Proper design is the first step toward a successful 401(k) program. A consultant can help determine 401(k) plan options and features that should be included. Selection of a document and 401(k) service providers can then be accomplished.
The most important design element of a 401(k) program usually is the determination of the employer's matching contribution, since it can increase employee participation in the 401(k) plan. Increased employee participation is desirable for both employers and employees. The appropriate matching contribution can decrease employer costs by lowering the employer contribution that may be required to meet certain "nondiscrimination" requirements. Conducting a survey to ascertain employee contributions will help determine the most advantageous 401(k) matching contribution.
In addition to matching contributions, other important 401(k) design considerations are:
1. Eligibility. Should the employer allow employees to enter the 401(k) plan immediately upon hire or should they be required to wait up to one year? The answer will depend on several factors, including the use of the 401(k) plan as a tool to attract valuable employees, employee turnover and the affect the eligibility period has on passing the nondiscrimination tests.
2. Additional Employer Contributions. A profit sharing feature can be added to allow for additional employer 401(k) contributions. The profit sharing formula requires separate design; it can be, for example, "non-integrated", "integrated" or "age-weighted", depending upon how the employer desires to allocate such contributions.
3. Vesting. The employer may elect to have 401(k) participants become fully vested immediately in profit sharing and/or matching contributions, or a vesting schedule may be selected.
4. Choice of Investments. The employer must decide whether 401(k) plan participants should have "self-directed" accounts or pooled investments directed by the employer. The fiduciary concerns of the employer and the investment wishes of the participants are key factors when making this decision.
5. Availability of Loans and Hardship Withdrawals. Participants may have access to their accounts, through loans or withdrawals, prior to termination of employment. Factors that must be considered when deciding whether to allow this access include the administrative difficulties with making these options available and the financial needs of the plan participants.
After the design of the 401(k) has been completed, the type of document needed can be selected. Prototype plans offered by 401(k) fund service providers and some consulting organizations limit the design more than individually drafted documents. Although 401(k) prototypes are less expensive and may simplify 401(k) administration, they do not allow the alternatives available in an individually drafted 401(k) plan. A consultant can help select the type of document needed.
If you are considering or already have a 401(k) plan but have questions or need assistance, please complete our short form. We will provide some suggestions, without obligation. If you prefer, contact us at 718-793-9885. Our web site home page contains additional useful information about 401(k) plans.