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A 401(k) plan is established to attract and retain valuable employees, among other reasons. Efficient employee communication is needed to help the participants understand the way their Plan works and helps satisfy the disclosure and compliance requirements under ERISA. It is also needed to effectively promote the 401(k). Finally, an effective employee communication program should provide investment information; this is particularly important regarding plans which allow participant-directed investments.

DESIGNING AN EFFECTIVE 401(K) EMPLOYEE COMMUNICATIONS PROGRAM

The 401(k) employee communication program must be carefully designed to help achieve its objectives. It should be kept simple and easy to understand. It should also promote a positive attitude in employees as a means for saving for their retirement. Once the employees are actively involved in the plan, they will appreciate it better and the entire communication effort will be significantly easier. A successful 401(k) employee communications program will have the following objectives:

I. Helping employees understand the 401(k) Plan and the way it works, including the disclosure and reporting requirements under ERISA is critical.

II. Promoting the 401(k) Plan to encourage additional participation is important.

III. Providing investment education and information to participants is also crucial.

I. Helping employees understand the 401(k) Plan and the way it works, including the disclosure and reporting requirements under ERISA

Basic information about how the Plan works is contained in the Summary Plan Description, which must be provided to all participants under ERISA. However, since this document is usually written to satisfy legal regulations and to shield employers from fiduciary liability, it is not read or understood by many employees and has not been viewed as a positive communication tool for 401(k) plan participants. Therefore, alternative means should be used to ensure that all participants understand the terms of the 401(k) plan. This can be done through an announcement to employees providing a brief outline of the plan prior to the plan's adoption, by other written material, at employer meetings designed to answer any employee plan questions and by several other techniques. The operation of the 401(k) should be explained in simple terms, so the participant is aware of the way it works and is not overwhelmed or confused. Participants should understand:

1. What is required for participation in the 401(k) plan and the amount of contributions which can be made by the employee and employer.

2. The way the account accumulates with contributions and investment earnings is important. An understanding of investment choices is also needed.

3. The conditions under which the employee can receive the vested portion of the account when employment is terminated and the ensuing tax consequences. Participants should be aware of any amounts which can be received in the form of loans or hardship distributions while a participant.

Information is provided to the participant through legal forms which must be completed by him. The participant must be given an explanation of his responsibilities and a brief understanding of necessary forms. The following must usually be completed by a participant upon entering the 401(k) plan:

1. Salary Reduction Election. On this form the participant indicates the percentage of the salary which he wants to contribute to the plan. This percentage may be changed in accordance with the terms of the 401(k) plan.

2. Directed Investment Form. This form must be completed by 401(k) plans in which a participant, rather than the employer, directs the investment of his account.

3. Beneficiary Designation & Pre-Retirement Survivor Annuity Forms.These forms designate a beneficiary for the participant. A married participant must obtain spousal consent to designate a non-spousal beneficiary.

An employee who terminates participation in the plan must complete certain forms to receive a distribution. They include:

1. Election of Benefit Form. The participant should indicate the desired form of payment (e.g., lump sum, annuity, etc.).

2. If spousal consent is required for the participant to receive a distribution, an Election to Waive the Joint and Survivor Annuity form must be completed by the participant and the spouse must consent to this waiver by completing a Spouse's Consent to Waiver form.

3. An Election of Direct Rollover for Qualifying Distribution form must be completed indicating whether the distribution should be transferred to an Individual Retirement Account or whether it is to be given directly to the participant. For direct rollovers, the participant must also complete an Authorization for Direct Transfer form and have it signed by the institution where the rollover will be held.

4. A Special Tax Notice Regarding Plan Payments which explains the tax effects of the distribution must be distributed to terminating participants.

A participant in the 401(k) plan should receive the following:

1. An annual participant statement showing the development of hid vested account balance during the year should be distributed. It should show both employee and employer contributions that have been made as well as investment earnings which have occurred during the year. Of course, it is extremely important that such statements be reconciled with the balances that are actually in the participants' accounts at the end of the year.

2. An annual copy of the Summary Annual Report of the Plan reflecting the Plan's current financial condition and a summary of the year's income should also be disseminated.

3. Information and forms on hardships, loans and Qualified Domestic Relations Orders (QDRO's) must also be provided, where applicable.

II. Promoting the 401(k) Plan to Encourage Additional Employee Participation

Promoting the plan will enable the employee to better understand its benefits and will increase participation. It is in the employer's interest to promote the 401(k) plan because:

1. It will help the employer attract and retain valuable employees and avoid postponement of retirement by older employees who otherwise would not have acquired sufficient funds for retirement.

