Technology Firm Makes Minor Changes to Achieve Massive Results
A technology company in Tennessee had a problem. Their employee base consisted mostly of younger employees who were compensated well but didn’t see the value of the 401(k). Because of this, participation and contribution rates were low from this group of employees.
Because the rates were low, the company was having trouble passing annual testing, and to make matters worse, their highly compensated and key employees were extremely limited in their ability to contribute to the 401(k) plan. This situation also made recruiting and retention of highly compensated employees much more difficult. They considered a safe harbor match to eliminate the need for testing, but determined it was not something they could add to their current budget.
The company partnered with Ellis Retirement Services to do a comprehensive review of their 401(k) program, and to design and implement solutions in an effort to optimize the plan for both non-highly and highly compensated employees.
- Technology industry
- 225 employees
- No match
- Low participation and contribution rates
After a thorough review and analysis of their plan, the Ellis Retirement Services team recommended two primary changes to their current 401(k) program. First, we recommended that the company add what is sometimes called a “stretch match.”
The company couldn’t afford to implement a full safe-harbor match, but they felt they could do something. After analyzing their budget, they determined that they could match up to 2% of compensation. Traditionally, when this is the case, the company might add a match formula of something like “dollar for dollar up to 2% of pay.”
In this situation, however, we needed to encourage employees to contribute a higher percentage of pay, so we decided to “stretch” the match with a different formula. The formula we implemented was $.25 of every dollar up to 8% of pay. Not only would this formula limit the company’s financial exposure to 2% of pay, but it would encourage employees to contribute 8% of their salary to take full advantage of the match.
In addition to the match, our team stressed the importance of implementing a full financial education and wellness program for the employees. A 401(k) plan can be structured in amazing ways, but if the employees don’t understand how it works or how it provides value to their lives, they will often be hesitant to participate.
Based on the demographics of the employee base, it was determined that a full education program using multiple methods and mediums would need to be employed. The Ellis Retirement Services team designed an educational program that delivered education via webinars, virtual office hours, email newsletters, short-form videos, and one-on-one meetings to all employees. In addition, the educational program was designed to help employees with all aspects of personal finance, not just the 401(k).
Six months after implementing the stretch match and educational programs, 401(k) participation rates were up 48%. In addition, highly compensated employees were now able to defer 6% of pay as opposed to their previous limit of 2% of pay. Most importantly, though, employees were surveyed, and they conveyed that they were must less stressed about finances in general since the addition of the new 401(k) educational programs.
If you would like us to take a look at your 401(k) program, please reach out to schedule a meeting. We’d love to learn more about your company and see if we might be able to help.
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