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 of 1974 (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 does not 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 will not 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 are not 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
Some organizations have higher turnover rates than others, however. If you routinely experience turnover, allowing new hires to join the plan right away 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 is 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 is all about finding the right balance.
Target the right strategies
Ultimately, you have to exercise cautious generosity when it comes to setting enrollment rules. You definitely want to encourage enrollment to a reasonable extent, but you also do not 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, which also comply with complex rules.