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Why Your Employees Aren't Joining Your 401(k) Plan


There are various reasons that keep employees from signing up for their employer’s 401(k) plan. At some companies, the resistance is enough to make the group plan fail the 401(k) Actual Deferral Percentage (ADP) or Actual Contribution Percentage (ACP) nondiscrimination testing or to be “top-heavy,” or not have enough rank and file employees participate in relation to the number of highly compensated employees participating. According to the IRS, a plan is top-heavy when, as of the last day of the prior plan year, the total value of the plan accounts of owners and managers is more than 60 percent of the total value of the plan assets. Top-heavy plans can trigger required contributions from the employer on behalf of non-key employees.

Here's a look at reasons why employees may not join and how companies can increase 401(k) participation by effectively communicating the plan to employees.

Why Employees Don't Participate in 401(k) Plans

A company-sponsored 401(k) plan is often seen as a valuable benefit. It allows employees to make pre-tax contributions toward their retirements, and potentially lower their annual Federal taxable compensation as well. Yet, some companies find that employees, especially those at lower salary levels or those at younger ages, may be less likely to participate. There may be several reasons for this:

  • A focus on financial priorities other than retirement, such as buying a house or saving for college
  • Limited available funds to dedicate toward retirement
  • Intimidation by the process of choosing how to invest their 401(k) plan

While there might not be much an employer can do about the first two reasons, the third barrier is one that smart action on the part of the employer or financial advisor can help overcome.

Effectively Communicating the Plan

Companies working to increase 401(k) plan participation may benefit from developing and executing a strategy for ongoing employee communication. Ensure that all of your employees are aware of the 401(k) options available to them, including any incentives such as employer match. Ask your plan provider for, or develop in house, materials that explain the availability of investment options and explore in more detail how these investments work. Consider coordinating with your plan provider or financial advisor to have an individual on site before or during the annual enrollment period to provide an overview of 401(k) plans and answer employee questions.

Encouraging your employees to participate in your 401(k) program can help ensure their future financial stability while also managing the risks of your plan failing ADP and ACP testing or being top-heavy. To help increase 401(k) participation, focus on developing a strategy for communicating the plan features to employees.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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