June 26, 2018
401(k) plans are one of the most widely-used retirement and savings account types used in the United States. Since they're set up by companies for their employees, it's incumbent upon the human resources department to make sure their company's 401(k) is running smoothly. However, even a perfectly-run 401(k) plan doesn't get everyone to take part; according to the Bureau of Labor Statistics, only 54% of the civilian workforce is participating in any type of retirement savings plan, despite the fact seventy percent have access to such benefits.
Therefore, just having such a plan available isn't enough. From the executive level down, businesses need to make sure the largest possible number of employees are signing up. Here are some core strategies for doing so.
Automatically enrolling employees in a 401(k) plan is by far the most effective way of getting them to participate. The U.S. Department of Labor reported that the rate of eligible workers who do not participate could be cut in half simply by making them choose to take themselves out of the plan rather than choose to put themselves in.
There are certain guidelines that need to be followed when using an automatic enrollment system. However, the most important rules to know are that employees must be informed they may opt out of enrolling into the plan, and to pay attention to default deferral limits (generally based on how long employees have participated in the system). You're not limited to helping employees with retirement savings above and beyond any restrictions imposed on automatic enrollment.
Most importantly, automatic enrollment does not preclude using other methods of persuasion, such as better education and communication on the topic of retirement plans. Some HR workers might think it's preferable to sign employees up and stay quiet, rather than possibly give them a reason to opt out; you're better off making sure employees are knowledgeable and understand how the 401(k) works. If an employee is going to opt out, there's an excellent chance it's because they think they can't afford to have even a penny removed from their checks, or they're reflexively against anything that pulls extra money out of their income, and staying quiet about a 401(k)'s benefits won't change those motivations.
Education about 401(k)s
People broadly know that 401(k) plans are designed to help with retirement. However, in a workforce that's increasingly mobile and prone to switching from job to job, retirement can seem too far off to be a concern. In addition, as mentioned above, some employees respond to the question, "Would you like a percentage of your paycheck to be taken out..." with the answer, "No!" They don't have to hear the end of the question. Whether it's due to crushing bills or simple fear of putting any money into someone else's hands unnecessarily, they do not want to sign up for any such program.
How you educate people about tax-deferred investments depends on who you're talking to and when. Is it a group of new employees or a single one speaking with someone on the finance team? Is it an experienced employee who has showed financial savvy in the past, with this one odd blind spot, or somebody who always talks about spending down to the last dollar?
Make sure whoever's doing the educating can both show useful charts and explain the nature of 401(k)s in understandable terms. Sometimes in-depth knowledge helps, such as explaining how pre-tax dollars, employer matching, and investment work; sometimes you just need to tell a person, "If you put five dollars per week in a sock, that's $260 per year. Multiply that times fifteen years and your sock will have $3,900 in it. Put it in our 401(k) instead and you'll have $100,000. Now, how badly do you want that five dollars per week?"
The Context of Personal Finances
This is different from showing employees how much more effective money will be in the long run. In this case, help them with current personal budget issues that may be impacting their ability to contribute to the 401(k). Sometimes, with the numbers laid bare, they see that the money to contribute is already there; more often some tweaks to spending (ie. more coffee at home, less at Starbucks) are relatively easy to find, which can convince the employee to participate in the plan. Your finances team should be able to do this easily enough, but you need to make sure it's being done.
Why Worry About 401(k) Enrollment?
This is a reasonable question. It's the employee's money, right? If they have other needs or desires, it's not your place as an executive or HR professional to convince them they're doing the wrong thing.
Except it doesn't just affect the finances of one employee, or a handful. If enough employees aren't part of the 401(k) plan, it starts impacting the company even more than those individuals.
The number one benefit to employers is the tax deductions. Matching contributions are tax-deductible, and as such reduce the overall corporate tax bill. The more employees you have that aren't on the plan, the more you're losing out on those potential deductions.
Of course, you know about the tax deductions. What should concern you even more, however, is the ability of 401(k)s to attract and retain employees. Over 75% of employees consider the benefits package of a current or prospective employer to be extremely important. In addition, once an employee is settled in at a company with a functioning 401(k)—especially if it has a favorable employer contribution match—they're much less likely to look for other employment or be swayed by a recruiter without an extremely good offer. You'll save on taxes, turnover costs, and make your competitors pay a premium if they're intent on luring your employees away.
A strong 401(k) plan is integral to modern businesses. Between automatic enrollment, education, and strong support services, you can maximize your employees' engagement with your company's plan. If you need any assistance with training on 401(k)s, from the top of HR to the newest employee on staff, contact us to see how we can help.