This article is part of Samet’s Plan Sponsor’s Guide to 401(k) and 403(b) Plans. Find the full Guide here.
Plan administrators may be noticing a lower than expected participation rate in their employee benefit plan. Increasing plan participation is advantageous not only to employees, but also to the plan sponsor for reasons which include:
- Employees that view their employer’s retirement plan as part of their compensation package, along with salary and benefits, are less likely to leave for another company that may offer a higher salary, but no employer match. As a result, costs associated with employee turnover are diminished.
- As participation increases, certain fees related to the operation of the plan will decrease per participant. The added participation will help spread the payment of administrative costs among participants.
- Highly compensated employees are those who earned over $115,000 in 2013 and 2014 ($120,000 in 2015) or own greater than 5% of the company. An increase in participation rate may translate to a higher deferral amount that they may make based on ADP and ACP testing.
There are numerous methods for increasing employee plan participation, which include the following:
Automatic Enrollment – It has been shown that participation rates increase with automatic enrollment. A plan sponsor who automatically enrolls employees when they become eligible will notice a higher percentage of participation in the plan. However, the employee has the ability to opt out of deferring or to defer a different amount before he/she is automatically enrolled. The employee, depending on the plan, also has the option to withdraw the money without penalty within 90 days of the first automatic deferral.
Matching Contributions – Many employees only contribute to the plan to benefit from the employer match, which is essentially “free money” to the participant. Increasing the employer’s matching contribution will make contributing to the plan desirable to employees that would otherwise not be compelled to contribute.
Withdrawal Opportunities – Some employees are concerned with financial constraints and feel that plan participation may restrict their ability to meet their current financial needs. By offering plan loans and hardship withdrawals, these employees should become more comfortable with investing in the plan.
Change Eligibility Requirements and Enrollment Periods – Employee benefit plans that have a length of service requirement might be missing out on potential participants. Workers that have become accustomed to a certain take home pay might be reluctant to take on a 401(k) or 403(b) deduction. Allowing new employees to enroll immediately should help increase participation.
Employee Communications – Encouraging employees to participate in the employee benefit plan should be done when the employee is hired. Reminding employees about the importance of retirement savings could persuade them to enroll. This can be achieved through circulating newsletters concerning the plan, sporadic enrollment meetings, and offering enrollment forms to non-participating employees.
Variety of Investment Options – Offering a variety of investment options with competitive investment strategies and fees will entice participants to contribute to the plan. The plan sponsor should actively monitor the investment mix and assess the investment fees.
Provide a Third Party Investment Advisor – Many workers are hesitant to invest in a retirement plan because they are unsure how to allocate their funds and how this decision will affect their return. By providing access to a professional financial advisor, employers can ensure that participants feel more comfortable with their investment allocations.
Educate Employees – Some employees are cautious about contributing to a retirement plan as they may intend to use their whole paycheck for living expenses and may not understand how a retirement plan operates. Plan sponsors should explain the concept of pre-tax dollars and that a contribution of even 1% of their wages could increase considerably over the span of twenty to forty years due to compound interest.
Implementing all of these techniques may be costly and an administrative burden. Take into consideration your employee mix and your goals when deciding which of these options will best increase your participation rates.
For more information, please contact Jay Kessler, Managing Shareholder, or view the full Plan Sponsor’s Guide to 401(k) and 403(b) Plans.