401(k) Escalation and allocation

It is extremely difficult for the human resources staff to convince employees to shift some of their net pay into a retirement plan, especially in situations where employees are accustomed to spending all of what they earn. Even more pressure must be applied to convince them to increase the amounts being withheld as employee compensation increases over time.

A possible solution that takes the pressure off the human resources staff is to install a 401k escalation and allocation system. This system contains the following features:

  • The plan automatically enrolls all new employees in a 401k retirement plan, which forces them to opt out of using the plan if they do not wish to enroll.
  • The plan automatically increases the amount of employee net pay contributed to the plan as their compensation levels increase. Again, employees must opt out of these increases if they do not wish to participate.
  • The plan automatically shifts their contributed funds into more conservative investments as employees approach retirement age.
  • In the event of an employee departure from the company, the plan automatically shifts all contributed and matched funds into a tax-deferred account. Doing so keeps employees from being penalized for having taken an immediate payout from the plan.

It may be more expensive to operate an escalation and allocation system. However, it is the responsible approach to take with employees, to give them a better chance at having a reasonable amount of money set aside when they retire. Also, the automatic inclusion of all employees in a 401k plan makes it much more likely that a business will easily pass its annual plan discrimination tests.

Related Courses

Human Resources Education Bundle 
Human Resources Guidebook 
Payroll Management