When it comes to educating participants, plan sponsors running ERISA retirement plans must, at a minimum, notify employees annually that they have the right to participate in the plan, or to make changes. But there is a lot more plan sponsors should do to help employees save for retirement besides sending a “heads up” email. Your communication as a sponsor is a great opportunity to educate employees not only about how your plan works, but also on the importance of savings for retirement in general.
After all, it’s in the best interest of everyone for employees to not only participate, but to maximize tax deferred retirement savings. While getting your highly compensated employees (HCEs) to participate may be automatic, better employee education programs can help you pass compliance tests like the IRS Actual Contribution Percentage (ACP), which requires you to get non-highly compensated employees (NHCEs) to make meaningful contributions as well.
When it comes to participating and contributing to their retirement plan, non-profit employees are trailing their for-profit counterparts. According to a survey of 2015 plans, 79% of eligible 403(b) plan employees had an account balance in the plan. That’s compared to 88% of eligible 401(k) employees. While the contribution rates were similar, non-profits lagged for-profits 6.2% vs. 6.8%, according to a Plan Sponsor Council of America survey.
But with Americans so reliant on their retirement plans, and no indication that such plans will become less important, why isn’t the participation rate above 90%?
Most might assume that employees are too stretched for cash to do anything that diverts money from their take home pay. Yet our research at ForUsAll suggests otherwise. When our virtual advisor, DAVE, asked employees why they had not joined the retirement plan, only a minority blamed stretched finances for their decision. About 40% said they were “too busy” and 19% said signing up was “too much hassle.” That means there’s room for better, participant-focused 401(k) education efforts to move the needle.
Five ways to better educate employees about the retirement plan (and make the benefit as impactful as possible!)
Rule #1: Make sure your retirement plan is easy to join
In our above example, 59% of those not enrolled in the plan might very well have joined if signing up was understandable and convenient. And when it comes to “understandable” the glossiness of the brochures has nothing to do with their value to employees. In a plan participant survey, 67% gave the industry a grade of “C, D or F” for how it explains saving and investing. In fact, 30% said they delayed investing because it was too confusing, according to a participant survey conducted by Charles Schwab.
And when it comes to onsite seminars, it may be more productive to spend that time researching fantasy football. Humans are great at becoming motivated, but often are quick to lose steam. Behavioral research has shown that almost everyone claims they will make a positive change after attending a workplace seminar. In reality, only 14% actually do, according to two University of Chicago researchers’ working paper “Preaching to the Converted and Converting Those Taught: Financial Education in the Workplace”.
Rule #2: Avoid information overload
Traditional retirement plan enrollment involves a stack of forms and a number to call with questions. If there is an online platform to sign up, the password might be weeks-deep in the employee’s email in-box. Once the employee gets around to navigating through the forms, they are asked to come up with an asset allocation, and then asked to select the funds to satisfy these risk vs. return preferences.
All this paperwork, all these choices, and with much of this information being unfamiliar, can result in the employee freezing up and doing nothing. Or perhaps, seeing that enrollment is going to take a while, it will be postponed for another day, perhaps one that never comes.
Rule #3: Make enrollment automatic
A sure way to get employees enrolled in your for-profit or non-profit retirement plan is to enroll them automatically. Those who truly have no interest in joining the plan can exit the plan at their discretion. But because they must proactively opt out, good old inertia will likely keep them in the plan and get them saving for retirement.
Because auto-enrollment works, more plans are including this feature. But here the for-profit world is miles ahead of the non-profits. In 2015, 58% of 401(k) plans included an auto-enroll feature. That compares to just 19% of 403(b)s. Smaller 403(b) plans offering auto enrollment were particularly rare:
**Percentage of All 403(b) Plans with Auto-Enroll**
Rule #4: Make it easy to save more than the default rate
If you are going to enroll employees automatically, you have to decide how much of their salary will automatically be diverted into the plan. Here’s where many plan sponsors don’t follow through on the best practices for auto-enroll. Too many sponsors choose a low deferral rate, often as low as 2%. Even if the plan includes automatic escalations, it can take years for the annual bumps to result in meaningful salary deferrals. At ForUsAll we recommend a 6% initial deferral rate with auto-escalation.
**Share of 403(b) Plans by Auto Enroll Default Deferral Percentage**
Rule #5: Re-think both enrollment and ongoing plan communications
A 6% deferral rate with auto escalations is a great first step to increasing your employees’ odds of a successful retirement. With 1% annual increases, that 6% deferral will turn into 10% in just a few years. And with any increase in salary, your employees won’t even notice the extra dollars being invested in their retirement account. But engaging communications and making it easy to adjust deferrals can result in even more savings.
An example of 401(k) education best practice
Want to see a well-tested and optimized 401(k) and 403(b) employee comms strategy? Here at ForUsAll, this is our primary focus.
As you can see, the employee gets the information needed to make each decision but is not overwhelmed with information. We use behavioral science to the plan’s advantage by telling participants they are already a member of the plan. That means if they opt out they are losing something, a behavior humans typically avoid (loss aversion).
We also let them know that the default savings rate of 6% is a basic starting point – not the recommended savings level. In fact, we remind tell them 6% is below the average savings rate (leveraging a behavioral concept called “social proof”).
And best of all, employees can boost their contributions by merely pushing a button. This approach overcomes the tendency to avoid taking action when overwhelmed with information, or forcing them to make several decisions in unfamiliar territory.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
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