A number of recent studies indicate that significant improvements can be made in 401(k) plan participation and 401(k) savings levels through plan design changes.
Plan Saving Features
Features to promote 401(k) savings that you may want to include in your plan:
This is a feature whereby participants are automatically enrolled in their plan as soon as they become eligible, based on plan design. Forms are completed at the time the participants receive their initial benefit package, and a reminder is sent the month before pay check deferrals start.
The enrollment forms can allow participants to elect to have their contributions increased by a dollar amount or percentage automatically at a specified time (e.g. annually).
Many plans allow participants to elect to defer a percentage of their bonuses into their plan. This election is usually made during enrollment and when bonuses are paid, the percentage is pulled out and sent to the plan automatically.
Asset Allocation Models or Target Date Funds
Offering model portfolios on your plan makes it easier for participants to select the investment options during enrollment, and can account for overall increased plan diversification.
Simply having a 401(k) allows employees to make the following 401(k) savings:
- Pre-tax salary deferrals of up to $17,5001
- Individuals age 50 and older are allowed to make a $5,5001 catch-up contribution if meeting the lesser of the plan or IRS limit
If you a make a match, the company contributions are tax deductible; pre-tax contributions and earnings are tax deferred
You can boost 401(k) savings by adding a profit sharing plan to the 401(K) plan. This lets your company make discretionary contributions.
- Provides plan design flexibility
- Allows varying levels of contributions each year
Profit sharing Allocation formulas
ERISA allows for several different allocation formulas for sharing profits. You can allow contributions to favor certain classes of workers. This method can help the owners and highly compensated employees in the retirement efforts and also decrease the overall plan cost to the company. The IRS requires a specific, pre-determined formula for allocating profits to employees. The four formulas to choose from are described here:
Pay-to-Pay: Based on participant’s pay. Each participant receives an allocation based on the ratio of his or her eligible pay to the total payroll of all plan participants.
Integrated: Allows you to give a larger percentage of the contribution to higher-paid participants for wages above a pre-selected amount. This method integrates the plan with a participant’s Social Security benefit.
Age-Weighted: Gives each participant a share of the contribution based on his or her age and compensation compared to other participants. This results in older participants with higher salaries receiving a larger share of the plan contributions.
Comparability: Contribution is tailored to a specific group. Attempts to maximize the contributions given to a select group of your most valued plan participants while giving the minimum contributions necessary to pass required testing to the remaining participants. Identifying factors for your select group may include age, title or ownership.*
The chart below shows an example of how the same plan contribution amount ($109,050) can be allocated given the various allocation methods.
|Name||Age||Income||Pay-to-Pay Contribution||Integrated Contribution||Age-Weighted Contribution||Comparability Contribution|
|% of Budget||73%||77%||85%||92%|
|Tax Savings at 31%||$33,806||$33,806||$33,806||$33,806|
|Net Employer Cost||$75,244||$75,244||$75,244||$75,244|
|Changes in employee group can change allocation|
* Table for illustrative purposes only.