Go beyond a basic 401(k)

Go beyond a basic 401(k)

Give your employees more than just a 401(k), join the movement.

5 min read

How to Get a 90% Participation Rate in Your Employer 401(k) Plan

David Ramirez, CFA
March 20, 2023
How to Get a 90% Participation Rate in Your Employer 401(k) Plan
Table of contents

Getting employees to join the 401(k) is good for employers and great for employees. But most 401(k)s have low participation, with a staggering 68% of the working age population (25-64) actually not enrolling in their employer-sponsored 401(k) plan according to a recent study by the Schwartz Center for Economic Policy Analysis at the New School. But our customers routinely get over 90% participation with 10% savings. I’ll share with you the tips, that if done right, can help boost your 401(k) participation to 90%, or more.

And increasing 401(k) savings is really important. Besides helping your employees save more for retirement, higher savings rates can actually make it cheaper for employers to offer a 401(k).

Here’s what I mean: When employees don’t save at high rates, it significantly increases the chances that the plan will fail IRS discrimination tests, which could result in the IRS forcing the business owner to either return money to some employees or make a mandatory contribution to employees’ accounts.

Plus, by helping them get on a solid financial footing, it’s a great way for you to make a meaningful, long-term impact on your employees’ lives.

But before we share what works, we should first explore why people don’t currently save as much as they should (or often want to)…

Why don’t employees join the 401(k)?

Many people think employees don’t join because “they’re living paycheck to paycheck” or “they aren’t thinking long-term.”

From what we’ve seen, that’s just wrong. Our virtual advisor DAVE asked employees at a 500-person company why they hadn’t yet joined the 401(k) – the results surprised even us.

So clearly Rule #1 is make it super easy to join.

In fact, at least for this population, just making enrollment easy could help solve 59% of the participation problem since 59% of the people we surveyed said they were too busy, or it was too hard! We’ll talk more about what makes it easy, but first…

What makes joining a 401(k) so hard?

Pretty much everything from how we present options to employees to how we ask them to enroll.

Okay, so, those fancy glossy enrollment packets with the couple on the sailboat? Throw them away – most people probably won’t read them (or understand them if they did).

What about onsite seminars?

Surely the 401(k) advisor that comes into the workplace and gives an amazingly motivating seminar will help right? Wrong again. You see, a clever researcher from Harvard did a study to find out how much of a difference these seminars make.

They interviewed participants following onsite educational seminars and found that nearly 100% of them “intended” to join the plan. However, over the next 6 months, only 14% actually did so. [1] Sounds like me and the gym, but I digress…

We may be motivated in the moment, but as humans we procrastinate, and employees are no different with their 401(k). Most want to save and will get around to it, eventually (but probably not)…

Typical 401(k) enrollment process = information overload

When we look at what they need to do to enroll, it’s easy to understand why they delay. In many instances, you have to find enrollment forms, remember to ask your HR person or dig up a temporary password from an email you got months ago…

Then once you find the forms, you have to figure out how much to save and how to invest – decisions that are not at all easy (even for us money managers)…

Indeed, academics have found that too many 401(k) choices can lead to “choice overload” that often leads to inaction (see “How Much Choice is Too Much? Contributions to 401(k) Retirement Plans”).

Moreover, others have found that requiring employees to make both saving and investment decisions leads to a “multi-dimensional” problem that can overwhelm many employees (see “Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment”).

Before you know it, just enrolling in the 401(k) can easily take 30 minutes or more.

Maybe that doesn’t seem like a big task at first glance, but BJ Fogg (a behavioral change expert who looks at everything from successful apps to weight loss) suggests it could be a deal killer.


Well, he’s developed a pretty intuitive framework for understanding how to make people change behavior. It asks the basic question – how motivated is someone to make a change, and how difficult is to make the change.

A fancy graph for sure, which basically just states something we all probably already know – if people aren’t that motivated, you have to make it super easy, otherwise they won’t do it.

You get my point – behavioral scientists have looked at it from a bunch of different perspectives and they concluded the obvious: both the choices and the enrollment process have to be super easy or many people won’t enroll (even if they want to).

3 steps to making 401(k) enrollment easy

Step 1: Make joining the 401(k) so easy it’s automatic (or vice-versa)

That’s where properly designing 401(k) plans comes in. The Department of Labor (DOL) allows (and some may say encourages) employers to automatically enroll employees into the 401(k) plan, and even automatically increase their savings rates over time.

With automatic enrollment, employees still have the choice to not join the 401(k), but they have to pro-actively “opt-out”. Automatic enrollment typically comes with a default savings rate and a default investment (e.g., 3% savings invested in a Target Date Fund).

Because automatic enrollment comes with default settings, from a behavioral perspective, the choice ceases to be a hair-raising “multidimensional problem” and becomes a simple binary decision – do you want to stay in the plan or not.

