It states that companies that allow new hires to participate immediately do not have to count, for the purposes of ADP testing, the participation rates of new hires who make less than $80,000--the group that tends to contribute or participate the least.
This should make it easier for companies, such as Advantica Restaurant Group, that want to eliminate or shorten their waiting periods to go ahead and do so, employee benefits consultants say.
Starting Jan. 1, Spartanburg, S.C.-based Advantica--which employs 20,000 workers in California through its 800 Denny's, Coco's, Carrows and El Pollo Loco restaurants--plans to cut its one-year waiting period in half.
From the standpoint of the employee, the benefit of such changes is clear.
Take Helen Ahn.
Last December, the 28-year-old Santa Monica resident took a job as a legal secretary for a law firm in Los Angeles that imposed a one-year waiting period.
She had never been offered a 401(k) before. "So I didn't care," said Ahn, who has since left that job to work as an editor and producer for a television production company--where she is allowed to immediately contribute to her plan.
"Now I do."
Here's why. Assuming an employee contributes just $4,000 a year to a 401(k) (the IRS limit for 1998 is $10,000) starting at age 22, and works until he or she is 62, that person will have amassed $1.1 million in the account, said Dee Lee, president of Harvard Financial Educators of Harvard, Mass., and coauthor of the book "The Complete Idiot's Guide to 401(k) Plans." That's assuming an 8% average annual return.
But if the worker changes jobs seven times--the national lifetime average--and runs into a one-year wait each time, that person could have just $534,000 by retirement age.
(There may be a way to reduce some of the damage, depending on your circumstances. If you otherwise qualify, you could put up to $2,000 each year you're forced to wait into a deductible IRA. Nevertheless, you could very well wind up with hundreds of thousands of dollars less at retirement age if forced to go through several such waiting periods.)
Even a single one-year delay, if encountered early on in one's career, could cost you tens of thousands of dollars by age 65.
That's what could happen to Debbie Busby. The thirtysomething Manhattan Beach resident began contributing to a 401(k) plan with her first employer, in Texas, immediately after graduating from the University of Texas at Austin. But five years later, Busby moved to Los Angeles, where she took a job with Trident Data Systems, a software company that, at the time, imposed a waiting period. (It was technically a six-month period, Busby said, but she missed an enrollment period and had to sit out a full year.)
"It was annoying," said Busby. But had she been allowed to invest even $5,000 in her 401(k), she could be $86,000 richer by the time she turns 65, again assuming 8% annualized returns.
From some companies' standpoint, the advantages of faster participation are less obvious. Those in high-turnover industries, such as retail, cite the added costs associated with having to enroll new hires that might not be with the firm six months down the road. These include not only record keeping but the costs of educating the worker about 401(k) plans.
But Patricia Summers, director of compensation and benefits for Sempra Energy--the San Diego-based parent of Southern California Gas and San Diego Gas & Electric, which in late July eliminated its one-year waiting period for most of its workers--notes that firms with waiting periods have an equally expensive and burdensome task: They have to keep track of when each employee becomes eligible, and find a way to contact that worker and educate him or her one-on-one about 401(k) options, she said.
This can be especially costly for companies whose employees are scattered in dozens of locations throughout the world, said William Gebhardt, vice president of human resources for Pasadena-based Jacobs Engineering.
For instance, before Jacobs got rid of its waiting period in 1995, Gebhardt recalled the difficulty of finding field services workers, such as welders and pipe fitters who are often working on projects for clients, when they became eligible to contribute.
Now that Jacobs allows immediate participation, the company can educate its new hires at the same time it discusses other benefits at orientation.
Since Allergan did away with its waiting period, the percentage of employees participating in its plans has shot up from 64% to 73%.
Allergan's Burnham notes that the ability to sit down and educate new hires at orientation--when their minds are on benefits--is critical in convincing workers, especially those who aren't highly paid and aren't as familiar with the importance of 401(k), to take advantage of the plans.
Not only has this benefited those employees, it has helped Allergan recruit middle-level managers.