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3 arguments to knock down 401(k) eligibility barriers

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Perhaps it’s time to take a philosophical assessment of your company’s retirement plan. Does it exist simply out of a sense of obligation, or because your competitors have one? 

Or does your culture support it because of a belief that employees should have something to show for their labor after they have left the company?

If the latter is true, but you still have outdated eligibility policies for participation in the plan, then a reconsideration of those policies may be in order.

Yes, “outdated” is the word. Or so says retirement consultant Rob McCracken, in an article for Pension Consultants Inc.

McCracken notes that the trend these days is to scale back or reduce any barriers to retirement plan entry for employees. Citing figures from the Society for Human Resource Management, he notes that plans offering immediate eligibility have increased from 45 percent of defined contribution plans in 2001 to 76 percent in 2013.

“We’ve also experienced increased trends in participation rates and distributions in tax qualified vehicles, which may be associated with relaxed eligibility standards, and ultimately can help participants become retirement ready,” he says.

McCracken makes the following argument in favor of relaxing or eliminating altogether barriers to retirement plan entry.

Argument No. 1: Help the job-hopper

The author points to data that indicates that most employees switch jobs often, and that 4.6 years is an average tenure these days.

“Given these averages, over a 30-year period, an individual would be losing out on seven-plus years of contributions into various employer-sponsored retirement plans if each employer had an eligibility waiting period of one year. 

“This would mean that over 19 percent of this individual’s working career would have been spent waiting to become eligible to participate, and the opportunity loss would probably have a major impact on retirement readiness. Reducing the eligibility gap would allow a participant more time to contribute, and in turn, their savings to grow faster,” he says.

Argument No. 2: Encourage opt-out, not opt-in

Plans that have waiting periods play into the worst retirement planning tendencies that people have. New employees lose interest. They get used to spending every penny and don’t want to divert it after three months to a plan promising security in one’s dotage.

“It may be easier to explain the benefits of plan participation to a new hire who is excited about the new opportunity, than to an employee who may have lost interest or whose priorities have shifted since being hired. 

“Relaxing eligibility periods can take advantage of this inertia and get participants in the plan. Combining automatic enrollment with relaxed eligibility provides participants the option to opt-out rather than to opt-in, making for a very effective way to increase plan participation,” he opines.

Argument No. 3: Roll with the rollover trend

McCracken cites stats that show American workers are more likely now than ever to roll over assets from one account to another when they change jobs.

“Shortening eligibility requirements to allow quicker if not immediate rollovers will discourage participants from cashing out and will allow balances to continue growing. Some employers even have force-out provisions that mandate action from the participant before being considered eligible to participate in a new employer’s plan, another reason to consider shortening eligibility requirements for the good of participants,” he says.

So get on the no-eligibility bandwagon, McCracken says, and help your employees make sound financial decisions now that could turn into wise financial management practices later and wind up with a former employee who, in retirement, is contributing to the economy rather than eking out an existence on whatever Social Security has to offer.