A 401(k) plan is a powerful retirement savings vehicle for employees and also an important employee benefit that serves as a recruitment and retention tool for employers. When employees are engaged and participating in their company retirement plan, it's a win‐win scenario — and a compelling reason for employers to focus on plan participation.
“Cognitively, it's a no brainer, employees agree they should participate in their 401(k) plan, but many get sidetracked by emotional and behavioral factors such as procrastination or prioritizing current financial obligations ahead of retirement planning, which seems so far off. In some cases, employees get bogged down by the paperwork involved in the enrollment process or overwhelmed with the plan's investment options. This situation makes it easier to do nothing versus taking action,” says Ron Yee, Vice President, Wealth Retirement Plan Services Advisor at Johnson Financial Group.
Employers can incorporate various plan design features to increase plan participation and savings rates, such as adding automatic enrollment and annual deferral escalation. Other options include offering an employer match or augmenting the current match formula. Complimenting these plan design features with user friendly planning tools and retirement income projection models can simplify the enrollment process and help elevate employee retirement readiness profiles. Many of these tactics have been embraced by large companies. Small and mid‐size companies are starting to follow suit as they look for ways to increase employee participation and engagement.
Automatic enrollment is gaining momentum. According to an AARP survey of large U.S. employers in 2017, 68% of companies automatically enroll workers in 401(k) plans, up from 58% in 2015. One‐third of larger companies automatically enroll workers into contribution rates of 6% of their salary or more.
“Automatic enrollment provides the necessary convenience and encouragement procrastinating employees need by making the enrollment process effortless,” Yee says. In an auto enrollment arrangement, eligible employees are automatically enrolled at a predetermined deferral rate, and contributions are placed into a default investment arrangement such as a target retirement date fund. Some automatic enrollment arrangements go one step further by including an auto-escalation feature. This feature increases a participant's 401(k) deferral rate by 1% each year until a certain threshold is met.
“Pairing auto enrollment with an auto‐escalation feature can be beneficial, especially for firms that consistently provide annual salary adjustments for their employees,” Yee says. “Once enrolled, employees rarely revisit their deferral rates. In a situation where a savings gap already exists and an employee doesn't adjust their deferral rate accordingly, they'll continue to fall further behind. Auto‐escalation can help remedy this situation.”
Offering employer matching contributions is one of the best ways to encourage employees to participate because it rewards them for putting their own dollars into the plan and provides an immediate return on their investment. Research by The Pew Charitable Trusts found that when an employer match is offered, employee participation rises by 15 to 16 percentage points for workers of all ages.
“Companies that properly structure their match formula can achieve a targeted deferral rate for their plan which in turn can improve year‐end compliance testing results. This situation benefits the company executives by either raising or eliminating any deferral restrictions that could be imposed on the highly compensated employee (HCE) group,” Yee explains.
Ramping up participation with a match also builds loyalty. It sends the message to your employees that you care about their financial future and want to help them achieve a financially secure retirement. “An employer match accompanied by a vesting schedule provides a mutually beneficial arrangement by offering a savings incentive for the employee while creating a retention tool for the employer,” Yee adds.
A robust communication effort can help employees make more confident decisions, which in turn builds a level of employee rapport necessary to maintain a stable workforce for your company. Reviewing the message you're conveying during the enrollment process is a logical first step to improving plan participation: Are you telling employees about your 401(k), or selling them on the plan benefits and why participating now can make the difference between ‘wishing for' vs. ‘having' a financially secure retirement? Providing information beyond what's legally required is critical to increasing plan participation.
“Without a doubt, administering a 401(k) plan involves an overwhelming amount of required disclosure documents that are distributed to employees,” Yee says. “The intended purpose of the disclosures is to improve transparency, but in many cases, it results in information overload. Relying solely on the distribution of required plan disclosure notices to garner plan participation is doomed for failure. Instead, create a personalized experience to simplify and guide a person through the key retirement planning considerations, and supplement those efforts with interactive online planning tools and resources.”
Give employees access to resources that work for them — from in person group meetings to video guided online enrollment sessions. Supplementing those meetings with access to one‐on‐one consultations with a financial professional can help employees get on the right track and make important decisions about their retirement planning. The AARP survey also found that 61% of companies offered one‐on‐one financial counseling in 2017, up from 22% in 2001. Online advice and tools, including mechanisms for asset allocation and risk assessment, can also be helpful in guiding employees to make educated decisions about their 401(k) plan.
“Larger employers are rethinking how they communicate retirement benefits by rebranding their 401(k) messaging to mimic the same themes and storylines used to promote corporate wellness programs where the 401(k) is described as a way to improve your “financial wellness.” Financial wellness communications focus on promoting how the program works, the benefits to the employee, and how taking action now can profoundly impact one's financial retirement readiness trajectory,” says Yee.
“There isn't necessarily a one‐size‐fits‐all 401(k) plan design feature or employee communication campaign an employer can deploy to increase participation. To be effective, the plan design and communication has to take into consideration the demographics and dynamics of the employer's workforce. Working with a service provider that understands those nuances is key to increasing participation,” Yee says.
Are you interested in seeking ways to leverage your retirement plan arrangement to its fullest potential for you and your employees? Or, are you considering making changes to your existing plan? To learn more about Retirement Plan Services, contact a Johnson Financial Group advisor today.
IRS. IRS announces 2018 pension plan limitations. Available at: https://www.irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018
AARP. More Companies Automatically Enroll Workers in Retirement Plans. Oct. 27, 2017. https://www.aarp.org/retirement/retirement-savings/info-2017/automatic-enrollment-retirement-fd.html
The Pew Charitable Trusts Issue Brief. Retirement Plan Access and Participation Across Generations. Feb. 15, 2017. http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/02/retirement-plan-access-and-participation-across-generations
EBRI Policy Forum, May 13, 2010. Success of Auto Enrollment and Auto Increase: Using Behavioral Finance to Improve Retirement Planning. https://www.ebri.org/pdf/programs/policyforums/Robinson0510PF.pdf