A recent New York Daily News reader poll suggests that most current participants in a 401(k) plan intend to stay the course.  Nearly half (49%) said they’d leave their investments alone and try to ride out the storm.

Surprisingly, 21% said they intended to increase their investments in the hopes of getting in on some bargains that will grow dramatically as the economy stabilizes. Another 10% intend to downshift a portion of their investments to more conservative options (such as bonds).

There is still a significant percentage (19%) that intends to get out entirely. It also should be noted that there’s only so much one can read into polls such as these. Responses are limited to people who not only participate in a plan but also take an active interest in them.

Nevertheless, there is at least hope that the dire predictions of massive long-term drops in 401(k) participation will prove to be unfounded.

Employees see their 401(k) statements and read about the hit 401(k)s and similar retirement accounts have taken in the current economic downturn. One especially dire estimate said that on a national level, 401(k) accounts have lost a total $2 trillion in the last 15 months.

What’s an employer to do? According to financial planner Sarah McDevitt, it’s best to look at what not to do:

• Pretend everything is hunky-dory and not address the issue with employees
• Fail to emphasize the point that down markets eventually go up again and a 401(k) is a long-term investment, not a short-term get-rich strategy, and
• Allow potential misinformation about the workings of your company’s 401(k) plan to create undue worry among employees.

Generally speaking, the best thing to do with a 401(k) in a down market is sit tight. Taking loans against the plan is usually a poor strategy for a short-term fix, and taking a full-fledged distribution is even worse.

The scariest part: Victims of benefits-related ID theft often make out worse than those who fall prey to the more common variety. The bad guys are ahead of investigators after such thefts occur, and are often very good at covering their tracks.

Also, because benefits ID-theft is a relatively new type of crime, there’s no well-established system for victims, plan sponsors and vendors to set things straight after the fact.

401(k) accounts a prime target

Not surprisingly, employees’ 401(k) accounts have become the primary target for benefits thieves. An alarming MSNBC news report showed just how easy it can be for thieves to tap into an employee’s 401(k) accounts: If an online account gets hacked into or account paperwork falls into the wrong hands, it takes only a few mouse clicks to wipe out the victim’s retirement savings.

With typical credit-card or bank account fraud, victims need only call their card issuer or bank, report the crime and refuse to pay for an item. But 401(k) theft is much, much harder to resolve.

Three huge obstacles:

1. Money in 401(k) accounts is not federally insured, like a bank account.
2. 401(k) accounts rarely — if ever — come with automatic identity theft protection from the vendor, like credit cards.
3. Even if the theft is successfully resolved, the situation becomes an ERISA nightmare for plan sponsors, because your company also has to account for the way the theft affected the growth of the employee’s account before the money was restored.

The threat is growing, with people living and working longer.

In a survey conducted by MFS Investment Management, nearly half of people nearing retirement age are expecting to continue working into the early phase of retirement to help bolster their savings.

The definition of retirement is changing. MFS suggests formulating a formal retirement income plan and extending retirement planning well into the employee’s golden years.

Currently, about 25% of employees  underestimate how much money they’ll need to retire comfortably.

Experts caution that, without financial education, even workers with pensions or 401(k)s could find themselves struggling after retirement. This is especially true if your firm doesn’t offer retiree health coverage.

Even experienced benefits pros can struggle to keep on top of the feds’ arcane 401(k) reporting requirements and special-case distribution rules.

Here’s how to handle four areas where people often get tripped up:

1. Year-end 401(k) enrollment

Suppose you hired an employee in late December and he enrolled immediately in the 401(k) plan.  His first contribution to the plan likely came out of a January check.

So should you count him in your 2008 plan report or wait until you file your 2009 report?

Answer: The feds say to wait until 2009 for record-keeping purposes, because he had no 2008 compensation from which he could make a salary deferral.

2. Distribution without consent

Generally speaking, you must contact a former employee for verification before making any 401(k) distribution over $5,000. But there are exceptions:

• distributions of under $5,000 made after age 65 (although best practice is to notify the retiree anyway), and
• situations where you’re unable to get current contact information for the person after at least four unsuccessful contact attempts.

