Abstract
The intent of the paper is to examine current trends in the most commonly defined contribution retirement plan, the 401(k) plan. It will outline the best course of action to achieve an effective plan and maximize employee participation. This paper will review current mandates regulated by government agencies and explain the importance of remaining in compliance. Finally, the paper discusses best practices for implementation, as well as the best ways to promote a 401(k) plan within your organization. Throughout the process the details of the 401(k) plan at Tampa Bay & Company, a small sized organization, will be compared to other non-governmental company 401(k) plans to highlight specific examples and draw comparisons.

Overall 401(k) Trends
In response to the economic downturn there has been an increasing surge of employers who are lowering benefits associated with 401(k) plans. The most common trends are employers reducing the amount of match, reducing the portion of the match, or eliminating the match altogether. Over the past couple of years several surveys have been completed by investment firms, revealing that the number of employers who have decreased company contributions is on the rise. Some surveys show as low as a 7% decrease, but the majority of surveys claim that the amount is closer to 25% of employers who decreased matches or ceased employee contributions all together. Nearly two-thirds of employers still continue to provide matching contributions. This is astonishing, considering that 75% of all employers froze raises and/or reduced salaries in 2009. ( Metropolitan Life Insurance Company, 2010).
Participants have also decreased their contribution amounts while increasing their need for loans and hardship withdrawals. Due to the current economic conditions and the need for disposable income, 38% of participants have chosen to decrease their deferral amounts (Deloitte Development, 2009). Congruent with this trend, only 25% of employer 401(k) plans have a participation rate of 91% to 100% (Deloitte Development, 2009). Tampa Bay & Company has averaged over 97% participation over the past five years due to enhanced education and continuous promotion of the 401(k) plan. Unfortunately not enough companies share Tampa Bay & Company’s philosophy in stressing the importance of saving for retirement, for only 47% of working employees have an established retirement plan ( Metropolitan Life Insurance Company, 2010).
With the decreased level of contributions, due to the burdens of the current economy, many employees are choosing not to save for the future in preference of spending the money now. With that said, employers need to become even more pro-active in reviewing, administering, and promoting their 401(k) plans. 401(k) Compliance Review
In order to establish and maintain a successful 401(k) plan, employers and plan sponsors must start with an annual review of the plan to determine if the plan is in compliance with all of the Department of Labor's (DOL) guidelines. The DOL enforces a specific law entitled the Employee Retirement Income Security Act of 1974 (ERISA). It sets the standards for plan sponsors and administrators to follow. ERISA guidelines state that all plans must be in writing and effectively communicated to all employees. It mandates that the assets of the plan must be held in a trust and that the plan be for the exclusive benefit of employees and their beneficiaries. The plan is obliged to satisfy a certain minimum participation, vesting, and distribution requirements. In addition, the plan is required to be established and maintained by the employer, although funding contributions may be from the employer, the employee, or both.
The plan administrator is the person or entity ultimately responsible for daily plan operation. This responsibility is usually handled within the employer's organization. The duties of a plan administrator must act in accordance with the plan documents and ERISA requirements. The plan administrator is responsible for determining when employees become eligible for the plan. The administrator must provide plan information to employees, accountants, trustees, attorneys, auditors, or government agencies upon request. ERISA requires that an employer follow strict reporting and disclosure guidelines. As required by the law, administrators must furnish a summary plan description to each participant, which must be filed with the DOL. An information return, called the 5500, along with an audit and summary annual report, must be sent to the DOL each year to satisfy reporting requirements under ERISA and the Internal Revenue Code. The plan administrator must communicate plan provisions to both active and inactive participants. Finally, employers must maintain accurate records of all the employee information relating to the plan.
