This is a difficult 401(k) plan

[SteveH]

I am trying to figure out how to price this client, and also figure out a strategy for the future.

Client currently has:

A 401(k) plan with no employer matching or profit sharing.

1,500 people employed at some point throughout the year.

700 eligible participants

60 currently participating.

"Free" daily val administration

Client Wants:

Still wants online access.

Personal Service.

Now my dilemna.

To keep fees as low as possible, are we allowed to put a 2 year wait on deferrals? This would help lower his eligible employees and benefit his longer term employees the same as they are right now anyway. I know that you can do 2 year and make everything 100% vested, but in the back of my mind I am thinking that even with a 2 year eligibility that you have to allow deferrals after 1 year. Since he doens't have any match or profit sharing right now, the plan wouldn't operate any differently except cut down on all these employees popping up with zeros on the plan.

I don't think I can do this, but maybe...I always have hope.

[Jim Norman]

I don't think I can do this, but maybe...I always have hope.

Abandon all hope, ye who enter here. You cannot have eligibility greater than 1 year.

With just 9% of eligibles deferring, what exactly is the employer accomplishing with this plan? Certainly the HCEs can't defer much. Without a match, it is what it is. Not all employers are a good fit for a 401(k).

[david rigby]

... what exactly is the employer accomplishing with this plan?

That is the central question.

Any interest in safe harbor?

[Guest Pensions in Paradise]

I wholeheartedly agree with the prior two posts. I would go so far as to say that either the client should terminate the plan or find a new financial advisor to handle enrollment meetings. 9% participation is horrible. What makes matters worse is since the plan has more than 100 eligible participants they are subject to annual audit. I can only imagine how much this company is paying in fees so that 60 employees can defer!

"Free" daily val administration

Haha, good one.

[SteveH]

I know, I know.

Safe Harbor seems out of the questions because the company is just so large. They would get destroyed if all of a sudden 600 people started deferring, there would be potential for 1 million in matching dollars due. There is only 1 HCE participating and there really aren't that many HCEs, maybe 10 total. The owner isn't even using the plan. It was only adopted because his management was bugging him to have something. But the company must have something to offer because I have never seen so many employees with hire dates in the 1980s.

At this point the HCEs that think they can't participate aren't even doing their catch ups, so at least I have that I can offer them. They really aren't a candidate for any type of plan that I can think of. It's too bad too, really nice people.

Isn't it page 908 of the Pension Protection Act talks about the new 2 year eligiblity for 401(k) deferrals?

[GBurns]

Something is not right with this scenario.

When a company decides to set up a 401(k) there are usually some illustrations done forecasting different scenarios. These usually show different participation rates, worst case, pie in the sky etc. and also shows what the employer liability will be for each. These forecasts are used for many different reasons including being used by the broker to hype the possible services etc needed and to justify add-ons etc such as daily val.

So the company knew when setting up the plan, how much they might have to contribute as matching amounts each year, even before the plan was installed. How can they now be facing "destruction" if they now get increased participation and now have to contribute the matching funds that they knew up front that they might have to, but did not and instead saved all that money all these years?

My bet is that ownership put in the plan under duress then discouraged or undermined the enrollments to drive down participation, so as to save the matching contributions. If this is true, then there is nothing that you will be allowed to do to increase participation until ownership truthfully agrees and makes the commitment.

[Guest BXO]

There is no match. The original post says so.

[wsp]

I wholeheartedly agree with the prior two posts. I would go so far as to say that either the client should terminate the plan or find a new financial advisor to handle enrollment meetings. 9% participation is horrible. What makes matters worse is since the plan has more than 100 eligible participants they are subject to annual audit. I can only imagine how much this company is paying in fees so that 60 employees can defer!

Sounds to me like no one is taking this plan seriously from the employer to the FA to the participants. New financial advisor combined with new investments would likely improve the participation. I'd venture to say that it wasn't at setup that this plan failed, but afterwards....My guess is that as new employees came aboard the plan was not being promoted and thus they were not participating. Original participants eventually separate and take distributions. Without new ones joining in the plan slides towards what you have now..... I'd try to reinvigorate current participants with "NEW NEW NEW" speak before I made any plan changes like adding a match or taking it safe harbor. Could very well be they simply aren't aware.

[four01kman]

There is a solution. I'm not sure the company will "buy" it, but with an "automatic enrollment" provisions for all employees on a specific date may significantly increase participation even without a match. Although employees will be able to "opt out", inertia is a powerful force.

[Guest Pensions in Paradise]

GBurns - did you even READ ttott's posts?? Your comments are completely off-base with his situation. The employer never said they would do a match. In the future please think before posting.

[RCK]

I agree with each of the last three posts:

wsp is correct in that studies have shown communications to be as important as plan design, so in this case communicating the (limited) advantages can overcome the plan design.

automatic enrollment can help pretty quickly, but I have to say that auto enrolling with no match will not be as effective as auto enrollment with a match.

and Pensions in Paradise is of course right. GBurns' post reads like a Emily Litella (SNL) tirade. Oh, never mind.

[GBurns]

While the OP did state that there was no match, ttott in a follow up posted on September 19 at 6:37 PM "They would get destroyed if all of a sudden 600 people started deferring, there would be potential for 1 million in matching dollars due. "

I underlined for you the "destroyed" and "matching dollars" so that you can see where I saw it posted and why my response was worded that way.

I was responding to the second post and yes that second post was giving the reasons why they would not do a Safe Harbor and was not addressing the plan in the OP.

But that still does not change the possibility that the employer set up the plan this way so that it would fail. And it does not change the fact that the employer was aware of all the possible scenarios before they chose that plan design without a match.

[Guest BXO]

But that still does not change the possibility that the employer set up the plan this way so that it would fail. And it does not change the fact that the employer was aware of all the possible scenarios before they chose that plan design without a match.

The plan was set up with no match so that it would *not* fail, just the opposite of what you have now proposed twice. I am confident the employer was aware of the scenario where a mandated match would cause a large outlay of cash; hence, the setup of the plan without a match. Your insinuations that the company is up to something nefarious are unfounded.

[Guest Pensions in Paradise]

GBurns - you need to learn to read things in context. Ttott's second post only mentioned match because a prior poster had made a comment about match. You are good at twisting things out of context.

[Larry M]

The match does not have to be a lot to make the plan enticing to employees.

The employer could limit its discretionary match to 10% of the first 6% of employee deferral, with a total matching limit of no more than 1/2% of eligible payroll.

In addition, the employer could provide a discretionary profit sharing contribution limited to another 1/2% - 2% of eligible payroll, with allocations by class.

A key here is to determine the upper limit of additional compensation the employer is willing to provide to its employees in order to make the plan viable for more than 60 employees.

As was noted earlier, the costs of this plan, to the employer, are way out of proportion to the benefits gained by a few employees. Why is it willing to pay those fees with so little reward, when with a very small discretionary contribution, more employees would benefit and administrative costs would not increase very much?

As for your question concerning pricing this client (or any client) , that is not appropriate for this board, in my opinion.

[BG5150]

A lot of times, just some education will increase participation. Once people realize that if they defer 5% their paychecks aren't gonna go down by 5%, they start thinking about contributing.

Some simple scenarios about how much more they'll have on retirement if they start now as opposed to later also helps.

An information session can be done for little or no cost (depending on if you're handing out material and such). If the broker or agent can't or won't do this (it is in his or her interest to get people into the plan as well), it's time to find a new one.