Small Business Retirement Plans

Getting Employees to Contribute to Retirement Plans

Learn how to get employees to contribute to retirement plans. Aside from the obvious benefits for employees, getting employees to contribute to 401(k) plans or other retirement plans is important because it allows business owners to make larger retirement plan contributions than they might otherwise be able to.

Are your employees no longer contributing to their retirement plans?

If that's the case, you as a business owner may be at risk of having to take back some of your own retirement plan contributions and pay income tax on money that you'd prefer would go into your small business retirement plan tax-free.

Financially battered by a recessionary economy and painfully aware of the nation's rising unemployment rate, many employees are cutting back on retirement savings.

In fact, one in two Americans polled in a survey by The Hartford say they are concerned about losing ground in their efforts to save for retirement.

The survey found that 56 percent of respondents worry they will be unable to maintain their current level of contributions to their employer's 401(k) or other defined contribution retirement plan.

Nearly one in three (32 percent) survey respondents said they were likely to postpone making additional contributions to their retirement plan and one in four (24 percent) said they were likely to postpone retiring altogether.

Those numbers could pose problems for employer-sponsored retirement plans as declining participation rates and reduced contributions can have a negative impact on the viability of the plan.

If the gap between what highly compensated and non-highly compensated employees contribute to a company's retirement plan exceeds IRS guidelines, then many highly compensated employees may be forced to take back a portion of their contributions and pay additional income taxes.

Despite the current tough economic times, there may be ways for employers to encourage employees to contribute to their retirement plan and even increase participation without having to institute or increase matching contributions.

The Hartford recommends the following ways to get employees to start contributing to their 401(k)s again:

  • Sponsor educational meetings. Most retirement plan providers can make trained specialists available to lead educational meetings for employees, explaining the advantages of regular retirement savings, tax-deferred accumulation, and how pre-tax savings will make less of an impact on their paychecks than after-tax savings.
  • Promote the new Savers Credit. Employees who earn relatively modest salaries can qualify for a special federal Savers Credit based on their contributions to a defined contribution retirement plan or IRA. The tax credit can equal as much as 50 percent of their total contribution, capped at a total credit of $1,000, depending upon how much they save and their income level.
  • Adopting automatic enrollment. A 2006 study by Hewitt Associates found that nine in 10 employees participate in their employer's 401(k) plan if they are automatically enrolled in it. Among other requirements, employers must notify employees of the automatic enrollment and employees must be allowed to opt out.

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