401K Focus: How to Increase Employee Participation without Twisting Arms

401K Focus: How to Increase Employee Participation without Twisting Arms

Deferred compensation programs (401k, SIMPLE IRA, etc.) typically offer open enrollment year-round. Employees can choose to participate when they feel ready and motivated to do so. This motivation and zeal sometimes doesn’t always materialize into an increase in employee participation for a number of reasons, such as, procrastination, forgetfulness, etc. This traditional enrollment method is known as the “opt-in” approach. In recent years, many employers are moving to an “opt-out” or “automatic enrollment” approach where employees are asked to specifically indicate that they do not want to save for retirement. Studies have shown that by taking away the procrastination (among other) excuses for not participating in the retirement plan, that participation rates go up, sometimes WAY up. As the employer, you should know that when employee participation increases, your plan’s annual testing metrics get better, and you reap the benefits.

Depending on the plan’s governing documents, in an automatic enrollment scenario, all eligible employees are automatically enrolled in, and contribute to, the plan accordingly. So, how should you implement an organizational strategy to increase participation when automatic enrollment is not an option, and how does this work? If you, as the employer, are wanting to increase the participation rate in your plan, but do not have the option of “automatic enrollment” built into the plan, consider distributing an internal memo that describes the benefits of participating in the retirement savings plan and asks employees to choose from a series of options:

  • I am already participating and do not need additional information at this time.
  • I am already participating and would like an account review with my representative.
  • I am not participating, but would like to start and would like the representative to contact me.
  • I am not participating and choose not to do so. I understand that I may not have sufficient retirement savings and may have to work longer if I do not participate in this important benefit.

Note that the fourth option helps heighten employees’ awareness of the possible consequences of procrastinating and nonparticipation. Wording the option this way and encouraging the employee to consider one of the other options helps them avoid regret aversion; the desire to minimize future regret from not participating in the retirement plan. This option is worded in such a way that it helps employees reassess their priorities.

Using this method and asking employees to actively choose to participate or not is one of the great success stories in increasing participation rates in retirement savings plans. According to the Journal of Consumer Psychology, studies show that programs using the “opt-out” choice method boasts as many as 75 percent of eligible employees choosing to participate in the program.¹ This is an enormous shift from the traditional method.

By Justin Leland, CFP®, AIF®
Moneywise Retirement Plan Specialist + Financial Advisor

If you have any questions or would like more information, please call the Moneywise Wealth Management office: 661.847.1000 or directly email: justin@moneywiseguys.com


*Disclosure* The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.