Extreme 401(k) Makeovers

If your plan has been battered and bruised by mutual fund scandals and the volatile stock market, consider revamping it to attract participation.

The last few years have not been kind to 401(k) plans. The stock market tumbled back to earth, mutual-fund trading scandals rattled 401(k) plan sponsors and participants alike, and stagnant wages limited employees' willingness to begin or increase contributions.

"Stock market performance has made plan participants either disillusioned about investing or more realistic about their abilities when it comes to saving and investing," says Lori Lucas, director of participant research for Hewitt Associates in Lincolnshire, Ill. "As a result, many people are not saving for their retirement at all, or at very low levels."

The availability of other tax-deferred savings options is further depressing plan assets and participation. "There is a lot more competition for tax-free dollars from vehicles like health savings accounts and Roth IRAs," says Don Bartolai, a principal with Mellon Human Resources & Investor Solutions based in Chicago.

But companies are not giving up. Although in the past they congratulated themselves on achieving participation rates in the mid-70 percent range, they are now beginning to strive for rates of 80 percent or more. Recent surveys show that they are working hard to boost participation out of concern that low participation rates will hurt employees' future ability to retire.

Organizations have another impetus for increasing the rates: maintaining their 401(k) plan's tax-deferred status. To retain this standing, they must pass nondiscrimination tests that determine whether their plan benefits higher-paid employees more than lower-paid workers. As a result, they are marketing the 401(k) plan to their employees by instituting company contributions or increasing the percentage of their match, cleaning house of underperforming investment options, and looking for ways to make enrolling in the plan or boosting contributions as easy as possible.