Workplace retirement plans are intended to help employees achieve financial security in retirement, but success depends on enrollment. To better understand the reasons behind low participation, Principal® surveyed people eligible for their workplace retirement plan but currently not contributing.1 Read the full report.
Roadblock one: Eligibility can be misunderstood
If employees are unsure of their eligibility for retirement benefits, they’re not likely to enroll. Of respondents:
Multiple jobs in the past with different retirement plan provisions could add to the confusion. Being automatically enrolled at a previous job may lead one to assume that’s how all plans work. In all the information they receive about their employee benefits, some employees don’t realize they need to take action to enroll.
Roadblock two: Saving for retirement is confusing
One of the survey outcomes found that 59% of non-participating employees thought they were saving for retirement through their workplace plans. Of these nonparticipants:
Feeling behind and not fully understanding how to enroll and save can prevent employees from taking action. The consequences of this uncertainty are daunting; just 27% of all surveyed are confident they’ll be financially prepared to live comfortably in retirement.
Roadblock three: Debt, salary, and expenses
Many employees feel now isn’t the right time to save for retirement. People across all generations, salary ranges, and account balances offered similar reasons:
- Monthly expenses are too high: 39%
- Paying off debt: 36%
- Income is too low: 34%
Helping employees get started and suggesting small action steps can help people move from feeling stuck to being empowered.
Ways to boost retirement plan participation among employees
Carve out time to address enrollment
Time and attention might be the easiest and most cost-effective way to help more employees save. Consider a focus on retirement plan enrollment during the annual benefits enrollment period. Nearly half (49%) of non-participating employees surveyed would be interested in enrolling if given the opportunity annually when they’re already focusing on other benefits. This option was more popular among younger and lower-wage employees, as well as those without a retirement plan balance.
Another option is to focus on retirement plan enrollment during performance review season; 46% surveyed said they would be interested in hearing about enrollment during this time. Salary increases usually come during performance reviews, so including a discussion of retirement plan enrollment could help employees make informed decisions based on their new pay rate.
Communication best practices
Consider the power of personalized communications to alert non-contributing employees that they’re not actively participating—especially when so many think they are.
Best practices for engaging communication include:
- Creating more personalized messages: Personalize messages based on plan information, but also on what’s known about the individual’s motivations.
- Increasing frequency and reach: Communicate more often throughout the year, using a variety of mediums.
- Making it simple and actionable: Add frequent automated nudges for those who start but don’t finish enrolling.
- Testing and optimizing messages: Test a variety of messages to find what is more successful.
- Improving the process: Work with the retirement plan service provider to address abandonment points.
Help find the balance between saving and debt
Balancing debt and saving for retirement are important for overall financial security.
The SECURE Act 2.0 offers some options that employers can consider, like matching student loan debt repayment and emergency savings provisions.
If adding these options, ensure that communication is extensive. Show how an initial low deferral rate of 1-2% can be a good start that allows them also to pay down debt.
Plan design can address most participation challenges
Adding automated plan design features is typically one of the fastest ways to help more employees and boost participation rates.
Auto-enrollment
Based on our data, plans of all sizes typically benefit from auto-enrollment.
- Fewer than 10% of employees opt out of auto-enrollment.2
- The likelihood that a plan with auto-enrollment has a 90%+ participation rate more than doubles at any plan size.
Auto-increase
Auto-enrollment is a powerful plan design feature because it works with human nature and can be even more beneficial when auto-increase is added. With auto-increase, employees are less likely to remain at the default percentage.
Nonparticipants are receptive to auto-enrollment with a 1% annual escalation:
- 62% agree with pairing auto-enrollment with auto-increase at some level3
- 35% would enroll at the default percentage
- 17% would enroll and increase their deferral percentage
- 11% would enroll but decrease their percentage contributed
Annual enrollment sweep
Employees generally go along with most plan provisions as evidenced by their acceptance of automated features. Adding auto-enrollment doesn’t provide a solution for current employees who aren’t enrolled. An annual enrollment sweep:
- Helps existing nonparticipants
- Re-enrolls those who stopped contributing but offers an opt-out
- Alerts those who didn’t know they were eligible.
With a sweep, employees can decide whether to participate now based on their current finances, not their budget on the day they were hired. Timing a sweep with the performance review season could effectively be the annual nudge that eligible employees are asking for and provide another opportunity to save if an employee is receiving a raise at that time.
Employer contribution matches incentivize participation
Employees respond to employer matches.
- 83% of those surveyed said they’d start contributing if they received a match.
- Interestingly, 78% of these specific respondents are in plans that do offer a match, highlighting the need for more and better communication.4
Principal® data shows when companies match employee contributions, participation rates are higher.
How matching contributions can be more cost-effective
Stretching the match can be an expense-neutral option for plan sponsors.
For example, a 100% match of a participant’s first 4% of deferral contribution costs the same as a 50% match on the first 8% of deferral, but the stretched match can incentivize the participant to contribute more.
These expenses can be offset by tax deductions; Employers of any size can deduct matching contributions up to a maximum limit from their company tax returns.
Considerations for a stronger retirement plan
The issues around retirement saving are complex, and each plan sponsor has a unique situation. From plan design and regulations to participant demographics and inertia, Principal® approaches these challenges holistically and offers experienced consultants to plan sponsors to help employees achieve their retirement goals.
If your organization is facing participation challenges, read the full report.
Important Information
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Company®, a member of the Principal Financial Group®, Des Moines, IA 50392.
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© 2024 Principal Financial Services, Inc.
- Principal® Retirement Security Survey—Nonparticipants, December 2023. All statistics are from the survey unless noted. ↩︎
- Principal data as of 12/31/2023. ↩︎
- Percentages may not total 100% due to rounding. ↩︎
- Principal data as of 12/31/23. ↩︎
Principal Financial Group® is dedicated to improving the wealth and well-being of people and businesses around the world—helping more than 45M customers plan, protect, invest, and retire.
