401(k) Plans – What You Need To Know?

Many employers who sponsor a 401(k) plan are looking for ways to boost employee participation in the plan. One way for companies to raise participation rates is by increasing the company’s matching contribution. However, certain types of employee education may increase participation rates nearly as effectively as matching contributions and at a lower cost.

Why Do Employers Need To Increase Participation?

For a 401(k) plan to maintain its tax-qualified status, the plan must satisfy certain tax law requirements. One of the requirements is that the plan cannot discriminate in favor of highly compensated employees. Highly compensated employees are those employees who were paid more than $110,000 in the past year or own more than a 5% interest in the employer in the past year or in the current year. Many employers need to increase the participation rates of their non-highly compensated employees so that their 401(k) plan will pass a special nondiscrimination test that must be performed each year.

How Can Employers Increase Participation?

Targeted communications can be as effective as an increased company matching contribution in boosting plan participation. Targeted communications include generic newsletters and statements prepared by consulting firms or investment managers that discuss current financial market trends, personal investment strategies, and the economic outlook. Communication materials that are tailored to the company’s plan that give more information about the specific plan and suggest appropriate savings levels are also potential targeted communications.

What Are the Other Benefits of Employee Education?

Employee education can not only increase participation rates, but may also increase the amount employees contribute to the plan and change the way in which participants invest their plan account. This is good news for employers. If your company can’t afford to offer a higher match rate, you might be able to improve results by providing education about investment and savings principles to your employees, at a considerably lower cost. The education may boost your plan enrollment rates while helping employees make the most of the retirement plan.


Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

Articles are published for general information purposes and are not an offer or solicitation to sell or buy any securities or commodities. This material does not provide individually tailored investment advice.  Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives.

Morgan Stanley Financial Advisor(s) engaged Ivie P Burns, II to feature this article.

Ivie P Burns, II may only transact business in states where he is registered or excluded or exempted from registration www.morganstanleyfa.com/burnsbinkley  

Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Ivie P Burns, II is not registered or excluded or exempt from registration.

Article by Morgan Stanley Smith Barney LLC. Courtesy of your Morgan Stanley Financial Advisor.

ã 2012 Morgan Stanley Smith Barney LLC. Member SIPC.


Leave a Reply

Your email address will not be published.