Question: What are the advantages and disadvantages of offering a non-elective contribution (for example, all eligible employees receive 1% regardless of their participation in the plan)? How can this work within a 401k plan?
Answer: Offering your employees a retirement plan that includes non-elective contributions definitely has its pros and cons. Here are some of the major issues on both sides.
- One of the biggest benefits of offering this "free money" to your employees is that for some employees, it may be the only money they are putting towards their retirement. According to a recent Congressional Research Service report, an astonishing 55 percent of all workers ages 24 to 64 do not even have a retirement savings account.
- Another major benefit of offering non-elective contributions is that those contributions are tax deductible for the company. It will most likely provide a significant tax break, which can help to offset the cost of the contributions.
- A fully vested, non-elective contribution may provide you with a retirement plan "safe harbor," which can ensure compliance with the government-mandated nondiscrimination requirements. It can help to eliminate the difference between the Average Deferral Percentage (ADP) of highly-compensated and non-highly compensated employees.
- Additionally, by giving employees non-elective contributions, you may get them more interested in contributing to their 401k plan. Once they see their retirement fund beginning to grow based on your contributions, they may realize the benefits of contributing on their own to grow their account even faster.
- Setting up accounts for all eligible employees will create some administrative work on your part, as well as the costs involved in setting up the plan. You will also have to take on the responsibility of choosing fund options, and determining what the 'default' account will be for those employees who do not choose a fund for their contributions.
- The addition of non-elective contributions could potentially increase your fiduciary liability unless you properly educate all of your employees on retirement planning in general, and specifically how to choose investments that are appropriate for their retirement time horizons.
Financial Education can play a role in getting employees to understand the need to save for retirement and how to invest their funds wisely, in both contributory and non-contributory plans. If you do have employees who have mentioned tight cash flow as a reason not to join a 401k plan, you may want to consider the benefits of a comprehensive financial education program that can address multiple financial planning issues. Many times, employees first need help with budgeting and paying off debt before they are willing or able to save for retirement.
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