Part 6 of 6., R.E.T.I.R.E.® series by Nathan Fisher

Engagement: Helping Employees Make the Most of Your 401(k)

A 401(k) plan is only worth what employees put into it, and without proper engagement levels, your plan may not be providing the value it should. Here, I’ll address why engagement is important, some standard practices for measuring engagement, and some tips for improving your employees’ engagement rates with your 401(k) plan.

Why is Engagement Important?

In order to run an effective retirement plan, you have to have the involvement of your employees. More than just a simple “set it and forget it” type of setup, 401(k) plans are designed to grow and evolve as the needs and situations of its participants change. Let’s explore in specific terms why engagement matters.

  1. Americans aren’t prepared for retirement, but they should be.
    According to a report from the Government Accountability Office, somewhere between 1/3 and 2/3 of American workers will likely have a lowered quality of life in retirement because they haven’t saved enough1. This is a statistic that doesn’t just talk about people who have 401(k) plans or people who don’t, but reveals that overall, people simply aren’t saving enough to retire comfortably. Our own survey data backs this up; 59% of workers in small companies plan to work past the age of 65 or not retire at all, with 55% planning to work at some level after they retire2. With increased engagement in the retirement plans American workers do have, we’ll see Americans saving more money, and thus preparing better for retirement.
     
  2. Lower engagement can make it harder to pass compliance tests.
    On the employer side, engagement is one of the key factors at play when it comes to compliance tests, which are safeguards established by the IRS to make sure that all eligible employees can participate equitably in a 401(k) plan. High participation and contribution percentages are important signs of a compliant plan, but low rates could lead to failure. If a plan fails compliance testing, there are often additional administrative tasks and financial impacts like contribution refunds. Making sure plan engagement is high can help you avoid all of these potential pitfalls.
     
  3. Your employees receive tax benefits for contributing.
    When your employees contribute to their 401(k) accounts, those contributions are made as pre-tax dollars. That means that each dollar contributed helps to lower the amount of your employees’ salaries that are taxable, which means more money your employees get to keep. It works both ways, too; as an employer, your contributions to employee accounts reduce the business's taxable income. These benefits are the government’s way of rewarding both employer and employee for taking responsibility and planning for the future, and they’re well worth working for.
     
  4. You can use good plans to attract and retain talent.
    Finally, many employers in a variety of industries find it difficult to attract and retain the qualified talent they need. 401(k) benefits can be key to tapping into talent you may otherwise be missing, but good plans–ones with high engagement that deliver real value–can help you keep your best workers around. In our 401(k) survey, we found that 77% of people prefer to work for someone who offers a 401(k) plan with support for managing that plan; that’s an opportunity if you’re facing a scarce talent pool.

Measuring Engagement

There’s an old adage in business that if you can’t measure something, it doesn’t exist. This idea can easily be applied to employee engagement in 401(k) plans. You can offer what you think is a good plan to your employees, and you can hope they’ll use it and value it, but if you aren’t measuring that in some way, you won’t know for sure that your employees are receiving the intended benefit of the plan.

Of course, there are a lot of ways to think about measuring engagement. On a qualitative level, you can learn a lot about how much your employees care about your retirement plan if you pay attention to their general behavior, asking the following questions:

  • Do they ask questions about the plan?
  • Do they seem to care about it?
  • Do they bring the plan up in conversations?
  • Do they show up when your provider makes on-site visits?
  • Do they tell you whether or not they value the plan?

These are all great ways to measure general satisfaction with a plan, but we also strongly recommend that you take more quantitative steps to measure the hard numbers surrounding two aspects of your employee engagement: participation and deferral (savings) rates. We have a methodology for understanding both of these rates and how your plan’s specific numbers (which your service provider should be able to give you) compare up against broader industry figures.

Understand Participation Rates

First, familiarize yourself with trends in participation rates so you can compare your numbers and see where you stand. When it comes to participation, there are a few factors that can impact rates on a broad scale:

  • Industry: Participation rates vary widely by industry. Employers in finance or insurance or telecom might have higher participation rates overall than a company that does transportation or construction.
     
  • Income: Participation rates are generally steady below $100,000 per year, but above that rate you start to see much higher participation.
     
  • Age: Age does have some impact on participation rates, but not as much as income or industry. The data suggests that where you have employees below 30 years of age, you’ll have 70% of them participate, while employees in their 50s might participate at a rate of 80%.

Review the charts below to find the average participation rates for your industry, and for the ages and income levels of your employees, to benchmark your plan’s performance.1

Compare Deferral Rates

Second, take a look at the deferral rates for your plan and for the broader industry. Deferral rates refer to the amount an employee saves divided by their total income, before taxes, and are typically presented as a percentage of an employee’s income. As with participation rates, we see different deferral rates based on income, and age:

  • Income: Generally speaking, deferral rates can be as low as 5% for people making less than $30,000 per year, but reach as high as 8% for those in the $30,000-$50,000 level. The highest income levels may reach as high as 10%-15% deferral.
     
  • Age: Younger workers (less than 30 years old) tend to save around 6%, where people in their 60s might be saving as much as 14% or 15%.

The notion that employees tend to save more as they make more money or grow older underscores the importance of active employee engagement. Each of these changes becomes an opportunity to check in with employees, to help them budget better, to help them participate more, and to help them fine tune their assumptions about how much they should be saving, and when they can retire.1

Benchmark with an Employee Survey

Another good way you can measure employee engagement and satisfaction with your 401(k) plan is through a simple employee survey, which we’ve provided in this kit. We’ve seen great success in presenting employees with a set of four questions, which can help you gauge their own understanding of your plan and the resources available to them.

Improving Engagement

Once you’ve evaluated your plan’s engagement levels, there are a few steps you can take to give your employees the support and the motivation they need to get more involved with their own retirement planning.

First, consider those resources we discussed in the first section of this kit. This is where many of those tools start to come into play, especially the one-on-one counseling. Remember: we’ve found that when employees get access to reliable, individualized counseling, participation rates tend to increase 38%2. Beyond that counseling, other tools like contribution calculators can help answer some vital questions and increase low deferral rates.

There is also some work you can do as an employer to change your plan and make it easier and more appealing to participate, including:

  • Increase employer matching contributions
  • Add an automatic enrollment feature or auto escalation
  • Shorten or eliminate your waiting period
  • Consider altering your vesting schedule
  • Offer frequent plan enrollment and election periods

 


1 http://www.gao.gov/products/GAO-15-419
2 Fisher Investments 401(k) Media Poll
Part 6 of 6., R.E.T.I.R.E.® series by Nathan Fisher

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