Small 401(k) Plans Face Low Participation

Resistance to auto features comes from both management and employees

By Stephen Miller, CEBS Oct 31, 2014
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Small 401(k) plans face unique challenges when it comes to increasing plan participation, facing resistance from both employees and management, according to an Oct. 29 workshop at the 2014 ASPPA Annual Conference at the National Harbor in Maryland. ASPPA is an industry association for retirement plan professionals.

Auto Enrollment Hurdles

Only about 5 percent of all 401(k) plans offer auto enrollment, a figure that appears surprisingly low because many surveys report upwards of 50 percent of plan sponsors auto-enrolling participants, said Natalie Wyatt, senior sales representative, Innovest, a financial technology firm.

“Many surveys only cover large plan sponsors,” she noted during the session, including some often-cited surveys of plans with 1,000 or more participants. But in terms of numbers, most 401(k) plans have fewer than 100 participants, and a vast number have fewer than 50.

Often, management sees auto enrollment and its brother, annual auto escalation of participants’ contributions, as “an extra capital expenditure, since the greater the number of participants, the more employers will contribute in matching contributions,” added co-presenter Jennifer Gibbs Swets, senior manager for retirement plan services at Dixon Hughes Goodman LLP, a CPA and advisory firm.

Another concern is the added costs when there is high turnover among employees, which cause the plan sponsor to pay for establishing accounts that are soon abandoned, leaving behind small balances. Other small plans face challenges because their workers may have hours that fluctuate, or they may have employees who move back and forth between hourly and salaried status, complicating eligibility calculations.

Similarly, while large plans that auto enroll are much more likely to also have auto escalation, far fewer small plans combine the two, and again, higher expense and administrative burdens are off-putting. But “auto enrollment without auto escalation is like peanut butter without jelly,” said Swets.

Overcoming Resistance

Management needs to view 401(k) participation as not just an expense, but an investment in an engaged, productive workforce that will be able to retire, the presenters said. And workers need to understand that what they save today will determine their quality of life during years of retirement.

While the presenters favor automatic plan features, Wyatt pointed out that “auto enrollment is not a replacement for education and communication.”

To encourage adequate savings, employers can provide tools that allow participants (and not-yet participants) to perform a “gap” analysis that forecasts their future ability to retire, focusing on income replacement over their estimated years of retirement (and keeping in mind that longevity is increasing).

Ronald Triche, ASPPA’s director of government affairs, discussed the importance of having an adequate retirement income stream during the session. Questions employees should be asking, he said, include, “Can they live on retirement income of $25,000 plus Social Security? Would they want to?”

For those with incomes under $50,000, Social Security can provide up to 70 to 75 percent income replacement, said Triche. Even so, “when you factor in medical issues, [that] doesn’t leave much for discretionary spending.” Retirement can end up being “the vacation they’ll take before they go back to work as a [Wal-Mart] greeter.”

Those with high incomes are more likely to have larger retirement nest eggs based on higher deferred savings rates. But those in the middle range often get “squeezed,” unable to save now because of present needs, but facing limited income replacement from Social Security.

For those who believe they are unable to contribute to their retirement plan, one response is to provide financial management education on matters such as household budgeting, the presenters said, so employees are able to increase their retirement contributions. That can be far more useful down the road than focusing on asset allocation or other matters that can seem esoteric.

Education meetings can drive home the need for employees to know their goals, addressing the “Where do you want to go? What do you need to get there?” questions.

Onsite tools and calculators can play a role, facilitating employee self-assessments. In addition, employers can identify employees not saving enough by age or other demographics, target them with more personalized communications and education materials, and hold group meetings that address their needs and concerns.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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