Participation in a 401(k) plan benefits employees by providing them a tax-advantaged way to save for retirement. Yet too often, a significant portion of eligible employees do not participate.

Employers should care about 401(k) participation mainly because it benefits their employees. But higher participation benefits the employer as well. First, it will result in greater plan assets, which, in turn, may lead to reduced rates for plan fees. Second, it can help plans pass nondiscrimination tests, allowing highly compensated employees to maximize their contributions. Fortunately, there are ways to boost participation:

Auto-enrollment. The most direct way to boost participation is through automatic enrollment of employees with a set contribution amount unless they opt out. Specific requirements apply based on the auto-enrollment option chosen:

• QACA -- A qualified automatic contribution arrangement has employee and employer minimum contribution requirements that exempt the plan from annual nondiscrimination testing. Employees can, however, reduce their contribution rate.
• EACA -- No employer contributions are required with an eligible automatic contribution arrangement. As a result, the plan isn’t exempt from nondiscrimination testing. But the correction period for a failed test is extended from 2½ months to six months after the end of the plan year.

Both options require annual notices to employees.

Other options -- If you’d prefer not to deal with the burdens of auto-enrollment — or you want to encourage auto-enrollees to contribute more, consider these strategies:

• Ongoing reminders and educational sessions. Regularly communicating with employees about the importance of retirement savings and how to enroll in your plan can help keep it top of mind, increasing the likelihood that employees will sign up — or boost their contributions.
• Opportunity to change contribution amounts frequently. This can make reluctant employees more comfortable participating and may encourage them to elect larger contribution amounts.
• Investment flexibility. A broad array of investment options and the ability to change investments frequently also can make employees more comfortable participating and, again, contributing more.

If you’d like to learn more about these and other ideas to increase participation in your 401(k) plan, please contact us.