401(k) Resources

Educating Your Employees

No retirement plan is effective if employees are not well educated as to how the plan benefits them and the large dollar amounts that will be required. In this regard, it's helpful to emphasize that just a little bit of savings can go a long way. Using accumulation tables such as the one shown above can be very effective in demonstrating how a minimal contribution accumulates over time to provide a large retirement benefit. It's also useful to point out that pre-tax savings will not detract markedly from an employee's take-home pay.

When educating employees, a key ingredient is simplicity; information needs to be presented in layperson terms. Your pension consultant should be able to clearly explain financial terminology, investment options, asset allocation and tax advantages. In fact, the better pension providers go so far as to provide ready-to-use pamphlets, memos, and "one-sheets" to create interest among your work force and a ready understanding of the real value of retirement plans.

Remember also that education is not a one-time-only event. Employees need constant refreshers about their investments, particularly since many plans allow investment changes on a quarterly basis.

Bill Greer, president of the life and health division of Smith Reagan Insurance in San Benito, Texas, discovered an added benefit when the company implemented a 401(k) plan for its 14 employees. "Since employees are responsible for selecting their own investments, they are becoming more cognizant about financial news and the business world."

Greer worked with his full-service provider to enhance plan effectiveness by making use of some of its programs.
"We took care of the entire process, from presenting instructive and entertaining videotapes to conducting on-site enrollment meetings," notes Marshall Pearson, the pension representative who assisted Smith Reagan. "The company also opted to take advantage of our easy calculation tools, payroll enrollment stuffers, and toll-free, 24-hour hotlines, which plan participants can use to check investment performance or request fund transfers."

While some businesses have made big strides in educating employees, most don't utilize all the resources available to them. According to the Pension and Welfare Benefits Administration, one-third of American workers who have access to a 401(k) plan don't participate. If employees fully understand what their retirement contributions mean down the road, and can see the earning power of even a five or six percent contribution, the number of contributors would be likely to rise dramatically.

401k Tip---

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

Get Started Today

The essentials offered in this article to clarify various retirement plan options are just that - essentials. Without professional help, the average small business owner can quickly become lost in the maze. The wisest path is to carefully weigh all of the issues before selecting a retirement plan, choosing a pension provider, and educating employees about their retirement benefits.

To obtain more information about retirement plans, contact the Department of Labor, the Employee Benefit Research Institute, or the American Savings Education Clearinghouse in Washington, D.C.

The following accumulation table was designed to demonstrate how a small amount of monthly elective contributions can accumulate to provide a participating employee with a large retirement benefit.
Several assumptions were made in the calculation of the amounts shown in this table, and therefore the table does not reflect the actual amount a participant might receive, even if age and compensation are the same as shown below. This table was intended only as an example to show how the combination of elective contributions and employer matching contributions can grow into a substantial amount over a number of years.

It will be assumed that elective contributions equal to 6% of monthly compensation began when the participant was age 21 and 40, respectively. It is also assumed that all contributions have been placed in a guaranteed interest account (fixed-income fund) and have earned 7.25% interest, compounded annually. The table assumes no salary increases and a matching contribution of 100%. Any additional employer contributions would increase the amount accumulated at age 65.

Monthly Compen.	Elective Contribution (6%)	Matching Contrib. (6%)	Accumulation at Age 65 at 7.25%	Mo. Retire Benefit on a Life Annuity

$ 833.33 2,083.33 4,166.87	$ 50.00 125.00 250.00	$ 50.00 125.00 250.00	$ 356,810.00 892,026.00 1,784,052.00	$ 3,066.00 7,666.00 15,333.00

$833.33
2,083.33
4,166.67

$ 50.00
125.00
250.00

$ 81,735.00
204,339.00
408,677.00

$ 702.00
1,756.00
3,512.00

This table shows how long various amounts of retirement capital will last assuming an initial annual withdrawal of $10,000 and different rates of return. The table assumes that the withdrawal amount (and rate of inflation) increases 5 percent annually.

Years Retirement Capital Will
Initial Retirement		Last with an Annual Return of :
Capital	5%	7%	9%

$100,000 $200,000 $300,000 $400,000	10 20 30 40	11 24 43 Life	12 36 Life Life

Figures are for illustrative purposes only and are not indicative of actual investment return. Courtesy of Transamerica Pension Services

Robert Swanson, president of Ridgewood Power Corporation in Ridgewood, New Jersey, enjoys boasting about low turnover among the company's 80 employees.
"Our excellent benefits are a main reason employees stay with us. We have liberal medical and dental benefits and recently improved our existing 401(k) plan," he notes.
Ridgewood Power is an energy company that buys co-generation plants throughout the country. "Major sources of energy escape in the burning of gas or coal. We capture the heat and reuse it," Swanson explains. One of the company's 11 facilities burns municipal waste to generate steam used by the paper mill that produces all the paper used for U.S. currency.
With the firm's profits increasing steadily, Swanson was concerned about tax savings and finetuning Ridgewood's original 401(k) plan. He was particularly interested in a plan that would reward the loyalty and dedication of the company's older, long- serving, and predominantly highly compensated staff.
Through Reynen Associates and Transamerica Pension Services, employee benefit specialists, Swanson learned about the features of a new comparability plan. This is a type of profit-sharing plan that allows a substantial allocation of contributions to long-term and typically older employees. In some cases, annual contributions can be as high as 25 percent of pay or $30,000 for older, more highly compensated participants, with as little as three percent of pay allocated to younger, less highly compensated participants.
"The new comparability plan fits better with our long-term objectives. It provides a better tax savings and employees get more benefits," Swanson points out. "The company has also added a 50 percent match to every employee dollar, and we're able to vest everyone immediately in the plan in full.
"I've seen too many cases where employees just waited around to become vested and were totally unproductive," adds Swanson. "I want our people to be able to take their money with them when they leave the company. With this new comparability 401(k) plan, they can do exactly that."

INCENTIVE RETAINS YOUNGER STAFF

"We needed an incentive to help retain our younger employees," prefaces Pennie Weber, vice president of operations at Sky Trek, in explaining why management decided to add a 401(k) to its existing retirement plan.
This 30-person aircraft charter company based in Modesto, California has been servicing all levels of planes, from single- engine vehicles to large jets, since 1982. In addition to its main facility in Modesto, Sky Trek maintains operations in nearby Merced and at Mammoth Lakes in the upper Sierra Nevadas. With employees located in different areas and working varied shifts, setting up a 401(k) plan was less challenging than staging the educational seminars required to get the program off the ground.

"We wanted to make sure everyone attended a seminar and understood the 401(k) plan," Weber explains. "Our pension provider spent hours with us and made several presentations to accommodate our employees. They simplified the financial material and were extremely informative." According to Weber, an important element in the success of the educational programs was an emphasis on contribution amounts.

"Employees didn't realize that deducting as little as $1.98 a week can accumulate into a substantial amount by retirement," she says. "Maybe retirement is worth one less hamburger per week." RRP

Weber was pleased with the costs involved in implementing the 401(k) plan, noting that "the administrative fee was much more reasonable than I expected. And we don't have the time or the knowledge to handle our own record-keeping. That's one of the reasons we hired Transamerica Pension Services, so they can oversee the process and deal with the details."

Weber hopes to offer additional benefits by adding a matching contribution at the end of the year. "We will look at our yearly financials; if we make money, our employees will make money. We're working toward a common goal."