A 401(k) expert suggests tips on how to legally communicate to employees information about your plan.
Confused about which information you need to give to employees about your 401(k) plan? Join the club. If you sit back and let the plan run itself, you're shirking your fiduciary responsibilities as defined by the Employee Retirement Income Security Act (ERISA); if you dare give specific advice, you're flirting with a lawsuit should an employee's investment go south. What to do? Educate -- but carefully.
One of your goals should be to achieve and maintain a high level of participation among all employees. According to Chris Cumming, vice-president of marketing at Diversified Investment Advisors, in Purchase, N.Y., a company may find itself in violation of IRS nondiscrimination rules if its plan favors highly compensated employees. As your staff grows and changes, says Cumming, it's especially important to educate employees about your 401(k) so that participation among the rank and file doesn't erode. You might, for example, use companywide meetings, newsletters, and materials from your provider to spread the 401(k) gospel. Although you'll want to steer clear of giving investment advice, you can and should include the following in your communication efforts:
1. Stress the tax advantages. Contributions are made on a pretax basis and thus reduce the employees' taxable income, and any accumulation is tax-deferred.
2. Let employees know that contributing to the company's 401(k) is generally less expensive than setting up a retirement account on their own.
3. Tailor communications to your workforce. If your employees are young, for example, they'll be less interested in what happens when they're 65 than in, say, a 401(k) loan provision that might help them come up with a down payment for a house.
4. Explain your company's investment-matching policy and other plan mechanics, such as how and when employees can move their investments into and out of the various plan options. According to R. Theodore Benna, president of the 401(k) Association, in Langhorne, Pa., this is a major source of misunderstanding. "Participants have the perception that once they hang up the phone, they've completed a transaction," he says. "It might take hours, days, or weeks before the money is transferred."
5. Let employees know that no investment option is without risk. "The most conservative participants want to be guaranteed that there is someplace they can put their $1,000 and get it back and then some at a later date," says Benna. "That doesn't exist." But Benna strongly recommends that a company avoid detailed descriptions of the various funds it offers. That should be left to the provider.
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You'll find everything you ever dreaded needing to know about 401(k) plans in The 401(k) Answer Book , by Steven J. Franz, Joan C. McDonagh, John Michael Maier, and William C. Kalke (Panel Publishers, 1995, $116). To order a copy call 800-638-8437. Also check out Helping Employees Achieve Retirement Security , by R. Theodore Benna (Investors Press, 1995, $45). Call 203-868-9411 to order the book.