Making 401(k) Saving Hard to Avoid with Marc Howell and Felix Okwaning at Principal^Ⓡ

Our guests on today have some ideas on dealing with this problem—centered on how instead of making it easy to participate, making it even harder to avoid enrolling in the plan in the first place.

Marc Howell and Felix Okwaning, who are both Managing Directors—Enhanced Plan Design at Principal Financial Group^Ⓡ, share some great ideas on how to use a combination of automated features including “auto-sweep” to boost enrollment and deferral rates, dramatically helping employees get adequately prepared for retirement.

Key Insights

1. Challenges in 401(k) Enrollment:
   Despite the efforts of workplace retirement plan sponsors to simplify the enrollment process, many employees still do not participate in their company’s 401(k) plan. This lack of participation is primarily due to insufficient information and a lack of confidence in investment basics. Even with modern plan designs that require minimal effort from employees to start saving, a significant number remain unenrolled. Research by Principal Financial Group suggests a shift in focus may be needed—from making enrollment easier to making it harder to avoid. This highlights a persistent issue faced by retirement plan advisors and sponsors for years.
2. Key Issues in 401(k) Participation:
   Two main issues contribute to low participation rates in 401(k) plans: a lack of awareness and the problem of inertia. Many employees are unaware of their eligibility or the specifics of their retirement plans, despite decades of communication efforts. Misunderstandings about plan details are common, with some eligible employees mistakenly believing they are saving for retirement. Additionally, inertia can work against enrollment efforts. For example, new employees overwhelmed by financial obligations might opt out initially and remain unenrolled for years, highlighting the need for ongoing re-enrollment strategies to combat this inertia.
3. Effective Strategies for Increasing Participation:
   To address the participation gap, many advocate for annual automatic enrollment sweeps and aggressive auto-escalation features. These strategies help ensure employees are periodically re-evaluating enrollment, aligning with times like annual raises when extra income might make contributions more feasible. Automated features, including auto-enrollment and auto-escalation, can significantly improve participation rates and seek to improve savings outcomes. Combining these features helps maintain the necessary contributions and promotes reviewing savings to help achieve adequate retirement savings. Implementing such strategies can help employees overcome initial opt-out decisions and continuously encourage retirement plan participation as their financial situations evolve.

SEE ALSO:

• Why are employees not participating in their 401(k)s and other retirement plan trends
• How to make saving in a 401(k) plan hard (to avoid)

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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. ​

Based on analysis conducted by the Principal Financial Group^®, November 2022. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; 10-15% individual plus employer contributions; Social Security providing 40 percent replacement of income: 4.5% withdrawal of retirement savings; 6 percent annual market returns; 2 percent annual inflation; and 3 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 80 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs as savings depends on many factors, including lifestyle, social security replacement, and retirement age.
Replacement factor of 80% is based on our industry experience and GAO Retirement Security Report to Congressional requestors.  The estimated average total spending for post-retirement households was about 77 percent of the spending levels for pre-retirement households. GAO, 2013 CE Data; 16-242, Retirement Replacement Rates.

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