One of the big questions that plan sponsors are always asking is, “How do I get my employees to participate in our retirement plan?” You want your employees to prepare so they can have a secure financial future, and you don’t want your highly-compensated employees to miss out because the others aren’t contributing.
Luckily, there are some steps you can take that have proven effective in motivating employees to participate. They are not mutually exclusive, so adopting more than one of these plan features may lead to even greater success than only trying one. Here are seven features that retirement plan sponsors have found lead to greater plan participation:
We tend to take the path of least resistance. One of the reasons employees don’t sign up for their workplace retirement plan is that they just never get around to doing it. If you adopt auto enrollment, then their inaction will work in your favor. The same people that never found the time to enroll will now participate in your retirement plan because they will never get around to opting out. Many plan participants also appreciate not having to complete the enrollment themselves.
Everyone likes free money, and to your employees, a match is just that. Many workers who wouldn’t otherwise contribute to a retirement plan will do so in order to get a match. A match doesn’t just incentivize employees to contribute, it often determines how much they contribute. According to the Voya Retire Ready Index, one-third of workers decided how much to contribute to their employee retirement plan based on the employer match.
A stretch match is where you don’t match employee contributions dollar-for-dollar, but rather offer a smaller per-dollar match in order to make it stretch farther. For example, instead of matching the first 3% dollar-for-dollar, you might match $0.50 for each dollar up to 6% of salary. Or you could even stretch the match farther and match $0.25 per dollar up to 12% of salary. As the Voya survey shows, many employees base their contributions on their employer match. The more they have to contribute to get the full match, the more they will contribute overall.
If your employees participate in your retirement plan but don’t contribute as much as you’d like them to, consider offering an auto increase. Employees can set it up so that their contributions automatically increase on a regular basis until they reach their desired contribution level. The auto increase works well in tandem with raises or cost of living increases because the increase won’t affect the employee’s take-home pay as much. Even without salary adjustments, small increases like 1% a year can make a huge difference over the long run while only having a small impact on their current finances.
A Roth feature provides employees the opportunity to contribute after-tax dollars for tax-free growth. The younger your employees are, the more they would benefit from a Roth feature. The longer they have until retirement; the more compounding interest can increase their tax-free savings. With Roth IRAs readily available to your workers, having a Roth feature in your plan may be the best way to compete for their retirement savings.
Safe Harbor Plan
A safe harbor plan is a way to avoid 401(k) discrimination testing and allow for all employees to contribute the maximum allowed by the IRS, regardless of their pay level. Employees are more likely to participate in these plans because they have mandatory employer contributions and immediate vesting. Employers who plan to make contributions anyway and want to maximize highly compensated employee deferrals would do well to consider switching to a safe harbor plan.
A Charles Schwab survey found that 57% of 401(k) plan participants wish there was an easier way to figure out how to choose the best 401(k) investments and 34% of them feel a lot of stress over correctly allocating their 401(k) dollars. Plan participants are intimidated and discouraged because they don’t have the requisite knowledge to make good investment decisions. As they say, knowledge is power, and more workers would participate in company retirement plans if they felt they had the knowledge to do so properly.
How We Can Help
Features like employee education and implementing a safe harbor plan can be complicated and require specialized knowledge. Also, every plan and company workforce is different, so not every one of these suggestions will be equally effective or recommendable for your unique plan.
At Beacon Pointe Advisors, we specialize in employer-sponsored retirement plans. We can sit down with you, help you decide which is the best approach to take to increase your employee plan participation, and help you implement it. Call us today at (949) 718-1600 or email us at firstname.lastname@example.org if you want specialized advice for your specific plan or have any other questions about expanding your employee participation.
Disclaimer: This article has been provided for informational purposes only and should not be considered as investment advice or as a recommendation.