Chapter 3...

Enrolling Participants in Your 401k Plan

Planning an Employee Communications Strategy

Planning and Conducting Enrollment Meetings
-- Planning the Meeting
-- Materials You'll Need
-- Guidelines and Agenda
-- Automatic Enrollment

Entering Employees into the Software Database
-- Setting Up the Database
-- Entering Enrollment Application Information into the Database
-- Entering Prior Year's Wages into the System

Planning an Employee Communications Strategy

Before you can expect people to join the 401k plan, you're going to have to make them aware that it exists; moreover, you must make them aware of the general and specific benefits that participating in it affords. In other words, you're going to have to “sell” the plan to your fellow employees. It shouldn't be a hard sell, though, considering your product. A 401k plan is a great benefit!

We've included a number of documents, as listed at the top of this page, to help you promote your company plan to your co-workers; the documents are housed within your 401k plan administration software under Reports. Your plan administration software package also includes a video slide presentation that you can present at the enrollment meeting, or extract information from to add to your own presentation.

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Planning and Conducting Enrollment Meetings

Some companies like to hold one big open enrollment meeting for all eligible and potentially eligible employees (such as those who are shy of the age or length of service requirement, for example, but will become eligible in the near future). Other companies prefer to meet with smaller groups, or even to brief individual employees. Other companies do all three. You can do whichever seems best for your company.

Promoting participation in the plan doesn't end with the initial enrollment meeting, however. You will continue to contact and educate newly-eligible and eligible-but-not-participating employees about the merits of the plan and participation in it.

How you go about explaining the vital information to your employees is up to you — but remember, your plan's health and livelihood depend on a participation pool that's balanced in the eyes of the IRS (see “Compliance Testing” in Chapter 8). It's your job to make sure a sufficient portion of eligible rank-and-file employees join the plan.

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Planning the Meeting

TIP… Before planning your meeting, review the video slide presentation, which addresses the following points in detail.

As Plan Administrator, you are the primary information source about the company plan. Before and during the enrollment meeting, you must impress upon the employees a number of important points, most notably the following:

1. The tremendous need for personal retirement planning (the spiraling descent of Social Security, the current lack of adequate personal retirement savings)

2. The basic benefits of participating in a 401k plan (deferred income taxation, the compounding effect of tax-deferred investing, the 401k's relatively high annual contribution limits, the bonus of any matching contributions being made by the company. . .)

3. How easy participating is (automatic salary deferrals, flexible contribution amount/deferral percentage, flexible investment selections)

4. That people can access their 401k money — via a 401k loan or a hardship withdrawal — before they reach retirement, but that doing so has a compounding negative effect on their final balance, just as deferring a little more money into the 401k each month has a compounding positive effect that can really add up over time!

5. What your company plan offers (specific investments, loan provisions, matching provisions, vesting provisions, as applicable)

Specifics of your presentation may include the following points:

• That a 401k plan is an IRS-sanctioned “tax-deferred retirement savings plan.” Participants don't pay federal income tax (nor often state income tax) on anything they have their employer divert into the plan, or anything the employer chooses to contribute to participants’ accounts, or any investment returns the accounts earn, until the money is withdrawn from the plan (usually at the participant's retirement).

• That deferring the payment of income taxes until later in life has two benefits: (1) the tremendous savings potential created by the compounding effect of tax-deferred savings, and (2) a likely lower total income tax assessment after retirement because the person will then probably be in a lower income tax bracket than during his or her working years.

• That the idea is to leave money in the 401k until the employee reaches at least age 59 1/2, and there are substantial early withdrawal penalties (plus income tax assessments)

• That if employees need to access their 401k money they can, either in the form of a 401k loan, which is sort of borrowing from themselves but which does bear a reasonable rate of interest, or in the form of a hardship withdrawal, which doesn’t have to be paid back and so doesn’t bear any interest, but which does involve substantial early withdrawal penalties and income taxations that can eat up close to half the withdrawal. Furthermore, a participant cannot choose to take a hardship withdrawal if he or she can qualify for a 401k loan; hardship withdrawals must be a means of last resort.

• That 401k loans are popular with participants. They believe it’s nice to know they have access to their money if they genuinely need it. But 401k loans do negatively impact the final account balance: the same compounding effect that bolsters 401k accounts also magnifies any breaks in the income stream into the accounts.

