How do I Encourage Participation in the 401k?
401k participation is not automatic just because the company offers a 401k plan. Retirement plans are offered by many large employers, but not everyone takes advantage of this benefit to help them save for their future. What motivates participants to join their retirement plan at work? It’s a question, employers that offer a retirement plan should be able to answer, and it was the topic of a recent article in The Mercury News by personal money manager and author, Julie Jason.
In her article, Ms. Jason quoted recent retirement plan participant data from Cerulli Associates’ Q2 2018 Cerulli Edge. It turns out, one of the biggest motivators for employees to participate in workplace retirement plans is the presence of an employer match. Employers who aren’t already offering a match in their retirement plans, take note: 51% of people said the employee match enticed them to enroll in their employer’s plan, according to Cerulli. Matches are more prevalent among large ($250 million to $1 billion in plan assets) and mega (more than $1 million in plant assets) plans, and less so among smaller plans (less than $25 million in assets), Cerulli also reported.
Ms. Jason also cited this choice piece of information from the Cerulli report, which may be a strong indicator of why some people are motivated to participate in their workplace retirement plan, and some are not. The survey indicated – 42.7% said “I could afford to start saving for retirement.” However, another Cerulli study Ms. Jason quoted found that 51.8% of those who delayed participating in a workplace retirement plan until after age 30 did so because they believed they did not have enough money to save for their post-work years. Unfortunately, a lot of people believe they “can’t afford to save for retirement.” What they don’t realize is that they can’t afford NOT to, and thanks to the “magic” of compounding, even a tiny savings today can go a long way toward helping them achieve their future goals. But people have to set aside savings for retirement, and they have to start somewhere.
As such, Jason, a self-proclaimed proponent of financial literacy (as is this author), recommends five critical lessons employers can use as a foundation to educate employees on the importance of maximizing their workplace retirement plan benefit:
- How employees can participate in their workplace retirement plan without taking a significant bite out of their pay
- How the match enables them to, in Ms. Jason’s words, “purchase retirement savings at a discount”
- How employees can lower their current tax bill by contributing to their employer’s retirement plan
- How compounding and time work in tandem to grow retirement plan savings over time
- How employees can accomplish all of this for themselves by choosing to participate in their retirement plan at work
Cerulli’s research supports indicates some of the above, lessons serve as key motivators to convince employees that they can, indeed afford to save for retirement and that their workplace retirement plan is the place to do it. Also, according to Cerulli:
- Tax benefits were a chief motivator for 27.7% of retirement plan participants
- 6% said a family member told me to start saving for retirement
- Automatic enrollment accounted for 24.4%
- 6% cited their employer’s recommendation as the impetus for their retirement plan participation
- 4% said “a financial professional suggested that I start saving for retirement (e.g., advisor or accountant).
Moreover, Ms. Jason writes that due to asset minimums, younger savers are likely to fly under the radar of advisors at wire-houses or banks, for example. As such, she notes, the education must come from sponsors. Moreover, younger employees are the most likely to benefit from a longstanding savings program and commitment to growing their wealth for their post-career years via a workplace retirement plan. And younger generations’ access to workplace retirement plans has increased within the past two decades, making it even more of a no-brainer for sponsors to encourage retirement plan participation among this demographic.
As Ms. Jason eloquently puts it, “Let me state the obvious: We want to know what motivates people to participate in 401(k)s because we want more people to participate in their 401(k)s. The vehicle is simply the best mechanism to save and invest for retirement.” We couldn’t have said it better ourselves.
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