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Quick Reference
1. Should I select an individually designed or prototype plan?
That depends. If you want an easily-administered 401(k) plan which may
not require IRS submission and approval, a prototype document is your
best option. If you want a more customized plan design, you may need an
individually-designed document (which does require an IRS submission).
Most third party administrators or companies that truly specialize in
plan recordkeeping offer prototypes with a rather broad range of plan
provision selections. Unfortunately,
most 401(k) providers which offer a complete or "bundled" approach
(focusing mostly on plan investments) do not permit
individually-designed documents. In addition, their 401(k) prototypes
may be severely limited and they may not facilitate submission to the
IRS for plan approval (when necessary).
2.
When should I allow employees to qualify for entry into
When selecting eligibility requirements, the employer should consider
that although a delay in participation may reduce employer costs, it
will make the plan less attractive to prospective employees. Recent
favorable changes in the laws are encouraging more employers to opt for
allowing immediate eligibility.
Ultimately, however, it depends on the nature of employment in your
company (i.e. significant turnover, seasonal employment schedules, etc.)
and your specific goals for you plan.
It is best to consult with a professional.
3.
Should I have an employer matching contribution? If so, how
should I design it?
Selecting an appropriate matching contribution depends upon many
considerations. Many 401(k) experts advise starting with no match or a
low one, since it can always be increased but may be difficult to
reduce. However, since a match can be used to motivate potential and
current employees and increase employee participation and appreciation
of the 401(k) plan as well as help reduce the potential for failure of
the
ADP/ACP tests, a match should be seriously considered when
establishing the 401(k) plan.
4.
Should I use a vesting schedule or vest 100% upon plan entry?
100% vesting upon plan entry creates additional employee appreciation of
the 401(k) plan and prevents resentment arising from employees' lack of
entitlement to employer contributions already made on their behalf.
There is also additional recordkeeping required for purposes of tracking
the vested percentage of each participant, assuring that a participant’s
vested balance is properly calculated upon distribution and the
appropriate handling of forfeitures.
However, if there is high turnover, using a vesting schedule may
significantly lessen employer 401(k) costs since non-vested amounts are
forfeited when employees terminate service and may be used as a tool to
promote longevity.
5.
Should I allow provisions for hardships or loans?
Since the laws governing hardship distributions are complex and a
violation can result in plan disqualification, an employer may not want
to include a hardship provision in the 401(k) plan despite employee
pressure. In addition, the employer must maintain records of each
participant’s 401(k) deferrals and prior hardship withdrawals, from
their initial date of participation, to determine the maximum amount
that can be taken for hardship. However, these options are common and can contribute to the
plan's success via participant satisfaction. Loan provisions are more
widespread than hardship provisions and are often provided to encourage
employee participation and appreciation of the 401(k) plan. It is important however, to establish a formal loan program
which places limits on the reasons for taking a loan, the amount that
can be borrowed and the number of loans a participant may have at one
time.
6.
What is required for 401(k) recordkeeping?
Meticulous 401(k) recordkeeping must reflect the various contributions
to the 401(k) and the crediting of investment earnings and amounts
distributed from it. Unless the company is very small, it is important
that 401(k) recordkeeping be coordinated with the payroll system. Plans
must monitor, separately, employee deferrals and after-tax voluntary
contributions as well as employer matching, qualified non-elective and
profit sharing contributions. Recordkeeping is considerably more
complicated when participant-directed investments are available than
when investments they are pooled.
7.
What are some basic 401(k) administration requirements?
Testing contributions, developing account balances and paying terminated
participants as well as administering any possible loans and hardship
withdrawals are some 401(k) requirements. Upon plan entry, participants
must receive a Summary Plan Description as well as the contribution
election, investment selection and beneficiary designation forms
necessary to properly enroll them into the 401(k) plan.
Reporting and disclosure requirements must also be satisfied.
These include the preparation of series 5500 forms, a Summary Annual
Report and a statement to participants of their account balance.
8.
What are some choices regarding 401(k) plan administration?
It is usually not advisable to perform 401(k) administration in-house.
Third-party administration firms specialize in this function. Although
mutual funds and insurance companies frequently provide this service
(they sometimes work in conjunction with third-party administrators or
allow the employer to select one), they often do not specialize in this
401(k) function.
9.
What is the most important consideration regarding 401(k)
investments?
A fundamental investment decision is whether 401(k) investments are
controlled by the employer (through some type of managed investment
account) or participant-directed. Most 401(k) plans use
participant-directed accounts. A managed account will require less
recordkeeping and frequently use the services of seasoned investment
professionals to produce returns which would be difficult for 401(k)
plan participants to secure on their own. However, employees who
contribute to the 401(k) plan may want to select their own 401(k)
investments. This does involve a significant amount of recordkeeping.
In addition, if participant-directed investments are used,
employer fiduciary responsibility for investment losses may be reduced
by following Section 404(c) of the Internal Revenue Code.
These requirements include, among other things, offer a certain
range of investments and providing employees with performance
information on a regular basis.
10.
What is the importance of an ongoing, comprehensive employee
communication program?
An effective 401(k) employee communication program helps employees
understand the plan, including the disclosure and reporting requirements
under ERISA, promotes the plan so employees can participate more fully
in it and provides investment education and information to participants.
11.
What information must be provided to participants to satisfy the
disclosure and reporting requirements under ERISA?
Basic information regarding the way the plan works is in the Summary
Plan Description, which must be provided to all participants under
ERISA. Certain information is provided to the participant through legal
forms which the employee must complete. Upon entering the plan the
participant must usually complete an elective deferral election form, a
directed investment form (if applicable) and beneficiary designation
form (even if they choose not to participate).
When the employee terminates participation in the plan, several
forms must be completed to receive the distribution. A participant in
the plan should receive, annually, a participant statement showing the
development of the vested account balance during the year as well as a
copy of the Summary Annual Report of the Plan, which reflects the plan's
current financial condition and a summary of the year's income.
Information and forms on hardships, loans and Qualified Domestic
Relations Orders (QDRO's) must also be provided, where applicable.
12.
How can I better promote the 401(k) plan to encourage additional
participation?
The plan should be first promoted at a mandatory employee meeting,
during office hours. The following methods for promoting the 401(k) plan
should also be considered: person-to-person contact, using promotional
materials, obtaining employee feedback.
You may also consider adding a matching contribution or
increasing the match and improving the plan to better meet participants'
needs by adding a loan provision, hardship provision, additional
investment alternatives or through several other plan enhancements.
13.
What investment education and information should be provided to
participants?
The basic concepts of saving, compound interest and the way money
accumulates in the plan until retirement and a general understanding of
investments and investment options should be discussed with employees.
Given the market performance in recent years, it is also
important to communicate market volatility and encourage participants to
make an honest assessment of their risk tolerance.
14.
How can I better explain the 401(k) plan to my employees?
The operation of the 401(k) plan should be explained in simple terms so
the participant understands how it works and is not overwhelmed or
confused. Employees should know the requirements for plan participation
and understand plan contributions. They should also understand how their
contributions, investment earnings and investment choices can help the
account appreciate. Finally, participants should be aware of the
conditions under which they can receive the vested portion of the
account upon termination and the tax consequences involved. Conveying
the way funds can be received in the form of loans or hardship
distributions while the employee is a participant is also important. |
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