BERLIN – One way to attract and retain employees who can help bring your company to the next level is to offer a solid 401(k) retirement plan that encourages them to build for their own financial futures. The Pension Protection Act of 2006 helps do just that. It has made setting up a 401(k) for your company easier than ever, with greater incentives for both you and your employees.
In one of the act’s most important provisions, you can automatically enroll workers in your company’s 401(k). While employees can still opt out, implementing automatic enrollment should increase participation. Each employee contribution must total at least 3% of salary (as an incentive to save, you may also offer to match employee contributions up to a certain level). And you may encourage even greater savings by choosing an “escalation feature” that automatically increases employee contributions 1% each year up to 10% of the salary.
In the event an employee’s investments decline in value, you’ve got one of three qualified default investment options to protect you from liability: Target-date or “life cycle” funds steer an employee’s portfolio in a more conservative direction as retirement approaches. Another option, balanced funds, put stocks and fixed income securities to work maintaining a long-term asset allocation. Finally, an employee can work with an investment manager to build an appropriate mix of investments in a privately managed account.
Keep in mind that the Pension Protection Act allows you or your firm’s chosen advisors to give employees investment advice. Such counsel, given in compliance with PPA regulations, includes information on opting out of the plan and choosing individual investments.
The regulation also eliminates a few headaches. “Discrimination testing each year meant limiting the contributions of your highly paid employees. It also required you to make additional contributions for employees or refund excess contributions after year-end,” says Kevin Crain, Managing Director of Business Retirement and Corporate Market Integrated Benefits at Merrill Lynch. And thanks to immediate vesting, employees were not encouraged to stay with the company.
Today, as long as you enroll your employees in a 401(k) plan automatically and provide the required default investment options, you can skip annual discrimination testing. “What’s more, employer contributions may now vest over a two-year period,” says Crain.
Easier administration and lower associated costs make the 401(k) a compelling option. Your Financial Advisor, working together with your legal and tax advisors, can help you determine if the 401(k) is the right choice for your business and, if so, can assist in designing a plan that fits your needs.
(The writer is a Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-9084.)