It’s the age-old issue of how to increase employee participation in a 401(k) plan. We know how crucial it is to the overall success of the plan – particularly to the highly compensated employee group. High participation also helps in creating a positive attitude towards the company and helps greatly in employee retention.
So, how can you increase participation? All major studies show a 401(k) plan is more appealing if you:
• Do a great job of designing a plan to meet the company’s goals, taking into account other pension plans, if any, demographics and employee investment sophistication. Involve a couple of key rank-and-file employees in the process.
• Shorten or eliminate the waiting period for new employees to enter the plan. You’re more apt to get a new employee to enroll during your orientation meetings when you have their full attention and can explain the benefits to them in a small group than you are one year down the road.
• Provide a matching contribution. The idea of “free” money has a strong appeal, even if it’s only a dime on the dollar. The larger the match, the bigger the impact on enrollment.
• Provide loans and hardship withdrawal options. Many employees don't want to put money into a plan that they can’t get to in an emergency. Emphasize the loan and hardship feature in all enrollment meetings.
• Furnish lots of good plan information. Regularly tell your employees about the plan and its benefits to them. Do this through more than just one medium. Use emails, newsletters, the Internet, company intranet, statements, etc.
• Ensure that a broad range of investment options are available. The day of providing just three or four options is gone. The average plan today has 10.6 options — a number that’s still growing. A good plan will provide from 10 to 15 options that are well balanced between index funds and managed funds.
• Demonstrate to the plan participants that your are monitoring the investment options by providing them with regular reports that provide net performance for each option against an appropriate index. Change funds that no longer meet the plan’s criteria for investment selection, and communicate this to all participants.
• Provide an Investment Advice Service or offer one-on-one meetings to participants by a qualified financial advisor to help participants ensure that they will meet their retirement goals.
• Provide daily Internet and telephone access to asset and balance information. Allow participants to trade frequently. When an employee feels in control of their assets, they feel better about being a part of the plan.
• Hold 401(k) meetings quarterly. These are great opportunities to communicate plan benefits and features. Remember, you need to sell the plan and the more opportunities you give your employees to enroll the more likely they are to join.
• Consider automatic enrollment. It has both good and bad points, but you should think about and research it.
Personalize It
When it comes to getting employees to participate in a 401(k) plan, personalized employee communication can go a long way, according to Watson Wyatt’s latest 401(k) Value Index research.
The research reveals that employees who receive personalized statements contribute 0.85% more of their salary to the 401(k) plan on average, compared with employees who don’t receive this information. This can mean a significant difference in retirement savings. For example, a 32-year-old earning $35,000 today would have an additional $73,415 in savings at age 62. This assumes a 7% return on investment, as well as annual raises of 5% per year.
Furthermore, companies that use personalized statements to inform employees about their 401(k) plan have an average 6% higher participation rate compared with those that don’t. The survey also shows that employers that communicate at least quarterly on such issues as the principles of the time value of money have a 4% higher employee participation rate than companies that communicate this information less frequently.
Plan sponsors who are concerned about employee participation should always attempt to personalize any employee communications about the plan. This includes enrollment materials and other forms of communications. For example, if you’re providing enrollment material to a group of new employees who are in their ‘20s, the ideas and data should be targeted to their life circumstances. Too often we provide generic material and just hope they get the message.
“The results of the survey confirm our long-held belief that targeted communication is one of the best ways to change employee behavior and enhance a 401(k) plan’s value,’ says Greg Metzger, director for DC consulting at Watson Wyatt. "Many employers underestimate the importance of communications in helping employees make the most of their retirement plan.”
Remember, you will always have some employees who won’t participate in the plan regardless of what you do. The key is to maximize usage of your plan by those who will participate.