In the latter case, keep in mind that your firm has limited choices for distributing the money. One legal option: transfer the money to a state unclaimed-property fund.

3. Contributions not withheld

What if an employee signs up for the 401(k) but, due to a clerical error, the money was never deducted from the person’s paycheck?

 Here’s how to straighten it out: The IRS requires your firm to make the missing contribution on behalf of the employee, plus any related matching contributions.

Finally, you must also make up for any lost earnings on the money the employee intended to invest.  Bottom line: This is a very expensive mistake to fix, but once its done, your firm is back in ERISA’s good graces.

4. Small refunds

Suppose Payroll accidentally took out a little too much money. Example: The department took out an extra $10 per check for three checks before someone caught the mistake.

Are you required to issue a $30 refund to the employee? Yes.

The expected participation rate may vary not only by your industry but also by your location. On a national level, 52% of employees participate.

 According to EBRI here are the five top and bottom states for retirement plan (defined benefit or defined contribution) participation.

Top 5:

1. Wisconsin (67.7% participation average)
2. Iowa (66.9%)
3. North Dakota (65.8%)
4. Connecticut (65.0%)
5. Minnesota (64.1%)

Bottom 5:

1. Florida (41.8% average participation)
2. Arizona (44.3%)
3. Louisiana (46.7%)
4. Texas (48.8%)
5. Nevada (50.3%)

In times like these, it’s crucial for colleagues to share their concerns, experiences suggestions. A few weeks ago, HRBenefitsAlert.com ran a special report on calming employees’ 401(k) fears. The reader comments revealed that many benefits pros were just as afraid as employees, and people’s frustration led to some unfortunate carping back and forth between several readers.

The purpose of the comments section, apart from giving people the opportunity to react to the story, is to provide a forum for benefits managers to interact. It’s my hope that we can generate an exchange ideas that have (and have not) been working at readers’ companies during the current situation. Specifically:

• What are you doing to manage health benefits costs as budgets are either frozen or shrink?
• Have you noticed a dip in morale or productivity with all the doom-and-gloom in the news?
• How is your company trying to calm employees’ fears about salary freezes or layoffs, 401(k) losses, health cost shifting and other issues that get a lot of mainstream media focus?
• What are you saying to employees to deliver the news they need to know but also keep morale high?

Thank you in advance for your willingness to share your expertise and personal experiences. Everyone benefits in the long run.

Workers at the North Dakota-based company complained about their share of monthly health plan premiums being raised while salaries were frozen. While this situation is common nationwide, workers only cared about their own situation.

Grass wasn’t greener on the other side

Management hadn’t increased the cost shares for the sake of being stingy. A lot of time had been spent crunching numbers to minimize the pain for employees without cutting benefits. A key focus point: How much did other employers in the area deduct from employees’ paychecks for similar coverage?The research proved useful not only for setting employees’ contributions for the plan year. It also came in handy as an employee education tool. Workers saw that the grass wasn’t greener in other local organizations.

Despite the cost increase, employees’ cost shares remained lower than those at many other companies. Once they were confronted with the facts, there were few complaints about paying a few dollars more each pay period and an extra buck or two for co-pays.

Shifted education focus to area of company strength

Because raises weren’t the cards for most employees, and the firm’s base salaries were neither exceptionally high nor abnormally low for the industry and region, management looked focus on the areas of its benefits package where it was markedly superior to competitors.In this case, the company found that its retirement benefits were the strongest part of the benefits package. The firm was one of the few employers to offer its workers both a 401(k) and a traditional pension plan. To help employees realize that these benefits were just as important as base salary, the HR/Benefits manager took two key steps:

1. The company’s employee newsletter regularly focused on ways to plan for a comfortable retirement. Specifically, it looked at ways employees could take advantage of both plans to be able to retire without fear of financial hardship.

2. The company offered its employees access to third party retirement-planning counselors.

While nothing could totally erase employees’ concerns about their health benefits and salaries, people also saw that management hadn’t forgotten about their needs and they’d be taken care of.

One sure sign the message struck home: 401(k) participation increased significantly even before the company adopted automatic enrollment.

