Because of recent tax law changes enacted by Congress, now is the time to review and implement changes that can increase the effectiveness of your company's employee retirement plan for 2007 without significantly increasing the after-tax cost of the plan for your company. Simple changes may allow you to increase contributions for owners and other key employees without significantly increasing contributions for all other employees. New plan provisions allow larger contributions to higher-earning employees while maintaining a reasonable level for rank-and-file employees. This type of contribution shifting would balance out the benefits provided by the retirement plan to more evenly reflect wage differences.
401(k) plans currently are the most popular employer-sponsored plans available and often the least understood. However, extremely low participation rates by many employees can reduce the effectiveness of a 401(k) plan for higher-paid employees. Internal Revenue Service regulations restrict the deferral rate of highly compensated employees to a maximum of 2 percent more than the average of all other employees.
Following are options for increasing plan effectiveness for employees in all salary ranges.
Options
It probably is easiest to add a safe-harbor provision to your plan. This provision permits highly compensated employees to defer up to the maximum $15,500 without regard to the average deferrals of nonhighly compensated employees. Two options are a match formula and a flat, fully vested contribution for all eligible employees.
In addition, employees older than 50 are allowed an additional $5,000 catch-up contribution to their 401(k) accounts even if they are putting in the full $15,500. The provision has been added to allow older employees to fund an extra amount into their retirement accounts to make up for time when they could not afford to do so.
Consider adding Roth provisions to your plan. This allows employees to contribute to their accounts on an after-tax basis but provides for tax-free withdrawals at retirement. Because there currently is a low-tax environment, it may make sense for employees to forgo their immediate tax benefits for future tax-free income.
It also is important to educate employees. A regular educational program about retirement accounts will help reinforce the need for employees to save and make them more comfortable with their investment choices. Everything from handout material to an invitation to a meeting should stress the importance of the plan and need to save. Also, with diverse workplaces, using multilanguage enrollers and educators can help reinforce the benefits of the retirement plan for all participants.
Upgrade your plan choices and look at investment options that feature new technology and high-ranked money managers with lower expenses. Because of the extreme complexity of plan design and increasing employer liability for plan choices, I recommend delegating this task to professionals, such as a financial adviser, accountant or attorney. Although keeping an eye on expenses is important, it is even more important to have a good plan design that directs benefits to employees who most need and appreciate the benefits. A cheap investment fee rarely overcomes the efficiency of a great plan design.
Finally, an often overlooked provision in many plans allows for the purchase of life insurance as a plan investment choice. This can be a significant benefit for you and your employees, providing a means to pay premiums with tax-favored money inside of the plan while still preserving the tax-free provisions of the death benefit. It truly is a win-win situation.
Taking advantage
If your company sponsors a retirement plan, observe how new laws can increase benefits for your employees and help you direct benefits to key employees. If your company does not sponsor a retirement plan, now may be the time to initiate one that fits your budget and helps you retain hardworking employees.
Brian Heckert is president of PENFlex Services Inc., a business consulting firm with offices in Nashville, Ill., and Peoria, Ill.
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