Workplace-based retirement savings plans, such as 401(k) plans, play a crucial role in ensuring retirement income security for U.S. workers. These plans have risen in prominence, as traditional pension plans now cover a shrinking number of workers, and as the future of Social Security continues to be questioned. But as they say with the Lottery, “You gotta play to win,” and a 401(k) plan isn’t worth much unless workers enroll and contribute. 401(k) plan features, design and communications can make or break the success of a plan, so if your company’s employees aren’t flocking to the plan as you expected them to, it might be time to consider where improvements could be made.
Automatic Enrollment. Almost unheard of as recently as a decade ago, this plan feature quickly has become recognized as one of the most effective ways to have an immediate, positive impact on plan participation. According to a report from the SPARK Institute (a coalition of retirement plan service providers and investment managers), the national average participation rate in 401(k) plans increased from an estimated 75% to between 85% and 95% when automatic enrollment was used. Among workers with incomes of less than $30,000, the increase was more dramatic – 44% to 80% – as it was among younger workers (age 25-34) – 56% to 86%.
A survey from Aon Hewitt indicates employers are well aware of the foregoing statistics, with 57% of plans using automatic enrollment in 2010 (up from 24% in 2006), and 36% of the remaining plans expecting to add it for 2011. Related plan features like automatic escalation and automatic rebalancing also are gaining prominence among plan sponsors: 47% of surveyed employers automatically increase participant contributions (up from 17% in 2006), and 26% of the remaining employers were likely to add it in 2011; 49% use automatic rebalancing, with one-third of the rest expecting to add it for 2011.
Employer Match. Traditionally, an employer match has been considered one of the most effective ways to boost plan participation. Research from Watson Wyatt examined the effect of the match rate (the percentage of the first dollar of an employee’s pay that the employer matches). Increasing the match rate from 25% to 50% increases average participation by roughly eight percentage points, according to the research. Employees are 15% more likely to participate in a plan with a 75% match than in a plan with a 25% match. If an employer offers a 100% match, employees are almost 20 percentage points more likely to participate
Other research from the Bureau of Labor Statistics shows that among lowest income workers, an employer match had little effect on plan participation, but among middle-income workers a match had effects that might be greater than the effects of automatic enrollment.
Financial Education Programs. Richer education programs can raise participation rates to an estimated 84%, compared with 62% in firms with very basic plan communications, according to the Watson Wyatt research. “Rich” education programs encompass comprehensive financial education, retirement projections, and the availability of Web-based planning tools. The research indicated that financial education had significant effects on all workers, but particularly on those at low earnings levels.
Appropriate Investment Choices. Although providing too many investment options can be overwhelming for participants, providing too few can give employees a reason to invest their money elsewhere. Increasingly, plans are offering help to employees to pick the funds that are right for them. Aon Hewitt found that 56% of the employers it surveyed included online investment guidance in their plans, and 83% offered target-date funds.
- The Best of the Rest. Other plan design features might not be documented by research to increase employee interest in the plan, but common sense indicates they should reduce barriers to enrollment. By eliminating, or at least shortening, the waiting period to enter the plan, you showcase the benefits of plan participation during orientation meetings (and use the excitement of being a new employee to encourage enrollment). By providing loan and hardship withdrawal options, you negate the concern of reluctant employees that they won’t be able to get to their money in an emergency.
- Many opportunities are available to employers interested in creating more employee interest in the company 401(k) plan. Look at design and communications options, and try those that seem to be a good fit for your workforce, and for the goals you have for the plan.