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401(k) plan sponsors generally do not relish the annual call from their 401(k) consultant with their plan's nondiscrimination testing results. If your plan regularly passes testing, that's great news. However, if you are not so fortunate or your plan is on the cusp, there are steps you can take to greatly increase your plan's chances of success. This article discusses those choices.
Just changing your matching structure without increasing the dollars involved can drive behavior. For example:If your current match is 50 percent of the first 4 percent of pay contributed, you will probably find a large number of non-highly compensated employees contributing at the 4 percent level.If you were to change that match structure to 25 percent of the first 8 percent of pay contributedand couple that move with effective education, your plan would most likely see an immediate migration toward the 8 percent of pay contribution level.
Just changing your matching structure without increasing the dollars involved can drive behavior. For example:
If you do decide to make your match richer, it's best to do it in a way that creates an incentive for desired employee contribution levels. Retirement plan experts say that employees need to save at least 15 percent of pay through their prime earning years, according to the Employee Benefit Research Institute. So, in an ideal world, a great matching scenario might be 50 percent of contribution to 10 percent of pay to bring the employee to that desired 15 percent overall contribution amount. However, economic conditions play a big part in whether such an approach is feasible.
Judy Simons, CPC, QPA, QKA is a senior consultant and vice president, and oversees regulatory compliance functions, at TRI-AD, a provider of employee benefit administration services. She has many years of experience designing, administering and consulting for defined benefit pension plans and defined contribution plans including 401(k), profit sharing, money purchase, target benefit pension, stock bonus and employee stock ownership plans. Valerie Gieseke, SPHR, is a senior communications consultant at TRI-AD.
Reposted with permission
Source: TRI-AD Newslink, January 2009 (This article should not be construed as tax or legal advice.)
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