For all of these reasons and more, automatic plans are quickly becoming all the rage. In fact, according to Vanguard, adoption of automatic 401(k)s has increased 50% since 2009 and now 60% of all new 401(k) participants were automatically enrolled.

Interestingly, while over 60% of new 401(k) participants at Vanguard were automatically enrolled, most of the automatic enrollment came from larger companies. Here, there is a huge disparity between what large companies do and what small companies do.

Case in point. Vanguard found that while 56% of their larger company clients (i.e., 1k-5k employees) adopted automatic enrollment, only 17% of their smaller clients (i.e., <1k employees) used automatic enrollment.

Why are larger companies twice as likely to adopt automatic enrollment? Well it’s not because it won’t work for smaller companies, there are just a lot of (solvable) hurdles small businesses face.

But, automatic enrollment as typically implemented can have a nasty side effect – lower average savings rates. So we need a second step.

Step 2: Make it super easy for employees to save more than the default

While we love automatic enrollment, it does come with one major drawback – as I mentioned, it tends to increase participation but lower the average savings rate. But as we’ll show, with proper communications and easy to use tools, you can get both higher participation and savings rates.

Why traditional automatic enrollment lowers savings rates

When Vanguard automatically enrolls employees they see an average savings rate of 6.2% vs. 7.3% for employees that voluntarily enroll.

Here are 4 key explanations for why we see lower savings rates with traditional automatic enrollment:

  1. According to data from Vanguard, default enrollment rates are usually pretty low (59% of plans default people at 3% or less).
  2. Many employees might not know they are getting enrolled and don’t take action. Typically, employers send emails that might never be opened, or worse, paper mail that gets stuffed in the trash (remember that study above, that found 54% of people don’t read financial literature?).
  3. Employees may see the default rate as advice and stick with it.
  4. Employees may intend to save more than the default, but the steps required to make a change are too big of a hurdle. It’s just not easy enough to save more.

How to get employees to save more than the automatic default

Based on data we’ve collected, the ideal automatic enrollment would:

  • Have at least a 6% default rate with auto-escalation
  • Reinvent 401(k) communications leveraging behavioral science
  • Make it easy to take action, on any device, in the moment
  • Celebrate the 401(k)!

Smart 401(k) defaults

According to Vanguard, most plans with automatic enrollment set the default rate at 3% and fewer than 10% add automatic annual savings increases as a default. However, we’ve found that over 90% of employees will stay in the plan if you set the starting rate at 6% with 1% annual increases. It’s possible to double savings rates, simply by choosing a smart starting default rate.

Step 3: Re-think 401(k) communications

But if you then add engaging communications that leverage behavioral science, your employees’ savings rates just might amaze you. As an example, here is one communication we’ve developed that seems to do the trick (just turn up you speakers and click the play button).


You probably noticed a few things. About every thirty seconds or so, we get the employee to answer questions which often determines what we talk about next. We put the employee in the driver’s seat, providing them just the right amount of information they need to make a smart decision.

Moreover, we’re pretty crafty with behavioral science. We tell them they have a 401(k), and it’s already set up for them, so if they opt out they are losing something (a loose application of a behavioral theory called “loss aversion,” which basically means people don’t like to lose things).

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 even tell them 6% is below the average 401(k) savings rate (leveraging a behavioral concept called “social proof”).

Make it super easy to take action

While the communication does a great job at getting people motivated, the single most important thing it does is give employees a button they can push to save more.

Without a way to quickly and easily take action, many employees will fail to implement their best intentions and likely stay at the default savings rate. Remember what BJ Fogg and Brigitte Madrian said – it’s got to be super easy or employees won’t follow through.

Make it a celebration!

Saving for a 401(k) is usually all about delayed gratification – you forgo consumption today in exchange for greater consumption in the future. But it doesn’t have to be that way.

We see adding (or upgrading) a 401(k) as a cause for celebration – the company just hit a milestone. So we send out a delicious #401cake so employees can pause, get together and celebrate their new (or improved) benefit. It’s just one of the ways we try to make 401(k)s fun.

And if the pictures our clients tweet about their 401(k) parties are any indication… it’s working!


If you made it this far, I commend you. I know, I covered a lot. But it’s important. In fact, getting employees to join the 401(k) and save at high rates is the single most important thing we do as a small business 401(k) advisor.

I know you’re probably thinking – easy for you to say, you’ve got a whole development team creating easy-to-use tools, but what am I supposed to do as an HR manager?

I get your point.

That’s where your 401(k) provider comes in. Push them to give you better tools. If you still don’t see significant improvements, keep pushing.

And hey, if they won’t step up, we’re always happy to help!

If you have other tips on improving 401(k) enrollment and savings rates, please share!

Go beyond a basic 401(k)
Give your employees more than just a 401(k), join the movement.
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About Author -
David Ramirez, CFA

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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1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.