7 keys to 401(k) engagement

1. No jargon or investment speak

We use jargon we dont even know is jargon, says Kristi Mitchem, senior managing director and head of global defined contribution for State Street Global Advisors. SSgAs survey of plan participants revealed that a large number of people dont understand words that are common in investing nomenclature. For example, words like bond and even fund were not well understood. Think about how to talk in plain, simple English without a lot of terms that confuse participants, she says. We encourage plan sponsors to do a jargon audit on their communications and watch for terms that might be off-putting. And if you do use jargon, include a glossary.
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2. Narrow the number of investment options

Research shows that the number of available investment options is directly related to participation, explains a new white paper by Diversified, a retirement plan provider. Plans that offer 10-14 funds have the highest participation rates, but as more funds are added, participation rates decline. While retirement professionals may appreciate the subtle differences among asset allocation plans, target-date funds, and one-decision investing solutions the average participant does not. For many participants, more options mean more work.
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3. Understand the frame and devise easy-to-use translation tools

Participants have a way they think about certain facets of retirement planning. The way participants think about retirement savings is in terms of deferral of their current salary what theyre putting away today, says Mitchem. They dont think about it in terms of whats the balance I need to achieve when Im 65? or income replacement ratios. Focus on talking to plan participants within the frame theyre using. Lets talk to them about percentage of salary saved, she continues. A good benchmark is 10% to 15%.

If you want to get people into the practice of thinking about income replacement ratios, start with what they know and are comfortable with: percentage of salary deferred. Then, give them an easy tool to convert that into an income replacement ratio.
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4. Design employer contributions to maximize plan objectives

Despite studies showing the impact of matching contributions on savings rates, many sponsors default to standard formulas such as a 100% match up to 3% of pay or a 50% match up to 6% of pay. If increasing the average savings rate is a key goal for the plan, Diversified recommends sponsors consider extending their match to 25% up to 12% of pay. In many plans, the rate at which the match is maximized is the most commonly chosen participant contribution rate so stretching this incentive will likely result in higher savings rates.
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6. Automate success

Employers could consider automatically placing people into an elevated savings rate for a specified period of time, say six months, to see if they can actually do it, says Mitchem. But instead of forcing them to sign up for a higher savings rate, you allow them to opt out if its not something they want to do.

More than half of all plans that automatically enroll employees use a default rate of 3% or less. Instead, experts from Diversified suggest setting a default rate that is at least as high as your current opt-in rate and integrate automatic escalation to improve participants retirement readiness over time.

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7. Limit plan loans

According to Diversified, 87% of all retirement plans offer loans and 47% of plans offer multiple loans. If the plan is falling short on average balances, loan activity is likely to be at least partly to blame. If improving employee retirement readiness is a business goal for the plan, why not consider a change to plan design to limit or eliminate plan loans?

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