Three strategies for boosting participation in your 401(k) plan
Posted On: 7-16-2015 | Posted By: Heidi A. Chick, CPA
Offering a 401(k) plan to your employees is a great benefit, but only if they take advantage of it. Are you doing everything you can to encourage your people to open and contribute to an account?
Younger employees who might be years away from retirement might need some additional coaxing. The Wall Street Journal reported last year that adults under age 35, on average, aren’t saving at all and have more debt than savings. Adults 35-44 have a 3% savings rate, while those 45-54 save at 6% and those older than 55 save at a 13% rate.
Clearly, workers are not saving enough, and employers might be able to have an impact on the savings rate. Below are three strategies you can apply to increase your employees’ participation in your 401(k) plan.
Make the process less intimidating
Perhaps your employees aren’t participating in your 401(k) plan because they don’t understand how it works or how to get started. Employers can help overcome this barrier by communicating frequently with employees and providing some educational tools to improve financial literacy. Here are a few tips for your consideration.
- Hold group meetings with newer employees to let them know what benefits you offer and what they need to do to enroll.
- Make printed and electronic resources regarding your benefits readily available.
- Encourage one-on-one meetings with a knowledgeable advisor to help employees consider their goals and how they can meet them, which a Department of Labor advisory council cites as having the most positive impact on participation. Be careful, however, to draw the line between educating and advising, so as to reduce your organization’s risk.
- Consider segmenting communications by gender, age and income level to ensure you are sending the most effective messages to each group. For example, your 23-year-old new hire doesn’t need to know about catch-up contributions the way your 52-year-old veteran does.
Encourage participation through plan design
The features you build into your 401(k) plan can make a difference in employee participation.
- Do employees have to opt in to your plan? Consider automatic enrollment, with an option to opt-out, so that accounts are established without waiting for the employee to take action.
- If your goal is to get an account established for your employee and start putting some dollars in it, consider nonelective employer contributions, so the savings can begin whether or not the employee defers a separate amount through payroll. Be aware, though, that nonelective contributions sometimes discourage employees from making their own deferrals.
- If your goal is to encourage employees to put their own money in the account, make matching employer contributions so the employee is encouraged to defer by the “free” dollars available right off the bat.
- Match at a higher level of deferrals. For example, instead of matching 50 cents on the dollar up to 3% of salary deferred, match 25 cents on the dollar up to 6% of salary deferred. Employees will often defer only enough to receive the maximum rate of match.
- Offer an auto-escalation option that would increase the deferral amount with any compensation increases.
- Eliminate or shorten vesting schedules and/or eligibility periods.
If your plan is designed to help jump-start savings with minimal effort by the employee, you’ll be setting them up for savings success down the road.
Set and monitor goals
If you truly want to increase the level of participation in your company 401(k), you first need to know what the current level is. How many people are enrolled? How many more are eligible but not participating? What are the savings rates, overall and among segmented groups? After you know this, you can set goals for boosting participation, determine strategies to meet those goals, and monitor your progress.
Why go to all this trouble?
Employing strategies to increase participation in your 401(k) plan might seem like a lot of work, but doing so can help you recruit and retain the best employees. Taking an active role in helping them save for retirement demonstrates your commitment to their financial health, and they are likely to thank you for it.
Heidi A. Chick, CPA, has more than 30 years of experience auditing 401(k) and other employee benefit plans. She is a member of the AICPA Employee Benefit Plan Audit Quality Center. For more information regarding WK’s employee benefit audit and administration services, contact your WK advisor at (573) 442-6171 or (573) 635-6196.