TIP…The standard loan application in the Loan Pac produced by your 401k plan administration software is designed to limit loans to only serious financial needs such as home purchase (or to prevent foreclosure), education, medical, or disability needs. We strongly encourage employers to adhere to such a standard for loans and not liberalize lending criteria. The statistics on 401k loans are dismal, and many loans fall into default because they are not repaid prior to the borrower's leaving the company, creating a financial liability for the borrower and extra paperwork for the Plan Administrator. Avoid unnecessary headaches: Keep borrowing to a minimum.

• That participation is completely voluntary. The employee chooses whether or not to participate. The employee chooses how much money to divert into his or her 401k account, either as a flat amount per month or a percentage of monthly earnings.

• That participating in a 401k makes saving money easy: the money is deducted automatically from the participant's pay before the person receives his or her paycheck, helping the person save money he or she might otherwise spend.

• That 401k money is portable. That is, if participants leave the company for any reason, their 401k money goes, too: they can simply withdraw it — but they'll be hit with early withdrawal penalties and IRS income tax withholding — or they can protect their accounts’ tax-deferred status by transferring them into their new employers’ 401ks or into an IRA, where the money can continue to grow and compound tax-free until they retire. The latter choice is called an IRA rollover. Participants can roll money they've accumulated in other retirement savings plans over into the current 401k, too.

• (Optional) That the company will be contributing to participants’ accounts, too. That means even more money compounding in participants’ accounts through the years! These contributions are called matching contributions and they'll be made at a rate of (fill in your company's matching formula).

• That matching contributions are designed to reward lasting employment with the company. To this end, many sponsors require a few years of being with the company before the matching contributions are 100% the participant's property. This is called “vesting” and it only affects someone if he or she leaves the company before the time at which matching contributions are 100% vested. The vesting formula being applied to matching contributions is (fill in your company's vesting formula).

• That all 401k participants will receive two monthly statements, one from the company (which your plan administration software compiles for you) and another from the investment account company mailed directly to their home address. The Plan Administrator will also receive a copy of the statements mailed to the participants’ home addresses.

• That participants have several investment options open to them, that the family of investments being offered through the 401k plan offer a diversity of investment goals.

• That investors should always read investment prospectuses before putting any money into an investment.

• That there are three principles to good investing: (1) diversification; (2) selecting investments that fit the employee’s personality, goals, and temperament; and (3) maintaining a long-term perspective (for instance, investors may actually benefit if investment values fall, because it means they can buy more shares per dollar now and if the value rises in the future those shares will be worth more. This concept of purchasing investment shares at lower prices is called dollar cost averaging.)

• That 401k investments are long-term investments: the market will go through bumps and glitches, but, over the long-run, things tend to even out.

• That 401ks are flexible: a participant can change investment selections or percentages and/or deferral amounts as time passes and needs change.

• That some investments companies expect participants to keep their money in the investment for a minimum amount of time. If they pull it out (for a 401k loan, for instance) before this time has elapsed, the investment account company may charge an exit fee. Any such fee is generally the responsibility of the participant to pay, and is clearly spelled out in the investment prospectus -- which is just one reason to carefully read each prospectus before investing any money.

• That some investment companies set minimum amounts on monthly contributions ($50, for instance). If the investment companies your company has chosen for its 401(k) plan use investment minimums, the enrollment meeting is a good time to make potential participants aware of such minimums.

• That most investment account companies don’t charge any exit fees if the participant is just moving money from one portfolio to another within the same family of funds, say from a stock-based John Hancock portfolio into a John Hancock bond portfolio.

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Materials You'll Need

We touch on each of the above topics in the enrollment meeting literature housed within your 401k software. The particular document names are listed at the top of this page and can be accessed via the Reports functions of your 401k administration software.

If you have not already done so, you should familiarize yourself with the contents of each of these items before passing them out to employees.

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Guidelines and Agenda

A lot depends on the level of enthusiasm of the prospective participants, and how much they were involved in the choice to have a company 401k plan. The more they already know about 401ks, the easier your enrollment meeting will be. You might wish to prepare them by sending out packets of material to each employee several times prior to the first enrollment meeting (varying the information in each packet sent), and of course advertising the whole subject of 401ks in your company newspaper and on bulletin boards throughout company facilities.

