4 Ways to Increase 401(k) Participant Savings
Joseph P. Trybula, CFP®, AIF®
Diversified Financial Advisors, LLC
Now is the perfect time for planning to find ways to increase employee participation and savings rates in your company retirement plan.
A well-designed 401(k) plan can play a significant role in helping you and your employees save toward a more financially secure retirement. I have highlighted four 401(k) plan design options in this article that have been used to help plan sponsors get higher participation and savings levels.
4 Simple Ways to increase 401(k) Participant Savings
- Automatic Enrollment: Under the automatic enrollment design, employees who fail to respond to enrollment materials will be automatically enrolled in the plan. As a plan sponsor you choose the deferral rate at which employees are automatically enrolled. The plan can be designed to automatically enroll only newly eligible employees or to also automatically enroll existing employees who are not actively participating in the plan. The automatic enrollment design eliminates the decision-making and guesswork for plan participants who might not otherwise take the initiative to enroll in the plan. Plan success: We have been successful in implementing this plan feature and have been able to obtain plan participation rates in excess of 90%.
- Automatic Deferral Increases: Although automatic enrollment can successfully increase participation rates, if the default deferral rate is set too low, automatically enrolled participants may not save enough to produce a meaningful retirement benefit. The automatic deferral increase feature can improve participants savings rates without requiring any action by plan participants. Under the automatic deferral increase design, plan participants deferral rates are scheduled to gradually increase over time in set increments, for example 1% or 2% each year, until they reach a designated cap such as 10%. By slowly increasing the deferral level, the automatic increase feature is intended to help plan participants become comfortable over time saving at a level that enables them to accumulate substantial retirement savings. The automatic deferral increase design can be an effective tool for any plan participant who wants to gradually increase their deferral limit not just for automatically enrolled participants.
- Safe Harbor 401(k) Option: This feature is popular with plans that have had to limit contributions by highly-compensated employees because of failed ADP and ACP nondiscrimination tests. Under this design approach, the plan is deemed to satisfy the ADP and ACP requirements so long as the plan incorporates certain features including mandatory employer contributions, immediate vesting, and restrictions on distributions. Another benefit of a safe harbor 401(k) plan is that the employer contributions may satisfy the required contribution under the top-heavy rules when key employees own more than 60% of the plans assets.
- Extended Matching Contribution: Extending the matching contribution is a plan design option that may be used to motivate plan participants to defer a larger amount into the plan without increasing the amount of the plan sponsor contribution. Under this design, the matching contribution formula requires a higher rate of deferrals to trigger the full employer match. For example, assume a plan currently makes a 100% matching contribution on deferrals up to 3% of pay. To encourage employees to defer more into the plan, the matching formula could be adjusted to match 50% on deferrals up to 6% of pay or 25% on deferrals up to 12% of pay. The plan sponsors contribution remains at 3% of compensation, but employees must save at a higher deferral rate to obtain the maximum employer match.
Selecting the plan features that will be most effective for your unique employee demographics and business objectives can be challenging.
Here are some ways we can provide valuable plan design support:
- Identify Objectives: Help you identify and prioritize business objectives driving your decision to establish or maintain a retirement plan.
- Share Plan Feature: Teach you how various plan features can drive the desired outcomes you are looking for.
- Periodically Review Plan Features: As your business grows and employee demographics change, plan features may need to be adjusted. Providing period reviews (e.g., annually) to review plan objectives and evaluate whether the plan is producing positive retirement savings outcomes for plan participants is an important step in keeping your retirement plan on track.