No matter the organization, getting increased participation is always an issue.
It can be difficult, but it doesn’t have to (necessarily) be pricey.
There are a number of tools to increase plan participation that don’t cost plan sponsor clients much money, either in contributions or plan expenses.
Why increase plan participation?
Why should a plan sponsor be concerned about employee participation in a 401k? They should remember why they implemented the 401k plan in the first place—to provide a benefit to their employees, and in order for the benefit to be optimally utilized employees should be deferring part of their salary.
Getting them to save for retirement is a good thing, and a benefit that encourages people to save goes a long way in retaining employees.
A sign of a well-run 401k plan is a plan with a higher deferral rate for employees, as well as a healthy average account balance.
- Add automatic enrollment
Automatic enrollment was originally called a “negative election” when first allowed in the late 1990s and subsequently codified in 2006.
Plans without an automatic enrollment feature only withhold money as salary deferral if/when employees affirmatively elect to participate in the plan, so it’s a beneficial feature if participants forget to hand in deferral election paperwork.
Common objections to automatic enrollment are that employees will be upset when they discover part of their salary was withheld for salary deferrals.
However, people tend to be passive, so they may not bother to go with the procedure of affirmatively declining a salary deferral election to try to retrieve their money.
Before negative election became automatic enrollment, a plan sponsor was offered no fiduciary relief for losses incurred by participants in deferrals automatically deducted from their pay, since the participant didn’t direct their own investments in such a setting.
Plan sponsors would just invest those automatically enrolled deferrals into some type of money market or stable value investment.
Negative election meant participants saw very little increase in their “forced” plan assets because there was little gain to using money market or stable value funds.
When it finally became automatic enrollment, fiduciary relief was granted to plan sponsors, as long as they invested those deferrals into a qualified default investment alternative (QDIA).
Plan sponsors should always at least consider automatic enrollment, whether their plan has a high deferral contribution rate or not.
If the goal is to increase the deferral rate of plan participants, automatic enrollment is a “cheap” and “cheating” way to accomplish it.
- Make enrollment meetings and materials interesting
401k enrollment meetings are as exciting as a funeral.
Plan sponsors and advisors should think of plan enrollment and education meetings as T.V. shows and movies.
It doesn’t mean adding special effects; it means holding a participant’s interest, at all times.
Add some comedy, make it fun to be there. Give out a $25 gift card as a raffle for those who attend. Speak to participants on their level; make them feel that they’re missing something by not attending. Make the meeting engaging so that plan participants can understand and be interested in a topic in which most (otherwise) have no interest.
Too many advisors treat enrollment meetings as a dissertation on investment theory. Don’t be one.
- Trim the investment options from the plan
Plan sponsors and advisors assume dozens and dozens of investment options in a 401k plan are a good thing. Studies show it’s not the case. As the number of different investment options grows, deferral rates decrease.
Why? Plan participants feel overwhelmed with too many investment choices, and they’re paralyzed to the point of not participating.
When a 401k plan has three to five large-cap mutual funds, participants with no investment knowledge won’t understand their difference.
I’ve seen plans with 50 to 75 investment options, which is at least 30 to 55 too many.
Pruning a retirement plan’s fund lineup to a more manageable 12 to 20 funds is even better.
Ary Rosenbaum is the host of That 401(k) Conference, a fun and informative retirement plan conference taking place at Dodger Stadium in Los Angeles on Friday, February 22, 2019, from 9:00 am to 2:00 pm. Special guest: Steve Garvey.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
