Four Ways to Turbocharge Participation in Your Company’s 401(k) Plan
Key Features that Drive Growth of Participants’ Savings
The average annual 401(k) savings rate for plan participants clocked in at 14% of participants’ gross wages at the beginning of 2022, representing combined employee salary deferrals and employer matching contributions, including company match and profit-sharing contributions, among other contributions. At the same time, average 401(k) account balances reached $121,700.
While these numbers were substantial compared with previous savings rates, Americans, by and large, do not save enough for retirement. Moreover, it is important to note that inflation skyrocketed to 8.5% shortly after these numbers were reported, adding hundreds of dollars to the monthly household bills for most. Rapid declines in the stock market throughout 2022 also have significantly chipped away at retirement account balances.
In short, this is a tough time to convince workers to divert a portion of their wages to retirement savings through 401(k) deferrals.
But this is no time to skimp on saving for retirement, and there are strategies that plan sponsors can employ to encourage workers to get into the retirement saving game earlier and maximize the benefits of a 401(k).
Four Ways to Turbocharge Your Plan
If you want to turbocharge your 401(k) plan to encourage employees to maximize their savings and be able to retire on time – or even early – here are the key features to build into your plan
- Offer an employer match and ensure employees understand the value of it. More than 80% of 401(k) plan sponsors provide an employer match, a key attraction for candidates considering joining those companies. But some employees still do not understand the value. If an employer matches 100% of contributions up to 5% of employee salaries, and an employee is only deferring 3% of income, they leave money on the table. An employer match is free money that rapidly accelerates the balance of a 401(k) over time. The key is to communicate and educate plan participants. Sending the required annual written notice of the plans features is not enough, which leads to the second strategy.
- Bring the plan advisor in to talk to your employees at least once a year. Many people are throwing darts to figure out how to save for retirement and where their 401(k) dollars should be invested. Most workers know little about asset allocation and how it should be adjusted as they age. Often, 401(k) websites have online asset allocation tools, but they are underutilized. Your plan advisor needs to be on-site at least once a year – perhaps more – to speak to participants as a group and individually.
- Implement auto-enrollment in your plan. Just as the name signifies, auto-enrollment means every new employee is automatically enrolled in your 401(k) plan upon meeting eligibility, and a minimal percentage of wages is deferred to help build their savings. They may opt-out within a specified timeframe, but that gives you time to start educating them about the plan’s benefits and, hopefully, keep them enrolled. Companies with auto-enrollment features in their plans often have more than 90% participation by employees.
- Implement auto-escalation in your plan. This is a bit more complicated than auto-enrollment but is a crucial driver of growth in participants’ savings balances. With auto-escalation, once an employee has been with the company for one year, their wage deferral amount is automatically increased by one percentage point annually, up to a maximum of 15%. Some companies escalate by two percentage points. Few plan features accelerate participants’ savings as effectively as auto-escalation, and since the percentage of increase each year is small, the impact on net pay is minor.
Other features can help boost 401(k) participation rates, but these are the tried-and-true winners. If you would like to discuss how to fuel growth in your employees’ 401(k) participation, contact your Adams Brown Wealth Management advisor.