Administration and plan design are decided in-house and are closely guided by the plan sponsor. According to Grant Thornton's retirement plan survey of 2010, 65% of employers were in compliance. The amount is surprisingly high considering the complexity of compliance issues. Seventy percent of employers reviewed their plan within the last year and intend to continue to do so each year (Deloitte Development, 2009). Continually reviewing the plan is a key factor to achieve maximum effectiveness. Tampa Bay & Company is a part of the 70% of employers who review their plan thoroughly each year to examine compliance issues. The Internal Revenue Service (IRS) gives favorable tax treatment, according to the Internal Revenue Code, to qualified 401(k) plans. If a plan administrator fails to perform the aforementioned responsibilities, they will be subject to fines by the Internal Revenue Service (IRS) and/or the (DOL). The IRS can also take away a plan's qualified status and its favorable tax treatment, rendering the plan useless. The Internal Revenue Code also mandates ADP/ACP testing. Traditional 401(k) plans are the most flexible; however, they are subject to ADP/ACP testing each year to ensure the plan is not discriminating in favor of highly compensated employees. With that said, many employers are switching to a Safe Harbor 401(k) to avoid testing. According to Hewitt Associates, LLC, Trends and Experience in 401(k) Plans, 31% of employees are using the Safe Harbor plan and trending upward (2009). The primary issue employers have with the Safe Harbor plan is that it requires immediate vesting upon the initial employee contribution.

Fiduciary Responsibilities and Investments ERISA guidelines require that 401(k) plans have a fiduciary with discretionary authority and/or control over the management of a plan or the management or disposition of its assets. Tampa Bay & Company hires a third-party investment company to act as the plan sponsor and fiduciary over the assets of the plan as do many small businesses. The fiduciary gives investment advice and is responsible for running a plan. A 401(k) plan fiduciary must operate a plan solely in the interest of its participants and must act for the exclusive purpose of providing benefits and paying only reasonable expenses of the plan. At Tampa Bay & Company an investment committee usually exists to meet with the fiduciary each year regarding the performance and mix of investments.
The type of investments and amount of investments an employer offers, significantly contributes to the overall satisfaction and success of a 401(k) plan. According to Grant Thornton's Retirement Plan Survey, 72% of all respondents indicate that they offer between nine and 20 investment options (2010). One of the key issues in selecting a fund for a 401(k) plan for over 60% of employers are fees and expenses (Hewitt Associates, 2009). Other important factors when selecting new funds is to achieve diversity and choose well performing funds.
Tampa Bay & Company offers 20 investment options which are reviewed at least once a year to ensure that a proper mix of funds are available and that those funds are performing well. Often participants are confused about how to invest their funds. To overcome this confusion, 90% of employers offer some type of investment education to their employees (Hewitt Associates, 2009). The employer is limited in respect to the advice they can give regarding these investments, therefore a representative from the sponsoring company is often brought in to speak on the companies behalf. An additional source of education is one-on-one meetings with employee and a plan sponsor representative. Usually the fiduciary does not charge a fee for these educational services and employees welcome these meetings. Today most employees have access to their plans online, and the sponsoring companies provide on the plan from the type of investment to their performance over several years. Online tools are available to assist employees with properly reallocating funds and properly diversifying their funds based on age, deferral amount, and retirement age.
401(k) Effectiveness Review and Plan Options
In addition to a compliance review, it is essential for plan administrators to review the 401(k) plan documents each year to determine whether or not their 401(k) is meeting the needs of employees, in order to retain good talent, attract new talent and provide employee satisfaction. The review allows the employer to determine if their options are in-line with industry trends, their tools are the most up-to-date available, best practices are established, and strategic goals are met. It is customary to compare your 401(k) plan options with those of others in the same industry.
Although it is essential to use your 401(k) as a retention and recruitment tool, according to the Deloitte’s Benchmarking Survey, only 23% of companies actually use their 401(k) as a means to create a competitive advantage (2009). There are several plan options controlled by the employer that can be used to enhance their 401(k) plan. These include age requirements, plan entry requirements, matching contributions, discretionary contributions, vesting, and distributions. All of these options are guided by ERISA; however, the employer does have some flexibility in tailoring their plan to align with company strategies.
