When offering a 401(k) plan or upgrading your current plan, it’s important to understand the basic components of plan design – and which features will best meet the retirement needs of your worksite employees. The ADP TotalSource Retirement Savings Plan (the “Plan”) is a robust 401(k) plan that provides you with flexible plan design options.
What is plan design?
Designing the right retirement plan for your business means choosing the features and options to the goals you want your worksite employee to achieve. In general, employers offer retirement plans to:
- Help employees prepare for a financially secure retirement,
- Maximize employer contributions to retirement plan accounts,
- Support the hiring and retention of employees, and
- Provide tax savings to your business.
Depending on your goals, these will vary and may change over time as your business grows. According to data from Human Interest, offering a 401(k) plan may lead to lower turnover rates for small to medium-sized businesses.1
There are building blocks that serve as the foundation for most traditional retirement plans. Beyond the essentials, however, there are popular plan features that you can adopt to help your worksite employees maximize the benefits of your plan. To ensure your plan design is continuing to meet your goals, here are features you may consider reviewing and why you might want to add:
- Auto enrollment – with this feature, you, as the employer, will deduct a set minimum elective deferral from your worksite employee’s pay and deposit it into their Plan account. While the recommended default in the Plan is 6%, you may elect a different percentage. When an Adopting Employer adds the Automatic Enrollment feature to their existing Plan, it will be implemented for all employees eligible to participate in the Plan but with no affirmative elections on file. For example: an employee was contributing to the Plan but changed their contribution amount from 1% to 0%. Even though this participant is no longer contributing to the Plan, they have an affirmative election of 0% on file and they will not be automatically enrolled.
Why add? Auto enrollment can improve your plan’s participation rate and promote worksite employee retirement readiness.
- Auto increase – when implemented, the deferral rate of your employees who were automatically enrolled in the plan will automatically increase at set intervals until it hits the maximum contribution rate. Typically, the rate increase is 1% annually with a maximum rate of 15%.
Why add? Often times, participant contribution rates remain the same year over year – even as income increases. Auto increase helps your worksite employees maximize their retirement savings.
- Employer match – this feature is exactly what it sounds like – you, the employer matching a percentage of the contributions made by your worksite employees to encourage them to save for retirement. The Plan offers multiple options for you to choose from, including various formulas and vesting schedules, as well as discretionary options (e.g., profit sharing).
Why add? It shows your worksite employees that their financial goals and retirement security are important to you and that you want to help them reach those goals.
- Safe harbor – this provision requires that you make minimum contributions to your worksite employees’ Plan accounts that are immediately vested. As a result, the plan automatically satisfies certain nondiscrimination requirements. Similar to other plan design features, the Plan offers various options from which to choose.
Why add? Safe harbor plans can provide an automatic pass to the Actual Deferral Percentage (ADP) test so this type of refund to your highly compensated employees is no longer required. In addition, top-heavy testing and the top-heavy minimum contribution requirements may be avoided.
Plan design can significantly impact whether your worksite employees are on track for retirement or not. Adding one of more of the above features may help ensure their success. Reach out to your assigned ADP TotalSource 401(k) Specialist today at 844-448-0325 to learn more and discuss your options.
