Only a fool would walk away from free money, especially if that money adds up to tens of thousands of dollars over a career.
But the reality is that most employees don’t invest enough in their retirement plans to reach their goals. One-third of employees fail to participate in company-sponsored 401k plans when offered. And at small businesses, that number is even lower.
Businesses that wonder why so many would pass up free cash probably don’t realize how much help their employees need. Retirement planning takes effort, patience, and a great deal of foresight, whereas many hard-working employees are tired, anxious, and focused on the present.
But a few hours in the doldrums today could mean several on the party boat in years to come. It’s an employer’s job is to help its workers connect the choices made on those boring 401k forms with the potential benefits. Encouragement is good, but a strong nudge in the right direction is even better.
Automatic enrollment can be just the push they need to get started. What’s more it could save employers money.
The Benefits of Automatic 401k Enrollment
Because administrative costs and contribution limits are determined by the number of people and total investment in a plan, low participation increases the cost of running them and lessens annual maximum contribution levels. The benefits of higher participation rates include:
- Businesses are less likely to fail nondiscrimination testing, which ties the average maximum contributions of highly compensated employees to within a few percentage points of the rest of the staff. Failing these tests can result in lower investment, higher administrative costs, and more penalties.
- Better recruitment and retention. More participation means access to better investments and more efficient administration, which can lead to better returns and matching contributions.
- Creating a culture of saving: These things tend to snowball. When people are happy with the plan, others take notice and participate themselves.
6 Ways to Boost 401k Automatic Enrollment Retention
Automatic enrollment boosts participation by making participation an opt-out affair, sweeping in employees whose inertia or affordability concerns keep them from signing up. But although creating an opt-out system is fairly straightforward, keeping employees from opting out and encouraging greater levels of investment are challenges that come with increased participation.
Here are a few good strategies:
1. Forget the Jargon and Show Employees How to Reach Their Retirement Goals.
Non-contributors to 401k plans are likely to be young lower-wage earners. They probably know how important saving is, but aren’t sure that they can afford to start contributing while on a limited budget.
Educate them on the importance of contributing what they can and how taking advantage of employer matching funds and long-term compounding interest makes even small amounts worth contributing. Show them how well-considered asset allocation can increase retirement income and the superior performance of plan-sponsored versus do-it-yourself retirement plans.
2. Boost Employee Retirement Savings Rates.
Compulsory enrollment probably means a lower percentage of plan participants will try to maximize their contribution. According to Vanguard, many will end up deferring three percent or less. By encouraging incremental annual increases in employee investment, businesses can grow their plans while helping workers increase their savings faster.
3. Offer Age Adjusted Target-Date Funds.
Savvy investors optimize the amounts and frequency they invest to fit their age and risk profiles. Target-date funds seek lower risk as investors approach their growth targets. As an employee ages, the plan automatically increases outlays to low-risk investments while simultaneously decreasing exposure to high-risk ones.
4. Emphasize Employee Benefit Options and Be Honest About Opting Out.
For some, automatic enrollment can feel like a company is pinching from their paychecks. Without trust, employees will hesitate to participate no matter how good the program. Be honest with them: Just because enrollment is automatic doesn’t mean employees lose control over their investment. They are always free to opt out, change investment rates, orroll their money over into a new plan.
5. Encourage a Steadily Increasing Contribution Rate Through Matching
Try to increase the matching amount when possible. Employers are free to adjust this amount annually, which gives them a safety net for when money becomes scarce. Wide swings in matching funds, however, may affect participation and contribution rates.
Employers may retain more credibility by consistently honoring a lower matching rate than repeatedly raising and lowering their matching commitment. If an employee expects a certain amount to go into his retirement plan each month, then “taking away” some of that money may be perceived as a lowering of wages.
6. Consider a Qualified Automatic Contribution Arrangement (QACA) Plan
A QACA plan arrangement requires employers to match three percent of an employee’s compensation in the first year and increase it to six percent by the fifth year. While businesses give up some control over annual contribution levels this way, the guaranteed annual increase helps to maintain employee confidence in their retirement plan.
When Businesses Get It Right, the Benefits Are ‘Automatic’
When developing a plan, employers must understand their demographic. Failing to put rank-and-file employees at the center of an automatic enrollment strategy widens the gap between wage earners. Helping them understand the benefits of investing early on and often helps boost everyone’s financial health.
If you found this article helpful, may we suggest:
- For more on small business benefits management, read 3 Reasons Why Employee Benefits Are Critical to Small Business Growth.
- For more on improving employee benefits, read How to Secure Fortune 500 Employee Benefits for Your Small Company.
- For more on employee benefits and cost management strategies, read Avoid the Cadillac Tax by Adopting Voluntary Benefits.