When the prospective client has said "yes" to your PEO services, a logical next step is their commitment to participate in your 401(k) plan benefits. Although the strategies outlined below can be used in any plan design environment, their best fit may be in a multiple employer, worksite­tested environment, due to the increased flexibility available for each client.

OFFER THE BEST ALLOCATION FORMULA
Since the small-business owner makes the decision about participation in your plan, the most important thing to remember in your initial 401 (k) presentation is to provide the owner with the best plan allocation available.

In a 401 (k) plan, it is possible for the client/owner to make a tax deductible deposit into a retirement plan without making contributions for other eligible employees. A plan is "top heavy" when the total accounts of all key employees exceeds 60% of the total of the accounts of all employees. Please note that if a 401 (k) plan is offered to a small company where there is one highly paid key employee and a few non-highly compensated employees, the contribution and earnings that are credited to the key employee/owner may exceed 60% of the total assets of the plan, thus requiring up to a 3% "top heavy minimum contribution" to the non key employees.

A 401 (k) plan is one of very few qualified retirement plans that allow a client/owner to make a tax deductible contribution without requiring employee contributions. The contribution percentage of compensation allowed for the highly compensated/owner is the lesser of the average of the non-highly compensated employee percentage of compensation, plus 2% or the average of the non-highly compensated employee percentage of compensation times 2%. Although some may view this limitation as a negative incentive, we disagree. It is clearly a benefit.

Let's assume the average of the non­highly compensated percentage of compensation is 2%. The owner's allowed percentage is then 4% compensation. If that individual earns $100,000, they may contribute $4,000 to a retirement plan with no cost for employee contributions. If the highly compensated/owner earned $160,000 (the current maximum allowable compensation for plan purposes), they could contribute up to $6.400. Take this one step further. If the non-highly compensated employee average percentage of compensation was 4% and the highly compensated earned $160,000 or more. Their contribution would reach the maximum salary deferral limit of $9,500.

MAXIMIZE EMPLOYEE PARTICIPATION
Once the client has agreed to establish the plan, you are ready for the second step. Since the amount the highly compensated can save is directly tied to the amount the non-highly compensated save, we want to achieve the highest participation percent­age by the non-highly compensated employees. Although PEO contributions may not be required, they will certainly encourage participation by the non-highly compensated employees. An appropriate matching contribution formula should be discussed with client/owner before employees are offered participation in the plan. Whether the client/owner chooses to make matching contributions or not, remember these basics to increase non­highly compensated employee participation.

1. Obtain the clients commitment that enrollment meetings will be mandatory for all eligible employees.

2. Provide participant education on 401 (k) to employees in a clear, understandable format. Illustrations are very important. Personalize this information whenever possible.

3. Provide multiple investment options with a choice of investment managers and types of investments. (See sidebar, "The Numbers Game.")

4. Provide participants with basic investment education so they can make informed investment decisions.

5. Provide participants with an accurate contribution and investment environment. The trust of your participants is dependent upon accuracy. To help build that trust, we recommend the use of an allocated environment. All funds are separated by participant instead of being commingled in an unallocated account. This also provides for swift production of quarterly statements.

6. Utilize an investment company with toll-free telephone access where participants can obtain information on their account balances at any time arc make transfers within available funds on a daily basis. This will provide participants with a feeling of control, thus contributing to their security within your plan environment.

7. Establish direct toll-free number communications with your plan administrators so that your participants may have access to information related to qualified plans that may be unrelated to investment questions.

Remember the better the communication, the greater the participant's satisfaction. II participants wish to accumulate wealth, they must save. The absolute best way to save for retirement is in a 401 (k) plan. If the client's eligible participants understand this, they will join your PEO 401 (k) plan.

The information in this article is not meant to be legal or tax advice, nor is it meant to be accurate and applicable to all situations. It is designed to provide you with ideas to assist you in your marketing development. All parties must rely upon the advice of their own tax counsel for legal opinions.

David W D. Core is a Certified Financial Planner, a Charted Financial Consultant and a Certified Life Underwriter.
David W.D. Core is a registered representative of, and securities offered through, Lincoln Financial Advisors Corp.