Here’s how one small company in Arizona cleverly tied 401(k) education to employees’ other financial concerns. Rather than simply holding its usual 401(k) open enrollment education meeting, it held a “financial wellness fair.”

Stressed 401(k) importance

How it worked: On the same day the company’s 401(k) vendor sent a plan rep to discuss the retirement plan, the company also arranged for a certified financial planner to speak to employees.

The financial planner went first. She started the session by pointing out that she wasn’t affiliated in any way with the management of the 401(k) plan. That was crucial both for the company’s legal protection under ERISA and for building trust with employees. She then discussed why it’s vital for people to participate in the 401(k) plan, and offered attendees budgeting tips and basic strategies for cutting their debt.

The financial planner’s talk cut to the heart of several major issues that hurt both employee salary satisfaction and 401(k) participation. Numerous studies show that the No. 1 reason many people avoid 401(k) participation is that they feel they can’t sacrifice any part of their entire paycheck and still survive financially.

The second part of the session was the standard 401(k) enrollment presentation from the vendor. End result: Employees were more attentive and there was a noticeable uptick in both new 401(k) enrollments and salary contributions from already-enrolled workers.

The event was such a smash that the company plans to make the Financial Wellness Fair a regular part of 401(k) enrollment. While the financial planning advice is generic (the company may add third-party personal finance planning as a voluntary benefit in the future), it’s also timely.

The 401(k) signup appeal comes while the financial planning tips are still fresh in employees’ minds and they’re motivated to do something to help themselves.

The struggling economy has caused a lot of fear and misinformation to spread about the security of retirement benefit plans.

Every time employees turn on the TV or read the newspaper, they’re bombarded with reports such as the recent one that said that U.S. 401(k) accounts have lost $2 trillion in the past 15 months.

Employers are already feeling the pinch. Organizations that don’t feature automatic enrollment report a 15% dropoff in participation this fall, according to one estimate.

While those with auto enrollment haven’t taken as much of a hit, employees have more questions and concerns than ever before. Here are three suggestions for calming employees’ worries:

1. Offer financial planning benefits

Now more than ever it makes sense for your organization to offer employees’ access to a third-party financial advisor (i.e., someone with no direct stake in your 401(k) plan). Three reasons:

• A recent study showed 71% of employees lack even basic knowledge of the workings of their retirement benefits, which increases the chance of folks taking ill-advised withdrawals or not enrolling at all
• legally, it’s risky for a plan sponsor (i.e., anyone at your company) to give financial advice to employees. It’s much safer and to outsource it a third-party expert, and
• Under ERISA, you have a legal obligation to explain to employees the workings of your retirement plan – including fee schedules and the selection choices for investments.

Historically, this obligation has been met when the vendor mails a plan prospectus to the enrolled employee.
The document explains the risks of investing and goes over plan fees. But few employees read through (or understand) a prospectus. And the feds have increasingly been turning up the heat on employers to make sure employees receive the information in a format they can understand.

One of the simplest ways to do it is to hire the third-party advisor to read the prospectus and “translate” it into plain English for employees.

2. Review auto enrollment basics

If your firm offers automatic enrollment in your retirement plan, it’s crucial to make sure that employees understand:

• no retirement plan is immune from financial ups and downs, but the accounts grow over time
• management at your organization selects and (on an ongoing basis) reviews the plan investment options – both the defaults and any alternative options, and
• money is withdrawn from the employee’s’ paycheck and placed in retirement accounts unless (or until) he or she opts out.

Reviewing this basic information (even if you’ve done it before) encourages employees to stay the course with your retirement plan. It can also put your firm in a stronger legal position if an employee sues, claiming management “took and lost my money” during the current bear market.

If your company doesn’t have auto enrollment, management may want to consider it in the future.

3. Remain calm

The best thing management can do during the current economic situation is to show employees that:

• you take the safety of their retirement benefits seriously
• their concerns are normal, and
• the best advice is to stay the course, because down markets inevitably go up again at some point.

Remember: If employees go only by their current 401(k) statements and get all their education from the doom and gloom they hear, they’re more likely to panic. Otherwise, a little knowledge is a dangerous thing.