to qualify employees:
- Immediately – as soon as they start working for your company
- After a certain length of service – for example, hours, months or years of service
It is also customary to have an age requirement (for example, employees must be 18 years of age or older to participate). Also, you may want to add an “employee exclusion” to prevent part-time, seasonal or temporary employees from participating in the plan.
Once employees qualify, they can enlist immediately অথবা or, you can limit enrollment on a monthly, quarterly, or half-yearly basis. If you have immediate 401 (k) qualifications and enrollment, theoretically, more employees can participate in the plan. However, if your company has a high turnover rate, you may want to consider adding service length requirements to eliminate the unnecessary administrative burden of maintaining a much smaller account of employees with your organization.
Enrollment is another important feature when creating the structure of your plan. You can simply allow employees to register themselves, or you can add an automatic enrollment feature. Automatic enrollment (otherwise known as automatic enrollment) allows employers to automatically deduct elective delays from employee wages unless they contribute.
Through automatic enrollment, all employees become enrolled in the plan at a fixed contribution rate if they become eligible to participate in the plan. Employees have the freedom to change and change their contribution rate and investment at any time.
As you can imagine, automated enrollment can have a significant impact on participation in the plan. In fact, according to a study by The Pew Charitable Trust, participation rates in automated enrollment 401 (k) plans are over 90%! This is in stark contrast to the 50% participation rate for plans where employees need to be actively selected.
If you decide to auto-enroll, carefully consider your default contribution rate. A 3% default contribution rate is still the most popular; However, more employers are choosing higher default rates because research shows that opt-out rates do not change significantly even if the default rate increases. Many financial experts recommend a savings rate of at least 10%, so employees tend to get more heads using the default rate of high automatic enrollment.
You are permitted to exclude certain types of compensation for the purpose of the plan, including the benefits accrued before entering the plan and the compliance test and the benefits for allocating employers’ contributions. You can determine your compensation:
- W2 (Box 1 Wage) Plus Delay – Total taxable wages, tips, rewards and other compensation
- 3401 (a) Wages – All wages considered for the purpose of withholding federal tax, required additions to the W-2 wages listed above
- Section 415 Safe Harbor – All compensation received from the employer which includes total income
Want to encourage employees to enroll in the plan? A great place to start for free money! This is why more employers are contributing to profit sharing or mills.
In fact, EBRI and Greenwald & Associates found that about 73% of workers said they could save for retirement if their contributions were matched by their employer.
Some of the more common employer contributions are:
- Contributions to Safe Ports – In addition to the added bonus of being able to avoid time-consuming compliance tests, secure port contributions often follow one of these formulas:
- Basic Safe Harbor Match:The employer matches 100% of the employee’s contribution, up to 3% of their compensation and the next 2% matches 50% of the compensation.
- Advanced Safe Port Match:Employers match 100% employee contributions, up to 4% of their compensation.
- Unconventional contributions:Employers contribute %% of each employee’s compensation, regardless of whether they make their own contribution.
- Contributing to the consideration – You decide what percentage of employee 401 (k) will match and what percentage of the maximum salary to match. For example, you can choose to match up to 50% contributions up to 6% of the compensation. One advantage of making a discreet matching contribution is that you maintain flexibility to adjust the matching rate to suit the changing needs of your business.
- Unconventional contributions- During each pay period, your employees have the option to contribute to a 401 (k) account, regardless of whether they contribute. For example, you can make a profit sharing contribution (a kind of non-elective contribution) as a percentage or a single amount of employees’ salaries at the end of the year.
In addition to helping your employees make their leisure nest eggs, employer contributions are also tax deductible (up to 25% of the total eligible compensation), so it may cost less than you think. Also, the contribution of an employer can play a key role in hiring and retaining top employees. In fact, an improvement study for business found that more than 45% of respondents considered the 401 (k) match as a factor when deciding whether to accept a job.
401 (k) to be assigned
If you choose to contribute to an employer, you must decide on a vesting schedule (an employee’s own contribution is always 100% deducted). Remember that all employer contributions are immediate and 100% paid as part of a safe port plan.
The three main vest schedules are:
- Immediately – Employees are immediately credited 100% of the employer’s contribution to themselves (or themselves) as soon as they receive them.
- Grade – Slowly vesting is. For example, on a six-year graded schedule, employees may be assigned at a rate of 20% per year until they are fully assigned.
- Cliff – After a certain period of time, the entire employer’s contribution becomes 100% at once. For example, if you have a three-year cliff vesting schedule and an employee leaves after two years, they will not receive any employer contributions (only their own).
Like your eligibility and enrollment decision, assignment can also affect employee participation. Immediate assignment can provide an additional incentive for employees to participate in the plan. On the other hand, a long vesting schedule can encourage employees to stay in your company for longer periods of time.
Service calculation method
If you decide to use the length of service to determine your eligibility and vesting schedule, you also need to decide how to measure it. In general, you can use:
- Time spent – Term of service as long as the employee is employed at the end of the period
- Real time – The actual hours worked. With this method, you need to track and report employee times
- Actual Hours / Equivalents – A formula that credits employees with a certain number of pay periods (for example, monthly = 190 hours)
401 (k) Lifting and .n
Naturally, there will come a time when your employees will need to withdraw money from their retirement accounts. The design of your plan will have rules for outlining withdrawal parameters:
- Withdrawal of service (received at age 59)
- Eligible Domestic Relations Order (QDROs)
- Required Minimum Delivery (RMDs)
Also, you must decide whether participants will be allowed to take 401 (k) plan loans (and the maximum amount of the loan). Although loans have the potential to shatter employees’ dreams of retirement, having a loan system means employees can access their money if they need to and employees can repay themselves and repay interest. If employees are reluctant to participate because they fear that their savings will be “shut down,” the loan provision can help allay that fear.
When it comes to investment methods, there are many strategies to consider. Your plan provider can help guide you through the choices and related fees. At Betterment, for example, we believe that ETFs provide investors with significant diversity and flexibility at low cost. In addition, we combine ETFs with personalized, unbiased advice to help today’s retirees pursue their goals.
Take the help of experts
Your 401 (k) plan provider can help you go through your plan design choices and help you create a plan that works for your company and your employees. Once you have decided on the design of your plan, you need to codify those features in the form of a formal plan document to manage your 401 (k) plan. At Betterment, we draft a planning document for you and provide it to you for review and final approval.
Your business will probably grow – and so will the design of your plan. Massive increase in profits? Consider adding an employer match or profit sharing contribution to asset sharing. Participation plans stalled? Consider adding an automated enrollment feature to engage more employees. Employees worried about access to their money in an uncertain world? Consider adding a 401 (k) loan feature.
Need a little help figuring out the design of your plan? Talk to Betterment. Our experts make it easy for you to deliver 401 (k) to your staff quickly and easily – all for a fraction of the cost of most suppliers.