Participant contribute pre-tax dollars to an account that earns dividends. In some cases, the employer matches employee contributions. Almost without exception, employees can take their contributions and any dividends earned with them when they leave the company.
For employers, a 401(k) can be a great retention tool, especially when a company match is fully vested over several years.
Still, employers can find convincing employees to participate in their 401(k)s a tough task. And when employee accounts take a hit in down markets, the task can become that much more arduous.
"When the market is in as bad a shape as it is now, it's a tough sell," says Nicole Kelly, a principal in the Pittsburgh office of Buck Consultants.
Kelly says Buck Consultants educates younger employees by pointing out how a very modest amount saved regularly can build into a substantial sum over time. She also suggests putting the plan into terms that particular employee group can understand. To give employees of the Hard Rock Café a sense of how the money could grow over time, she explained to them that they could look at it as "a 150 percent tip."
Kelly suggests employers communicate information about the plan's performance on a regular basis and put short-term fluctuations into perspective so employees understand the value of a long-range investment strategy and don't grow preoccupied with temporary earnings peaks and valleys.
Employers should provide as much technical information as possible about investments in the plan, a description of the nature of available investments and general investment guidelines for asset allocation.
Pete McCormick, a lawyer and principal in Buck Consultants Pittsburgh office, suggests employers review their plans regularly to determine if their performance is adequate in the context of the market's general performance. A dip in recent quarters wouldn't be unusual, for instance, given the prevailing trend in the market, nor would poor performance in a single quarter necessarily indicate that a change is called for. But employers should have a process in place to review their plan and be prepared to make changes if required.
Says McCormick: "Your best bet as an employer is to establish that process with professional advice and follow that process."