How to Make Participants Save More?
Despite all the criticism of 401(k) plans, a 2015 American Century Investments survey of defined contribution plan participants showed that workers highly value this benefit. Having a retirement plan at work makes workers feel more confident about their financial future and loyal to their employer.
There is no doubt that you, as an employer, play an important role in your employees’ financial life. By providing plan participants with matching contributions that are in essence free money and the opportunity to invest in low-cost investment options, you lay the groundwork towards their secure retirement. Yet for many employees, that is not enough. Based on multiple studies, the biggest regret that the majority of employees had is not saving more early on in their career.
Fearing backlash from their employees, employers all over the country don’t want to take any responsibility for adjusting employees’ saving patterns by encouraging them to save more. As it turns out, they are wrong. Based on the American Century Investments survey, 43% of employees would welcome “a slight nudge” from their employer to save more, 27% would prefer “a strong nudge,” and 13% are okay with “a kick in the pants.”
So, if employees are fine with saving more and even want a nudge in that direction, what are you waiting for?
Let’s see what options are available to you that will help employees save more and be better prepared for retirement.
Auto-enrollment. Automatically enroll new employees into a qualified default investment alternative (QDIA) at a predetermined enrollment rate. For about 38% of plans, the current default automatic enrollment rate is 3%. However, more than 70% of participants would like to see a deferral rate of 6%. Instead of the standard 3%, try defaulting them to a 6% deferral rate. People will appreciate that.
Auto-escalation. Auto-escalation is a very powerful plan feature that automatically bumps up the contribution rate by a certain percentage (usually by 1%) until a cap is reached. Auto-escalation is usually offered as on opt-in option which is rarely utilized by plan participants. Consider making it an opt-out option and peg it to salary raises if you want to improve the savings rate for your participants.
Stretch a match. A standard employer matching contribution rate is 100% on the first 3% of an employee’s contributions. To improve their savings rate, trick employees to save more by stretching your matching contribution. For example, consider 50% on the first 6% or maybe even a more aggressive stretch of 25% on the first 12%. By stretching a match, you can increase the total savings rate (personal + matching contributions) from 6% to 15%.
Automate catch-up contributions. Upon attaining age 50, the IRS allows plan participants to contribute an additional $6,000 to their 401(k) plan. However, not many participants take advantage of this. By automating a catch-up contribution, you can significantly help your employees boost their savings rate right when they may need it the most.
Reenrollment. There is no doubt that not all employees will be participating in the plan. They will find whatever reason to not participate. Some plan participants will be passive participants, meaning that they will choose a not so high contribution rate and opt-out of any auto features. It is very helpful to give these employees a “kick in the pants” and reenroll them in the plan at a new default deferral rate with all of the auto features on. If you notice a tantrum from these workers, remind them that they can always opt-out but that they will lose all of the “free money” in the form of matching contributions. Another good reason to reenroll participants is to change their current asset allocation into a default one that is specified in the plan documents. For example, many DIY employees may invest in one single investment option and expose their money to significant risk. Reenrolling these participants in a broadly diversified investment fund can significantly limit downside risk, while preserving room for more predictable and consistent growth.
Education. As the old saying goes, “it is never too late to learn.” Financial literacy among participants is low and that's a fact. Educate them on various topics in their personal financial life and hope that it will transform their behavior. It is extremely important to know your plan demographics well and use the appropriate communication method. Simply holding a seminar during lunch is no longer enough.
Connect with an adviser. Multiple studies have shown that 67% of plan participants want personalized advice from an adviser. Introduce a "manage account" option within your 401(k) plan. Not only will your participants get custom tailored asset allocation and professional portfolio management, they'll also gain access to a real human adviser. Participants will be able to ask various financial questions and seek guidance from them. In order for your participants to improve their chances of retiring financially secure and on time, their total savings rate has to be closer to 15%. While this may seem like an extremely high bar, the reality is that if employees are saving less, they may not be able to achieve their retirement goals. This will result in them either having to work longer, or accept being poor. By applying all or at least some of the above options, you have a very good chance of significantly improving the retirement readiness of your employees. This will affect their lives in a way that will never be forgotten.