The message from the Department of Labor is that a free-fall economy shouldn't scare small businesses away from setting up an auto-enrollment retirement plan. To help make its case, DOL recently released a booklet that explains to small employers how to implement and administer an auto-401(k).

The publication, "Automatic Enrollment 401(k) Plans for Small Business," makes the business case for why small companies should implement auto-enrollment, explaining that it helps to attract and retain talented employees. In addition, employers that adopt auto-enrollment receive significant tax breaks for employer contributions and deferred taxation on earnings until distribution.

"Today, there are many retirement plan options available to small employers. The automatic enrollment 401(k) plan offers small business owners a way to help more of their employees save for retirement," says Bradford P. Campbell, assistant secretary of DOL's Employee Benefits Security Administration.

401(k) plans are an inexpensive way for small businesses to improve employee benefits during these challenging economic times, explains Rick Meigs, president of 401khelpcenter.com. "Even with unemployment rates exceeding 7%, retention of key people is still an important issue for small businesses. Adding a retirement plan is a good retention strategy."

He continues: "Employees are looking to their employers for more than a salary. They want to work for firms that help them meet other life goals, like saving for retirement," adding that small employers recognize this and are responding.

However, there still are about two-thirds of small employers who could start a defined-contribution plan but have not done so, says Paul Welykoridko, director of business retirement products at Merrill Lynch. It's those employers DOL is targeting with its latest campaign.

To reach them, he says, DOL - as well as the plan providers looking to win small employers' business - should know small business owners are looking for a couple of things. First, they primarily want to be able to save for themselves, as owners generally are the primary breadwinner for the company and have invested both capital and sweat equity into the business.

Second, but also important, they want to keep qualified employees, so they want a plan that can attract and retain top talent. Last, the plan can't be too costly or time-consuming. Small business owners usually wear many different hats, Welykoridko points out, and can't allow for the retirement plan to take over a huge amount of their time or resources.

Retirement planning experts seem to agree that an automatic plan meets these needs. Badger Mining sets the example.

In 2006, Wisconsin's Badger Mining, a family-owned manufacturer of industrial silica sand and limestone with about 180 employees, adopted auto-enrollment features in its retirement plan.

"We have nearly 100% participation with new hires because of the auto plans," says Barb Swanson, benefits associate and the leader of Badger's 401(k) team.

A year later, the company added a safe harbor to its auto-401(k) plan, thus increasing its matching contributions. If participants make a 6% default contribution, the company will make a 5% matching contribution. Last year, Badger also added a Roth 401(k).

"It's all about education and making sure your employees have selected the right choices as far as their investment arrangements," Swanson says. "We also have a yearly $200 benefit for financial planning. People who are concerned and nervous about the economy, we tell them to take that benefit and go see a certified financial planner."

Robert M. Kaplan, vice president and national training consultant at ING, agrees that if small employers want to see more of their workers saving for retirement, then it's vital for them to adopt an auto-401(k) plan.

Kaplan, however, points out that a prolonged declining stock market may make some small business owners nervous when it comes to moving workers who have not elected an investment arrangement into qualified default investment alternatives.

The choices under QDIAs are balanced funds, managed accounts and target-date funds, but not a capital preservation fund. QDIAs don't include a stable-value fund or a money-market fund, Kaplan explains.

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Small businesses, big advantages: Offering an auto-401(k)

• Helps attract and keep talented employees.

• Increases plan participation among both rank-and-file employees and owner/managers.

• Allows for salary deferrals into certain plan investments if employees do not select their own investments.

• Simplifies selection of investments appropriate for long-term retirement savings for participants.

• Helps employees to begin saving for their future.

• Offers significant tax advantages (including deduction of employer contributions and deferred taxation on contributions and earnings until distribution).

• Permits distributions to employees who opt out of the plan within the first 90 days.

Source: Department of Labor