If an employer decides to add the minimum age requirement to their plan, the age could not be greater than 21 years. As stated in Deloitte’s Benchmarking Survey (2009), about half of companies do not have an age requirement, so employees 18 through 21 years of age may enter the plan upon service requirements. Tampa Bay & Company is part of the 34% of employers who have an age restriction of 21 years (2009). In Tampa Bay & Company’s plan, a participant must be employed for 12 months with the equivalent of 1000 hours worked. This enrolment waiting period is longer than most companies. Fifty-Two percent of employers allow employees to enroll in the plan immediately and 30% of employers have a three month waiting period (Hewitt Associates, 2009). The one year waiting period may be a detractor for employees who understand the benefits of a 401(k) plan and include those benefits in their total compensation package. Strategic goals and turnover rates should be reviewed to determine the most effective waiting period for a company.
By law, a plan can allow employees to contribute anywhere from 1% of pay to 100% of pay into the plan. Nevertheless each year the IRS guidelines place a cap on the maximum pre-tax salary deferral. The limit for 2010 is $16,000 and an additional $5,500 catch-up contribution for employees 50 years and older. Total contributions for all defined contribution plans must not exceed $49,000 in 2010 and 2011. Of the amount that the participant defers, Tampa Bay & Company will match up to 5% of discretionary pay at a dollar for dollar ratio. The dollar for dollar match is the most common. Most companies offer a match from 3% to 8% of pay with the majority of employers, 39%, averaging deferrals at 6% (Grant Thornton, 2010). Over the past couple of years, employers have chosen to reduce the percentage amount of the dollar for dollar match, or offer $.50 or $.25 on the dollar instead of eliminating matches all together.
Another way to enhance the 401(k) plan is to add a provision for discretionary contributions, also referred to as profit sharing contributions. Discretionary means that the employer chooses whether or not to make the contribution at the end of the year. If a contribution is made, the employer determines a fixed percentage based upon the employee’s gross compensation and then distributes that percentage to all employees. Alternatively an employer may choose to designate a specific amount for the total contribution, incorporating various formulas to ensure that highly compensated employees are not at an advantage. A meager 5% of companies offer a profit sharing option (Hewitt Associates, 2009).
An additional option employers should consider is their type of vesting schedule. Vesting refers to the time an employee must work for a company before they are eligible to retain the employer match upon their separation from the company. ERISA enforces the guidelines for 401(k) vesting schedules. The law states that any funds contributed to the plan through employee salary deferral or rollover contributions are always immediately vested. There are two types of vesting structures available, a cliff schedule and a graded schedule. In a cliff schedule an employee would go from 0% to 100% immediately after a three year service requirement. In a graded schedule an employee earns 20% percent of the employer portion after the second year of service until they reach 100%, or they become fully vested after six years. Employers should look at their vesting schedule and determine what they would like to accomplish. Do they wish to retain employers longer? If so they may choose the graded vesting schedule. If an employer's goal is to immediately attract talent, then they may want to use the cliff so that the employee is fully vested at three years as opposed to six years. Employers should refer to their strategic plan, their turnover rates, and their need for attracting immediate talent, when choosing which type of vesting schedule to implement.
Distributions are another component of a 401(k) plan. Plan participants may take distributions at retirement (age 59 and a half), death, and disability, without incurring additional tax penalties. In addition to these distribution avenues, loans and hardship withdrawal may be included to offer employees more options. Hardship withdraws, and loans if offered, should be highly discouraged by the employer so that the employee will achieve a maximum benefit upon retirement.
If an employee requests a 401(k) loan, the employee is required to make payments on principle and interest back to their account. According to a survey done by Hewitt Associates LLC, Trends and Experience in 401(k) Plans, 97% of surveyed plans offer a loan provision (2009). Employees should be reminded that a 401(k) is to provide retirement, and the money taken out for a loan is essentially taxed twice. The loan's are paid with after-tax dollars and then upon retirement the money is taxable a second time. The employee is also losing out on compounding interest the entire time the money is out of the account. If the employee moves forward with the loan, they may take a maximum of 50% of their vested balance with a minimum of $1000 and a maximum of $50,000. Some 401(k) plans limit the number of loans to one per year, as well as the amount of time given to repay the loan. If employment ends, the loan becomes payable in full or it will be treated as a withdrawal, and taxes will be incurred. Penalties will also be incurred if the employee is younger than 59 and a half.
