Boost Participation in 401(k) Plan

If you have a 401(k) plan, it’s important for rank-and-file employees to participate. The amount that business owners can contribute to the plan is reduced if employee contributions are too low. Here are two ways to increase employee contributions:

Structure the plan so that instead of affirmatively electing to participate, employees automatically contribute a specified percentage of their salaries to the plan unless they elect to receive cash. The IRS recently approved this technique, provided employees receive adequate notice and are permitted to change the election later. This approach avoids the exclusion of employees who want to contribute but neglect to file the necessary paperwork.

Allow loans to participants. A recent General Accounting Office study showed that participation rates for 401(k) plans that allow employees to borrow from their accounts are about 6% higher than for plans that don’t allow borrowing.