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Exercise Cautious Generosity with 401(k) Enrollment Eligilibity

  • If your organization sponsors a 401(k) plan, you may have more flexibility than you think when it comes to setting eligibility rules for participants. Granted, the Employee Retirement Income Security Act (ERISA) sets many rules for enrollment. But plan sponsors still have plenty of leeway to meet the demands of their respective employment markets. The question is: How generous should you be?

    Know Your Market

    As mentioned, ERISA doesn’t dictate a certain level of generosity regarding 401(k) enrollment rules. So if you want to make all new hires eligible to participate and receive fully vested employer matches from day one, go right ahead. You won’t encounter any legal difficulties. There are, however, sound reasons you might not want to take this approach.

    Generally, in a tight labor market, prospective employees expect competitive 401(k) benefits. For sponsors operating in this environment, turnover is probably low and plans aren’t urgently trying to minimize 401(k) expenses. So, under this scenario, you could probably be more liberal with eligibility requirements — perhaps even offering “day one” enrollment.

    Find a Balance

    But some organizations have higher turnover rates than others. If you routinely experience turnover, allowing new hires to join the plan right off the bat may lead to needless administrative effort, possible errors and higher administrative costs. You could wind up having to distribute many small 401(k) balances to participants who leave within a year, or maintain those legacy accounts until former participants request a rollover.

    At the same time, you may need more employees to participate in the plan if you want to allow large contributions for executives and other higher-paid employees. That’s because tax law prohibits plans from discriminating in favor of highly compensated employees. For this reason, some employers even have a 401(k) auto-enrollment feature. It’s all about finding the right balance.

    Target the Right Strategies

    Ultimately, you’ve got to exercise cautious generosity when it comes to setting enrollment rules. You definitely want to encourage enrollment to a reasonable extent, but you also don’t want to create undue administrative challenges. Our firm can offer assistance in targeting retirement benefits strategies that meet your objectives without giving in to excessive costs — and also comply with complex rules.

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