A hardship withdrawal may be taken as a last resort providing the employee exhausts all other options, such as loans, and the situation is for a specific event. Up to 100% of the present value of an employee’s contributions is eligible for hardship withdrawal; however, the amounts may not exceed the amount of the documented financial hardship. Federal regulations state that financial hardship includes payment of medical expenses if they exceed 7.5% of gross income, purchasing a home, stopping foreclosure of a primary home, stopping eviction from a primary home, repairs on a primary home, or payment for post secondary educational expenses for the employee and his/her immediate family. The employees must pay taxes and penalties on the funds from a hardship withdrawal, and they may not contribute to their plan for six months. In 2009, 9% of companies offered a hardship withdrawal feature, and of those employers, 34% saw an increase in hardship withdrawals (Grant Thornton, 2010).
Promotion of a 401(k)
The most significant way to promote a company retirement plan is to create awareness. At Tampa Bay & Company the first phase in educating employees on the 401(k) plan is to describe it fully upon their arrival. The next step is to set a meeting approximately one month prior to the employee’s enrollment date. At that meeting, the employee is given access to the provider's website and presented with a summary plan description. During the enrollment meeting, an employee receives an explanation of the plan enrollment process, including deferral options, investment options, beneficiary requirements, and rollover options. The employee is also presented with several examples directly corresponding to their age, the amount of money they wish to defer, and how that money compounds exponentially over the remainder of their working years. The employees are given comparisons on participants who contribute immediately verses those who choose to wait. To cite one example, if Employee A contributes $2000 a year from ages 21 to 31and then stops, and Employee B contributes $2000 a year from 31to retirement age (65), then Employee A will have more money upon retirement. Additional examples would demonstrate how their retirement balances are significantly affected by small increases like 1% per year, or the difference in their take home pay in comparison with their deferral and a company match.
A step-ahead program is offered to all employees, allowing them to automatically increase their 401(k) deferral 1% each year. This plan, although named differently from company to company, is growing in popularity. An employee’s starting deferral rate is highly encouraged to be at least 5%, so that they do not forgo any of the company’s generous match of 5%. Many companies are also choosing to go with an automatic enrollment feature. Currently 61% of companies have implemented an automatic enrollment process (Grant Thornton, 2010). Unfortunately, with the current downturn in the economy, 12% of employees who were automatically enrolled decided to opt out of the plan (Deloitte Development, 2009).
It is crucial that the promotion of increased deferrals does not stop after enrollment. Increased participation across the board minimizes or eliminates refunds from highly compensated employees. Most importantly, it encourages the employees to save and be finically prepared for retirement. Plan administrators must familiarize employees with the plan sponsors website, so that they are comfortable with all the tools it has to offer. If an employee does not have home or work Internet access, a kiosk should be made available so that the employee can manage their 401(k) plan. Plan administrators should ensure that their onsite and in-person educational sessions are well promoted to receive maximum participation. Additional Tools and Trends for Prompting 401(k) Plans A new option in 401(k)’s is the Roth feature. This feature allows participants to contribute into a Roth IRA regardless of their income, which allows them to pay taxes now and then forgo paying taxes upon disbursements at retirement. The Hewitt Trends and Experience in 401(k) Plans research claims that 4% to 22% of participants who were offered the Roth 401(k) feature took advantage of the Roth alternative (2009).
Additional ways to promote a 401K plan may include establishing a 401(k) day at the workplace, participating in the National Save for Retirement Week, distribution of 401(k) pamphlets with pay stubs, and reminding employees of their 401(k) options upon pay increases. More and more plan sponsors are offering account information on Twitter and Facebook. Those in the electronic age may also choose to have their fund balances texted upon change.
Another option is for the plan administrator to send letters home, promoting discussion among employees, their spouses, and/or beneficiaries. When an employee requests to change his/her beneficiary, or the employee receives a raise, the plan administrator should take those opportunities to discuss the employee’s 401(k) plan. For the plan administrator to effectively manage the 401(k) plan, it is essential that they are very familiar with the federal compliance guidelines and regulations. The administrator should understand the strategic goals of the organization so that they are able to make correlating choices regarding 401(k) plan options. Once the proper knowledge is obtained, an administrator is able to effectively communicate the plan to employees and continually educate them on their options, so that they may be better prepared for their retirement.

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