2. It may lower employer 401(k) plan costs by helping satisfy the nondiscrimination tests and avoiding additional contributions for the lower paid employees that may otherwise be required.

3. It will help the employer develop a better relationship with the employees. If the employees are aware that the employer is making an effort to assist in their future financial well-being, their attitude towards the employer will improve, making them more productive employees.

The plan should be first promoted at an employee meeting, given during office hours and for which employee attendance is mandatory. The meeting should be carefully planned and administered by a knowledgeable person. That person is usually from the firm which will administer the plan. Even though the meeting is largely a sales presentation to encourage employees to join the plan, the presenter must be believable and gain the trust and confidence of the employees, since they will be putting their money in the plan. The meeting should encourage participation by making it interesting, interactive and easy to understand. Too much material can overwhelm employees. The meeting should be geared to the more reluctant employees, rather than to those who are ready to participate. The meeting should encourage employees to participate in the 401(k) plan by explaining:

1. The 401(k) plan is the ideal way for them to save for retirement, something which they all must consider.

2. The 401(k) plan offers tremendous tax advantages by deferring tax on contributions made to the plan and the investment earnings thereon, until age 70 1/2 or beyond. These contributions and investment earnings are taxable as ordinary income if they are not made to the plan.

3. The effect of how compound interest (on a tax-deferred basis) will help build participants' accounts is a persuasive technique. Graphic demonstrations may highlight the effect of compounding.

4. The benefits of employer contributions to the plan should be promoted.

5. Distribution options upon termination of employment should be explained. If loans or hardships are available, they should be discussed.

6. Investment options and some basic principles of investments should be discussed.

7. An enrollment form should be distributed at the conclusion of the meeting. An attempt should be made to get as many employees participating in the plan as possible; even if the initial contributions they make are small.

The enrollment meeting should not be the only means by which the plan is promoted. The following methods for promotion of the plan should also be considered:

1. A personal approach. Face-to-face meetings with employees, small discussion groups or employee meetings may be suitable.

2. Using promotional materials. These materials should be targeted to the participants' needs. Some participants prefer written material in the form of announcement letters, newsletters, envelope stuffers or brochures while others enjoy electronic means of communication, such as by audio, videos, computer software or the internet.

3. Getting employee feedback. This can be accomplished by surveys. A survey on participant satisfaction with the 401(k) plan should attempt to find out how the employees feel about the plan (if criticism is encouraged, the employer should be prepared to respond to it) as well as their understanding of how the plan works and an evaluation of the services supplied by the service providers. A survey can also be performed prior to the adoption of any changes to the 401(k) plan. A survey may be conducted on a random basis if the company is large enough and may be done by phone, if a written survey is not feasible.

4. Adding a matching contribution or increasing the match. Although employee communication is considered more important than a matching contribution regarding increasing employee participation, the use of a match will often help in this regard.

5. Improving the 401(k) plan to better meet participants' needs. This can be accomplished by the addition of a loan provision, hardship provision, additional investment alternatives or through a number of other plan enhancements.

6. Providing appropriate investment education. Please see the discussion below.

III. Providing investment education and information to participants

Although providing investment education to participants may not be specifically required, an increasing number of employers are doing so out of a concern for the well-being of their employees as well as a means of increasing employee participation in the 401(k) plan. When investments are participant-directed, there are two factors which may limit the employer in providing investment education to employees: their fiduciary concerns and the costs of providing such information. The fiduciary concerns can be reduced by meeting the requirements of Section 404(c): at least three investment options must be offered by the employer, the employee must be allowed to make selections and change them at least every three months, and investment options must be monitored and changed when prudent. Employers should not provide specific investment alternatives but general investment information and should carefully select and monitor the providers of such information.

The following investment information should be communicated to employees:

1. Basic concepts of compound interest and how money accumulates for the participant until retirement should be conveyed. This can be accomplished in several ways, including the use of employee meetings, videos, the internet or written communication. Presentations should use visual aides.

2. A basic understanding of investments should be discussed. This involves the concepts of risk versus reward, asset allocation, diversification and a number of other investment principles.

3. An understanding of the investment options and choices open to 401(k) plan participants should be given.

Regarding the investment education of employees, the following should be considered:

1. Investment information should be presented in small, repetitive doses; attempts to present all the information at one meeting can overwhelm the potential participant.

2. The use of charts, videos, slides and other graphical techniques can be extremely helpful in explaining the theory of compound interest, asset allocation and other important investment principles.

3. Although budget and fiduciary concerns may impose constraints on the employer's commitment to investment education, given the proper precautions, it can be pursued successfully and will greatly enhance the entire 401(k) program.