The modern 401(k) turns 40-years-old this year.
What started as a change in the law to prevent company executives from having easy access to tax-deferred income turned into a portion of the tax code that benefited both employers and employees alike.
At the time of writing, nearly 80 percent employees have a 401(k) tax-deferred savings plan available to them at their job.
Although the 401(k) has seen incredible growth and adoption over the last four decades, it’s not without flaws. Only a third of Americans are using their 401(k) to save for retirement and to make matters worse, a third of Americans don’t have anything saved for their retirement at all.
Shorter Vesting Periods
One of the first places to start with reimagining the 401(k) is to change the vesting periods often put in place by employers. A recent Vanguard study found that in some cases, although companies offered shorter waiting periods before the 401(k) became available to employees, employers would withhold some of the matched funds for as long as five or six years.
And if employees change their job approximately seven times in a lifetime and each employer requires at least a year before employees even become eligible for 401(k) enrollment, that’s tens of thousands of dollars lost in potential retirement savings.
Employers should consider revamping their vesting periods not only to benefit employees’ future financial health, but also as a potential hiring benefit to attract stronger talent.
Make 401(k) opt-out instead of opt-in
At the moment, most retirement programs are designed to be opt-in. After a new employee is on-boarded, the decision to enroll in a retirement plan is entirely up to them. As we know, many employees forego this decision for weeks or months at a time, and many don’t enroll at all.
But that could be changing.
Some employers have decided to change the default 401(k) enrollment selections for new employees from opt-in to opt-out and the success is staggering. For employees with at least six months of employment under their belt, voluntary enrollment rates for a 401(k) hover around 34 percent. Companies that chose to switch their plans to opt-out saw that number spike to 90 percent enrollment rate.
While employers will have to continue to over-communicate the fine print of benefits plans that are opt-out instead of opt-in, enrollment and engagement rates when employees are automatically placed into a retirement plan could be the way of the future.
Better Education and Culture
While it’s easy to pass the blame around why employees aren’t preparing themselves for retirement, a key factor influencing their behavior may be a simple lack of understanding.
Everyone knows that they need to save for retirement, but often the barrier to entry with retirement plans is complicated jargon and continued maintenance.
Employers can take steps to better educate their employees about what retirement plans are and how to take advantage of them.
Additionally, create a culture of saving, not just one-off campaigns to engage employees. Changing the conversation about retirement preparedness in the workplace can have a significant impact on how employees utilize the benefits available to them.
Smarter Investment Tools
Use financial wellness tools to make it easier to understand 401(k) offerings. Even major retirement plan providers still have confusing web portals that make investing and changing contributions difficult.
Let employers take the driver’s seat and make documentation and investment tools easier to access.
Auto-Escalation
Even though some employees make it through the process of enrolling in a retirement plan, many aren’t contributing enough to have enough for retirement when the time comes.
Auto-escalation is an approach that automatically increases employee contributions over time so that as they adjust to new salaries and lifestyles, their retirement contributions will continue to increase as well—taking a few extra dollars extra out of the paycheck every month.
Auto-escalation programs are less intrusive than asking employees to continually log in to their retirement accounts to make changes to their plans. Because the increase happens gradually, it often goes unnoticed.
The 401(k) is still a great investment tool for employees to save for their retirement, but some key changes to the way its administered could help better service employees’ retirement goals.
As the 401(k) continues to age, employers should revisit the tried-and-true tool to find ways to make it work better for their employees.
Chris Whitlow is the founder and CEO of Edukate, a workplace financial wellness provider with a mission to give every person access to expert financial guidance. Whitlow works with the Edukate team to solve problems that ease the financial stress most Americans experience each day. Edukate helps employers provide the best financial wellness benefits, thus helping employees manage their financial stress, increase their productivity, and live happier, healthier lives.
From reader Roger:
“For those of us who have been around longer than the 401k plan, it may be time for more than a 401k facelift. A facelift is cosmetic. What’s needed is a complete overhaul. Just look at the amount spent at industry events on exhibits, hospitality and entertainment, just look at the coterie and cost of 401k service providers, and just look at the amount spent by the industry on marketing and advertising and you can see the inequity if not the iniquity of the present system and its negative impact on retirement readiness in the US.”