Certified Public Accountants

SPARK PARTICIPATION IN YOUR BUSINESS'S RETIREMENT PLAN

Some companies have boosted employees' participation in 401(k) plans more than 90%. Their secret ingredient: negative elections, otherwise known as automatic deferrals. Along with increasing participation, automatic deferrals also help prevent discrimination and imbalances in qualified retirement plans. So if more employees contribute to 40l(k)s, more highly paid workers can invest greater sums in their accounts.

How does it work? Employers automatically enroll new employees and those who haven't chosen to participate - or make an affirmative election - in the retirement plan. Companies defer a set percentage of the employee's salary into an account, even placing the money into a balanced fund or combination of equity and fixed-income investments.

If you begin automatic deferral with your employees, you must inform them of the decision, allow them to change contribution amounts or investment choices, and discontinue 401(k) participation. There is some risk for employers: Your liability as plan sponsor and administrator may increase because you've chosen these employees' initial investment funds. You can safeguard your plan's qualified status by providing employees with documents that spell out how you'll direct investments and contribution amounts.

Some flexibility with automatic deferrals exists because the IRS hasn't ruled on the percentage that companies must deduct from employees' salaries. Typically a figure totaling 3% offers both plan sponsors and employees a happy medium. Remember, if the negative-election percentage is too high, employees may not participate - feeling that their take-home pay would suffer. Then again if the percentage is too low, the added participation may tip the plan into violating anti-discrimination rules.

Before you begin automatic deferral, don't forget that increased participation can lead to greater costs and more paperwork. On the flip side, it can help your employees get more involved in their retirement planning.