The fact that you already have contracted for a your plan administration software plan means that your company believes it will be popular and well received (otherwise the company never would have spent the money). But don't assume the employees know all there is to know.

Table 3-1 gives you some guidelines for conducting an enrollment meeting, large or small; Table 3-2 is a suggested agenda.

Table 3-1. Enrollment Meeting Guidelines
In preparing to conduct a 401k enrollment meeting...
Plan the meeting well in advance.
Decide if you want one big meeting or a series of smaller ones. Big meetings allow you to disseminate the same information to everyone at the same time, and everyone hears the same questions and answers; smaller meetings, on the other hand, allow more interaction and make some employees feel more comfortable to ask questions.
Send a personal notice to each employee you want to attend via e-mail AND through the company mail, stressing the subject matter of the meeting and how important it is for employees to attend (i.e., mention the major benefits to the employee).
Schedule the meeting at a place and time convenient for the employees (for instance, if employees use car pools, don't schedule the meeting at the end of the day unless all carpooling employees are invited to the meeting).
Advertise the meeting on company billboards and elsewhere around the facility well in advance of the meeting. (Your 401k software includes material that can be used for such advertising.)
Collate all the meeting handouts into packages, and place them in colorful envelopes. Make sure to have more than enough for the number of employees invited to the meeting, and make sure each attending employee receives a package (perhaps by placing one on each chair).
Prepare an agenda (see Table 3-2) and stick to it. A copy of the agenda should be at the forefront of each handout package.
Include as part of the handout package a one-page summary of the 401k plan, its key provisions, features, and benefits.
If you're calling together a large group of employees, have a top-level officer of the company (preferably the CEO) introduce the meeting and give a pep talk — a good idea even for small meetings if the executive can attend multiple meetings.
Order enough investment prospectuses so that everyone can take a set home.

Table 3-2. Sample Enrollment Meeting Agenda
Agenda:
1. Introduction by high-level management
2. What a 401k plan is and why the company is offering one to the employees
3. Employee benefits of participating in a pre-tax savings plan
4. What's in your handout package, and why each document is included
5. Summary of the company 401k plan
6. Our 401k plan's investment options
7. How to determine your personal investor profile and the type(s) of investments best suited to your needs — plus, the availability of personal investment and tax advice from qualified advisors.
8. The importance of contacting the investment company(ies), asking for prospectuses on investments that interest you, and studying them carefully.
9. Choosing the right 401k investments
10. Calculating how much to contribute
11. How to fill out the 401k Enrollment Form
12. Where and when to return the 401k Enrollment Form
13. Questions and answers

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Automatic Enrollment

Some companies opt for a relatively new procedure called automatic (or passive or negative) enrollment, in which every employee is automatically enrolled in the 401k plan as soon as he or she meets the plan's age and length of service participation requirements, whether or not he or she has made any active effort at joining the plan. Employees participate at whatever salary deduction rate and into whatever 401k investment(s) the company's published 401k automatic enrollment policy stipulates; a 3% of compensation deduction rate and a money market mutual fund are the most popular automatic enrollment policy coupling. Ample notification of the company's passive 401k enrollment policy and other restrictions and notification rules apply. For more on automatic enrollment, please visit the 401k Basics page of our website.

If your company has chosen automatic enrollment, you, the Plan Administrator should be aware of the following guidelines:

• All employees must be notified at least annually that the company 401k plan uses the automatic enrollment feature and how an employee can cease participation in the plan.

• Automatically enrolled participants must be immediately notified of their participation status.

• Any employer matching contributions being made to traditionally-enrolled participants’ accounts must also be made to automatically enrolled participants’ accounts.

• Automatically enrolled participants must have the opportunity to change their default investment selection and/or contribution rate.

• If an automatically enrolled employee soon after cancels his or her participation in the plan, any money put into the plan on the person's behalf must stay in the plan until the person's employment is terminated or the employee reaches age 65. At that point, the employee has the same withdrawal choices (IRA rollover, rollover into another employer's qualified retirement plan, or distribution) as any 401k participant of the same age and employment status.

TIP…The investment account company will mail prospectuses to you; order them at least 2 weeks before the meeting. Also, unless required, do not use the investment company's account application. Use your plan administration software's internally-created investment account application for all plan assets, attaching the two applications if necessary.

