If you are responsible for overseeing your company's retirement plan, then you know that a key measurement of success is employee participation rates. Of course your plan's participation helps employees save as much as they can for retirement, but it also ties directly to passing nondiscrimination tests. You may think that you're doing everything the right way when it comes to your plan by providing a broad range of investment options, having a match in place, and being in compliance with agencies such as the DOL and IRS. These factors alone do not ensure your employees will enroll and save. This begs the question: What good is a retirement plan benefit if people aren't using it? If you're wondering why your numbers aren't where you'd like them to be, here are a few problem areas you may consider modifying.
The matching formula
There are several components that contribute to the effect your company match has on plan success, such as the formula you've devised and how you communicate that to your employees. Obviously, if you're not offering employees any sort of match they are going to be significantly less inclined to save in the company-sponsored retirement plan. The National Bureau of Economic Research states, "Traditional economic models point to financial incentives, such as a matching contribution, as the logical mechanism to increase savings plan participation." So, if you're not offering a match, that's the first hurdle to overcome. It's also not just in what your match is, but how you say it. For instance, Principal Financial Group looked at two different employer match formulas that are the same, but communicated differently. For the plan that matches 100% up to 2% of pay the total contribution amongst employees was 8.8%, while when it was posed as 25% up to 8% of pay, the contribution rate went up to 9.1%. These match formulas cost the company the same amount, but the message employees receive is clearly different. By increasing the salary percentage that you will match, it also increases the amount that employees are encouraged to defer from their salaries. At AFS 401(k), we are definitely big proponents for utilizing the "stretched out" matching provisions as a way to help employees save more for the future.
This is probably the most obvious way to increase participation rates: If you automatically enroll people into a plan, your participation rates will rise. People experience inertia to get certain things done all the time, and saving for retirement is not immune to this. Automatic enrollment can play a large part in breaking down this inertia. Prudential Retirement notes that within their plans, those with automatic enrollment boast a 90% participation rate as opposed to those without the feature, which have a rate of 62%. Apart from increasing your plan's participation numbers, consider how "auto" features can make it easier for your employees.
Once again, the way we communicate about a retirement benefit program is an integral part to ensuring your plan's success. If employees don't fully understand or know how their plan works or how important it is to save, why would they even bother? Constantly tout the benefits of the employer-sponsored plan and the importance of saving for retirement through various mediums: in-person meetings, seminars, e-mail, newsletters, videos, social media, etc. No one communication platform will work with everyone so it's important to diversify your education strategy. Additionally, think of creative methods to tie your plan's data in order to promote the plan. For example, a video identifying that "90% of employees are getting the full match out of x%" is a great way to promote the plan's benefits and engage the employees who are not getting the full match.
The age and background of your employees can be indicative of who will save in a 401(k) plan. Plan participation tends to increase along with the income and age of employees, but that doesn't mean if your organization has a more diverse workforce with younger or lower-earning employees that your plan is doomed. Take into account the whole picture: Are my employees sophisticated investors who want a plethora of options? Would a Roth 401(k) option help younger workers save? Are my eligibility rules in line with our employee turnover rate? These and other questions will help you make plan design decisions that serve your unique employee-base. It is also important to tailor communications based on what generation you're targeting. Millennials have very different concerns when it comes to retirement saving compared to a group like pre-retirees, who are getting ready to stop working in the coming years. Keep this in mind and try to avoid generalized communication amongst your workers.
While getting your employees enrolled and helping them save for retirement should always be a top priority, increasing participation rates can also be in the best interest for the company. If your workers are unprepared for retirement that means it's likely they will be working longer, actually increasing costs incurred by your business. Take time to reevaluate your plan's design and goals. Remember, a successful retirement plan should be important to both the employees and the employer.
Alex Assaley is lead adviser, retirement plans, with AFS 401(k) Retirement Services LLC in Bethesda, Maryland; www.afs401k.com
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