Although they have only been around since 1978, 401(k) plans have long since replaced the traditional pension as America’s way to save for retirement. They allow employees to decide how much they wish to contribute, how to diversify those funds, and defer paying taxes on the invested portion of their income.
With all of these benefits, it is difficult to understand why only two-thirds of eligible employees elect to participate in the program. Increasing plan participation within a company is advantageous to employers, employees, and society as a whole.
Benefits of Increasing Plan Participation
Workers have witnessed a declining value of 401(k) funds in recent years due market losses and an increase in the need to borrow or withdraw their funds to meet their monthly obligations. An entire generation of retired employees without sufficient retirement funds could have serious repercussions for government assistance programs.
Employees who are content with their 401(k) plans and other benefits are happier with their situation and, therefore, less likely to seek employment elsewhere. This translates into reduced expenses for employers that come with high turn around rates. Larger balances can also reduce the cost of operating the plan. So, how do we get employees to participate?
Ways of Increasing Plan Participation
The best way to increase plan participation is to give employees enough incentive to do so. Some of these incentives can include:
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Relaxed eligibility requirements
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Employer matching contributions
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Enhanced withdrawal options
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Frequent election periods
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Diverse investment options
Providing Incentive
Employers can provide incentives for participation by offering matching contributions that allow employees’ accounts to grow larger, faster. Providing employees easy access to their funds during times of financial hardship with enhanced withdrawal options can also increase participation. Additionally, allowing employees some control over their investments with adequate and diverse investment options will encourage participation.
Restrictions surrounding when an employee becomes eligible to participate in a plan can reduce the interest in the plan. For an employer with only full time employees, eliminating age and length of employment restrictions is an excellent method of increasing plan participation without negatively impacting nondiscrimination testing.
Since it is important for employees to feel they have a fair amount of control over their funds, providing frequent election periods can help in increasing plan participation. Having the option to adjust their elections quickly if they are not working out provides security to employees.
Increasing Plan Participation with Automatic Enrollment
Automatic enrollment options provide a means by which employees are automatically entered into the plan upon reaching eligibility requirements. The employee has the option of opting out if they do not wish to participate. Studies show that this method is highly effective, increasing plan participation by up to 34 percent. Certain types of automatic enrollment plans are exempt from discrimination testing, while others allow extended correction periods after a failed test.
The Benefits of Increasing Plan Participation
All of these alternatives require regular communication with the employees. As with any relationship, communication is key. Employees just want to feel that their employer is concerned with their welfare, both during employment and in retirement. Increasing plan participation for 401(k) retirement funds offers great benefits to everyone involved. Coincidentally, it also benefits society since taxpayer burdens are decreased. It is prudent for an employer to explore the plan options that will meet their employees’ needs most effectively, and then encourage employee participation by offering incentives and flexibility. The result is happier, more secure employees with healthy company retirement funds.