For the growing number of small companies starting 401(k)s, careful follow-up attention can be every bit as important as good plan design. That's because companies that fail to aggressively recruit and retain 401(k) participants may run afoul of IRS regulations against "top-heavy" executive-skewed plans -- and thus, risk losing tax benefits for employees.

Here's how Aerodyne Controls, a Ronkonkoma, N.Y., manufacturer of aerospace products with 75 employees, has succeeded in attracting widespread participation for its 10-year-old 401(k) plan:

* Personalized updates. "We used to send participants a report once a year on how much their accounts contained and how much they were earning in interest, but then decided the information was so positive, we should circulate it every six months," explains Robert Tripodi, one of Aerodyne's owners. Participants are frequently surprised by how much their accounts contain, since the company matches 50% of each employee's income-tax-free contribution.

* Extended vesting schedules. Employees are encouraged to remain in the plan by a vesting schedule that kicks in slowly: they are vested 25% after three years, and 100% only after five years.

* Follow-up interviews from top management. When employees ask to pull out of the 401(k), Tripodi meets with them. "I tell them they're missing out on saving money on taxes and preparing for retirement," he says. "I show them the financial costs and benefits so clearly that they can see the benefits of perhaps reducing their contribution, but the great costs of withdrawing entirely." That coincides with Aerodyne's interests, since withdrawals, not contribution reductions, run the risk of causing IRS problems.

-- Jill Andresky Fraser

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