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You are here: Home / 401K / How to improve your employee 401(k) participation rate

How to improve your employee 401(k) participation rate

January 2, 2021 by Retirement

(Photo: Shutterstock)

Participation in your company’s 401(k) plan is critical to not only the plan’s success, but also to employee retention and other positive factors. For business owners, running a successful 401(k) plan is a significant investment of time and money. But if current (and prospective) employees appreciate the value of their retirement benefits, it’s well worth the investment.

Not only that, studies have shown that personal financial stress negatively impacts performance and productivity. This can have a damaging impact on business output, lead to higher employee turnover, and increase costs  associated with hiring and retention.

Reducing employee financial stress

By encouraging employees to make the most of the retirement savings plan, you can help reduce their financial stress and allow them to focus on what matters most.

According to a Betterment for Business survey, 67 percent of plan participants said that a good 401(k) was very important or important when evaluating a job offer.

In “A Compendium of Findings About American Workers” from Transamerica, respondents were asked why they chose not to participate in their employer’s 401(k). The top three answers were:

  • I didn’t have enough time to enroll (40 percent)
  • I don’t earn enough money (33 percent)
  • It is too much of a hassle to enroll (19 percent)

These concerns can help you determine what to do to address low participation rates in your own company.

Communicating with employees

Of course, if your employees do not know about the plan, they will not be able to make a choice to participate in it. But not all communication is created equally. Here are a few things to consider as you communicate to your employees about your 401(k) plan:

  • Use a variety of communication mediums. This includes emails, websites, newsletters, statements, meetings, flyers, video, apps, and more.
  • Be sure that the right communication is going to the right employee. For instance, 55-year-olds are more likely to want information on fast-tracking retirement savings rather than saving for a first home. Research from 401kHelpCenter has shown that personalized statements increase participation by 6 percent and increase contributions by 0.85 percent more of their salary.
  • Communicate often. Quarterly information about financial matters increases participation rates by 4 percent over those who communicate less often.

Financial wellness education

A good financial wellness program should have data showing its correlation to 401(k) participation. In our recent case study with a client, 34 percent of employees who engaged with the financial wellness campaign increased their 401(k) participation rate.

This is a good example of what a highly customized campaign can achieve, but even programs which aren’t optimized for retirement plan participation show a 15 percent year-over-year increase.

Consider offering a personalized, adaptive financial wellness program. Financial wellness programs work best when they do the following:

  • Provide individualized information based on each employee
  • Use various methods of communication
  • Have a wide array of methods for learning including videos, games, contests, tools, calculators, spreadsheets, etc.

This education should provide your employees with the information needed to understand their finances, including how the company 401(k) is a tool to help them meet their retirement goals.

Employees are more likely to participate if they understand the benefits of doing so. A holistic financial wellness program will teach employees the importance of participating, which can be emphasized by employer communication.

A comprehensive financial wellness program will also teach how a 401(k) plan can do the following for them:

  • Lower taxable income
  • Permit direct deferrals in any combination of before or after tax as long as they don’t exceed IRS limits
  • Provide tax-free growth

Retirement plan participation is one of several positive benefits of a good financial wellness program, and one of the factors that should be used when calculating the projected return on investment for this benefit.

Kris Alban is executive vice president of iGrad, a San Diego-based financial technology company that provides artificial intelligence-powered financial wellness solutions to employers, financial institutions, colleges and universities. Its Enrich Financial Wellness Platform is used by more than 20,000 employers and more than 300 financial institutions to provide behavior-changing financial literacy education to employees, customers and members.

Filed Under: 401K

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