Why Is Enrollment in Your Employees' 401(k) Plan So Low? How To Boost Participation
- Beneficios para empleados
Lectura de 6 minutos
Last Updated: 01/05/2023
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According to the U.S. Bureau of Labor Statistics, in 2021 81% of full-time U.S workers had access to a defined contribution plan like a 401(k) plan, and 66% contributed to a plan, which indicates a fair amount of opportunity to increase retirement plan participation. There may be a variety of reasons for low levels of participation in your employees' 401(k) plan, but you can help increase enrollment and ensure that your employees understand the value of this particular benefit. Additionally, you may need to look internally at your current retirement benefits to determine if any changes will better meet your current employees' needs.
Why Aren't Employees Participating in Retirement Plan Offerings?
The reasons for lower retirement plan participation can be multidimensional. When analyzing employees' 401(k) data, it's helpful to understand that it may be more than a single element contributing to their lack of enrollment.
Consider the following factors:
- Employees believe they are too young to think about retirement — For a newly hired employee fresh out of college, hitting retirement age might seem like an eternity away. More immediate needs like paying off student loans and cost-of-living realities are likely diverting their attention from the importance of long-term saving.
- Retirement benefits offered are limited — Employees are more engaged with a company that offers a range of benefits, with multiple investment options. In other words, if you want engagement, you need to give your employees reasons to do so. When they do, they're far less likely to leave your business to search for work elsewhere.
- Employers are not offering matching contributions — Matching an employee's 401(k) contribution is a significant incentive for employees to enroll and stay with a company. Since your matching contributions are tax-deductible, it's an incentive for businesses as well.
- Inadequate communications about the availability of the employee 401(k) — Before an employee can participate in a 401(k) plan, that employee needs to know what is offered and how to join. For those who didn't enroll when first hired or after a waiting period, reminders, encouragement, or education about enrolling may prompt them to start saving for their future.
Why Does It Matter if Employees Aren't Enrolling?
Although a 401(k) plan is a valuable benefit for employees, employers also gain several advantages from sponsoring a retirement plan with a high level of participation. Some of the benefits to the employer include:
- Improved employee satisfaction and retention — In addition to the use of a 401(k) plan as a recruitment tool, offering this benefit to employees can improve their satisfaction with their employer and encourage longer-term retention.
- Tax benefits — Employer contributions are deductible up to a certain limit, which lowers your company's taxable income. Additionally, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, small businesses may be eligible for a $16,500 tax credit, which is $5,000 per year and includes $500 per year for implementing auto-enrollment when they start a 401(k) plan. Plus, under SECURE Act 2.0, employers with 50 or fewer employees can take advantage of the employer contribution credit. This is generally a percentage of the amount contributed by the employer, up to $1,000 per employee. The credit is also available to employers with 51 to 100 employees but it is reduced.
- Lower fees — A larger number of plan assets and participants may yield fee discounts from your plan provider.
- Avoids perception of inequity — By encouraging all employees to participate, you'll avoid the notion that the 401(k) plan exists only for the benefit of higher-paid employees. This increased participation throughout the company can also help plans subject to nondiscrimination testing.
- Competitive advantage — For small businesses in particular, a 401(k) plan can be a competitive advantage when hiring employees.
How To Get More Employees To Sign Up for Your 401(k)
If you set up a retirement savings benefit and forget about it, chances are your employees will do the same. Active promotion is one way to encourage employees to enroll in a 401(k). Plan information should be distributed in a variety of formats, and at different times throughout the year.
If participation rates begin to trend lower, you'll need to find out why. Monitoring contributions and employees' 401(k) participation statistics can indicate how favorably the plan is viewed by employees. Also, keep an eye out for new retirement plan enhancements or expanded investment options that can allow participants to get the most value from this important benefit.
Ensure Employees Make Enough To Save Money
An employee's overall compensation may be one roadblock to saving. As an employer, you should ensure that your workers are fairly paid and annual raises reflect cost of living increases. Concerns over the cost of other vital benefits and daily living expenses may cause employees to prioritize immediate spending over savings.
Offer Employer Matching
Some employees may feel it's simply too risky to sink a portion of their hard-earned money in a plan with far-future benefits. When you incentivize employee retirement contributions by offering to match their funds, their interest is likely to pick up. No one likes to leave free money on the table. An important part of your message to employees should demonstrate how a matching contribution can effectively increase their savings.
Consider an Opt-Out vs an Opt-In Plan
Automatic enrollment features give employees the option to "opt out" of a plan rather than "opt in." Plus, the requirement to take specific action to remove themselves from the plan forces employees to at least consider saving rather than brushing the forms aside and forgetting about them. Many of today's workers are very comfortable with online transactions, so providing plan information and savings metrics online, after automatic enrollment, may generate more enthusiasm and participation. In this way, they can easily log in to their account and take note of the amounts they're saving and how their balance will grow over time. Provide additional financial tools to help them further understand the long-term benefits of contributing to the plan on a pretax basis.
Provide a Dedicated Benefits Counselor for Questions
Before or during an annual benefits enrollment period, provide employees with the contact information to a benefits counselor or other dedicated HR person who can explain the 401(k) plan options, and answer questions to help drive enrollment. Virtual Q&As can be used to reach groups of employees in many locations and communicate the benefits of retirement savings.
Make Enrollment Easier & Consider Removing Waiting Periods Before Employees Can Contribute
In the past, enrolling in a retirement plan involved intimidating amounts of education and paperwork — enough to cause most anyone to hesitate. Today's online tools and resources have changed that landscape. Providing seamless online access helps minimize enrollment challenges, provides flexibility, and centralizes information about plan options. You may even want to host a series of virtual sessions where employees work with HR to learn about the retirement plan and enroll on the spot.
Removing waiting periods may also encourage more employees to contribute to the 401(k) plan. While filling out their new-hire paperwork, they can also set up their retirement savings and have a portion of their paycheck deducted starting on day one.
Provide Detailed Materials
Consider providing educational materials in a range of formats such as hard copy (e.g., flyers, newsletters, or even table toppers for the break room), online interactive methods, video, lunch-and-learn seminars, and even face-to-face Q&A sessions with HR.
The more retirement planning-related materials your employees have access to, the more informed their decisions can be. In some cases, it may take a combination of delivery methods to reinforce the value of retirement savings. Materials outlining the benefits of planning and the ease of participation can be reinforced by live presentations on how savings compound over time, or vendor presentations on plan investment options.
Consider a New and Different Approach
If none of your efforts seem to move the needle and participation levels remain low, it might be time to try something new. Rather than showing employees what you're offering, ask them what they want from a retirement plan. Find out how they intend to save for retirement and how you can help them get to the number in their head. Surveys can gauge employees' confidence level when it comes to personal finance or investing. Based on the feedback received, you may want to sponsor training or classes to provide additional information on these important topics.
Today's 401(k) and retirement plan offerings provide valuable savings options for your employees. With a tax-favorable plan structure and matching contributions, employees can build their nest egg and prepare for retirement. By finding ways to increase enrollment in your company retirement plans, you can provide a life-long benefit to employees at a great cost, while gaining tax advantages for your business.