If you offer a 401(k) for employees, you may have noticed that not nearly all employees who qualify for it have signed up for it. This can be perplexing for employers. After all, this is a benefit to help employees, and it typically reduces their tax burden while helping them save. Yet many employees don’t sign up.
First, let’s ask ourselves: why would an employer be concerned about how many employees utilize their 401(k) benefit? There are several good reasons employers would want employees to sign up:
- More assets (read: money) in the plan may mean the employer can offer lower fee structures for the investment options. This can make the benefit – and thus the employer – more attractive.
- Employees who feel financially secure and know they’re able to save for retirement are less likely to be financially stressed. Financial stress can spill over into the workplace, so helping employees to be financially secure can have a positive impact for the employer.
- With high employee participation rates, employers are less likely to face scrutiny for perceived discrimination in benefit practices.
- It can reduce your tax burden because more of the employee’s pay is paid on a pre-tax basis if it is being diverted into a standard 401(k).
How Can You Get More Employees to Sign Up for Your 401(k)?
So, if you’re offering a 401(k) and not seeing the participation rates you’d like, here are a few ways to help encourage employees to participate:
- Start by offering a fair compensation package that pays a livable wage. Employees will not be incentivized to save if they feel their income is insufficient to cover daily bills.
- Offer a good employer match. The employer match is one of the most significant benefits for employees using a 401(k) as a retirement savings vehicle. The employer match is something that savvy employees will compare when deciding which employer to choose. It can also serve as an encouragement to join the program, as not doing so is equivalent to leaving money on the table. A high company match also incentivizes employees to make higher contributions.
- Offer a similar benefit for student loan repayment. For example, if the organization offers an employer match of employee 401(k) contributions, consider offering a benefit in which there is an employer match for student loan payments. This can help those with student loans get them paid off faster, thus freeing up more of the employee’s income for 401(k) contributions.
- Consider utilizing an opt-out rather than an opt-in 401(k) plan. Changing to a plan where employees are automatically enrolled unless they proactively opt-out can get past any inertia that holds employees back from enrollment. This type of plan typically also has automatic escalation to slowly increase the automatic savings rate.
- Consider having a dedicated benefits counselor to answer all employee questions about enrollment. This can help those who have questions get past their initial hurdles.
- Consider removing any waiting period required before a new hire can get started with their 401(k). During the first moments of employment with a new organization, an individual may be more receptive to joining such a program. After all, everything is new, and they may be getting a higher rate of pay. It’s a perfect time to get over initial inertia and get it started immediately—making it one less thing to have to address separately later.
- Offer a plan that has simple investment choices. Sometimes the reluctance to enroll in a 401(k) is because it is perceived to be complex. If the plan on offer has simple choices, this can be one less hurdle.
- Offer a plan with a Roth option. For some investors, the option to diversify their retirement savings taxation will be a big draw. This is something not all companies offer, and it could be a way to bring more employees onboard with the program.
Which of these options has your organization tried?