TIP…If employees have questions that you cannot answer, you should check our website's Frequently Asked Questions pages. If the question relates to how the plan administration software handles something, such as investments, you can call our technical support number: (818)501-4020.

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Entering Employees into the Software Database

The initial entering of employees into your plan administration software database is a six-step process:

1. Obtain from Payroll the names of all employees (except for members of any groups excluded from your plan administration software 401k plan) and the data needed for each employee that Payroll can provide (see below).

IMPORTANT!!!Part-time employees cannot be excluded as a class. Also, employers cannot exclude other classes of similarly-named groups (for example, “temporary” or “seasonal”). If an individual employee meets the age and service requirements, he or she is eligible. By law, anyone who works 1000 hours or more during the calendar year meets the service requirement and anyone 21 years or older meets the age requirement — such a person would be automatically eligible to join when he or she meets the other eligibility criteria (such as length of service), if any.

2. Enter this information into your plan administration software database, as well as needed information not provided by Payroll (see “Setting Up the Database," below).

3. Your plan administration software determines which employees are and are not eligible. (Non-eligible employees remain in the database, however.)

4. Conduct enrollment meeting(s) for eligible employees and distribute enrollment materials to all who attend.

5. Make sure all eligible employees who did not attend an enrollment meeting get enrollment material. By regulation and practice, all eligible employees must complete an enrollment form, even if only to formally decline participation! Not only is this good policy, it also protects the plan sponsor.

6. As enrollment applications are returned, enter the appropriate data for employees entering the plan. (Be sure to keep all the enrollment applications on file because they contain information you will need in the future.)

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Setting up the Database

Open your plan administration software and click on Employee Information. The fields will be blank.

Click on New, and enter the first employee's name (first, middle initial, last) in the highlighted “Name” box. Enter the rest of information for that employee through “Hired”: division (if applicable), social security number, title (VIP), address, telephone number, date of birth, and date hired (dates are month, day, and four-digit year).

The Amount of Contribution to Prior Plan and Year of Contribution to Prior Plan relate to the limits on the amount an employee can contribute in a year: either a certain percentage of their salaries or a fixed dollar amount, whichever comes first. These limits can change from year to year. your plan administration software prevents employee contributions in excess of the limit for a given year. These are the fields where you enter a new hire's previous 401k contributions for the current year.

(Until you have an enrollment application, you cannot enter the Desired Current Monthly Contribution or the date the employee joins the 401k plan.)

You must also check (by clicking on the associated box) whether or not the employee is an officer of the company, a 1% or 5% owner, a part-time employee, a union member, or a nonresident alien. (For definitions of 5% and 1% owners, see the Glossary.)

Because 99% of the time an employee with a social security number is also a U.S. citizen, the US Citizen block automatically gets a check when the social security number is entered. However, many non-U.S. citizens have social security numbers; if any employee is not a U.S. citizen, you can uncheck the box (it will not affect his or her eligibility if the other requirements are met).

Many 401k plans now have automatic enrollment; if your company does not, or if an employee has chosen not to accept automatic enrollment, check the Suppress Auto Enrollment box.

If the part-time, union member, or nonresident alien box is checked, your plan administration software will declare that employee ineligible, because these employees are usually excluded from eligibility in a 401k plan.

The 401k software calculates whether or not the employee is eligible, and displays “Eligible” or “Ineligible” in the left of the two lowest blank fields.

(When the employee terminates employment with the company, “Terminated” appears in the box to the right of “Eligible” when a date is entered for Termin.)

When you have finished entering data for the first employee, click on New, and enter data for the second employee. Continue until you have entered all employees.

TIP…Periodically, you will want to re-invite eligible employees who have declined in the past, to join the plan, You can identify these by comparing the “Eligible” versus “Participant” columns in your plan administration software Employee Census Report (on the assumption that eligibles who are not participants have chosen to decline) (see Chapter 9).

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Entering Enrollment Application Information into the Database

To process information from an employee's Enrollment Pac, click on Employee Information in the “Welcome. . .” window. Click on the name of the employee whose application you are processing (or add the employee by clicking on New, as described above).

Next to Joined, add the date the employee joined your plan (2-digit month and day and 4-digit year), then click on Participant. A check mark will appear in the Participant box, and a screen titled “Employee Allocations” will appear. This screen lets you list how the participant wants his or her 401k contributions (plus any matching contributions) divided among the plan's investments.

Enter the first investment choice of the new enrollee by clicking on the left-hand box of the first blank line under “Portfolio”, then click on the desired investment in the pull-down menu (at the right-hand side of the Portfolio line). The investment will appear on the blank line. Then enter the percentage of his or her monthly contribution the employee has allocated to that investment by entering the decimal number of the percentage (e.g., .2 for 20 percent, .15 for 15 percent).

IMPORTANT!!!Unless your plan is set up as having zero dollar minimum monthly contributions (depending on your choice of investment companies), the percentage of monthly contribution allocated to a single investment cannot equal less than $50 . In the latter case, if for any reason the amount allocated to a single investment is less than $50, your plan administration software will allocate the entire month's contribution to the default choice.

Continue with the second investment on the second line until all the enrollee's choices and their percentages have been entered. The total percentage must equal 100%. Then click on Exit to return to the “Employee Information” window.

It is important that you enter the employee's default selection. If you don't, a prompt will remind you that no default has been indicated, although you will be allowed to continue processing. However, your plan administration software does not consider the employee a participant until the default choice is entered and will refuse data for that individual. The Notes field in the “Employee Information” window is a good place to remind yourself that you have to contact the employee.

Also, the last line of the “Employee Allocations” window is a blank, with a star in the left-hand column. This shows the end of the list. If you have any more blank rows, you will not be able to exit the screen until you delete them. To do so, click on the black arrow on the left and press Delete on your keyboard.

When you have processed the first month's actual contribution in your plan administration software, for any new participant who needs to have an account opened or for a participant who has no account numbers in the system, an investment account application will automatically be issued (see Chapter 4). (Some no-load funds and brokerage companies require their own applications to be filled out and sent in with the first allocation, in addition to your plan administration software application. Please contact our office for additional information.)

You’ll enter the account numbers into your plan administration software when you receive them from the investment account company. The account numbers will be clearly identified on the investment account statements that are mailed directly to you (with a duplicate mailed to the participants) as soon as the purchase of shares is made. It is important to enter the account numbers as soon as you receive them. If you don’t, and you process another month’s contribution, the software will print out another investment account application and the investment account company may issue another account number, resulting in two account numbers assigned to the same account. (See “Investment Account Numbers,” at the beginning of Chapter 4.)

Again, be sure you maintain a file of all enrollment applications because they contain information, such as beneficiary designations, not input into your plan administration software.

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Entering Prior Year's Wages into the System

The first year you run your 401k plan using our plan administration software, there's one additional bit of information you need to provide the software with after you've input your basic employee data and -- preferably -- before you begin processing contributions: You'll need to provide the system with each eligible employee's prior year's W2 wages (a.k.a., gross wages) so the software can determine which employees to categorize as highly-compensated, a determination necessary to the software's IRS compliance testing functions. If you used the software to run your plan the previous year, the information is already in the system and you can skip the below.

To enter the necessary prior year's wage information, you're going to "process" a dummy set of contributions for December of the previous year.

NOTE…If you've already processed information for any month in the current year beyond January, the software won't let you jump back to December of the previous year without logging information for each month between December and the first month in the current year for which you processed information. If this is the case, simply backtrack — month by month — from the first month in the current year for which you processed information to December of the previous year, following the procedures outlined below for each month.

• Go to the "Main Menu," click on Processing, then on Process Monthly Contributions. So long as you haven't yet done any processing for any month beyond January of the current year, simply choose December from the Current Period pull down menu, and the prior year from the Year pull down menu (don't worry about the Posted to MF pull down menu). If you HAVE processed information for the current year, start by choosing the month one prior to the earliest month of the year for which you did any processing (for instance, May if you started your plan in June), and leave the Year as the current year.

• Click Process.

• The "Monthly Contribution Processing" grid will pop up. It should be filled with zeros. If any entries appear in the Loan column, change the figures to zeros.

• If you're NOT on December of the previous year (that is, you're working your way back to December), simply click Continue then repeat the above steps until you've worked your way back to the "Monthly Contribution Processing" grid for December of the previous year.

• Once your ARE at the "Monthly Contribution Processing" grid for December of the previous year, zero out any loan entries that appear, then in the Salary column key in each person's gross wages (also known as W2 wages) for that previous year and click Continue.

Now your system has the information it needs to determine which employees are highly compensated and to run IRS compliance tests in the current year.

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