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Employers Are Enhancing 401(k) Plans to Attract and Keep Talent

Innovations include letting participants redirect contributions to other benefits

A man's hand holding an egg with the word 40k written on it.

Many U.S. employers are eyeing enhancements to their defined contribution (DC) retirement plans in an effort to boost their employees' retirement security and financial well-being, as well as employee retention, new studies show.

2022: The Next Evolution of DC Plans Survey, a March report from consultancy WTW (formerly Willis Towers Watson), looks at results from 363 U.S. employers surveyed earlier this year. WTW found that companies are:

  • Redirecting contributions. Thirty-eight percent of respondents expect to adopt an innovative contribution strategy, such as allowing participants to direct their contributions to reduce student loan debt or to add to an emergency savings fund or a health savings account, and still receive a 401(k) match on those amounts.
  • Upping default contributions. Twenty-eight percent expect to enhance their plans' automatic deferral features, such as increasing the automatic deferral amount.
  • Expanding compensation options for contributions. Twenty-three percent are considering changes to plan contribution features, such as allowing employees to contribute to the plan from bonus payments in addition to salary and wages.

"Employer interest in helping employees address both their short- and long-term financial concerns has never been greater," said Alexa Nerdrum, managing director for retirement at WTW. "To that end, employers are refreshing their DC plans to give employees the opportunity to save more for retirement and the flexibility to use both their personal and employer contributions in innovative ways to manage their financial needs."

Improving Employee Retention

More than half of WTW's survey respondents (55 percent) expect to have attraction and retention issues over the next two years. Among these employers, 35 percent expect to differentiate their DC plan from those of their competitors.

"Employers have a golden opportunity to leverage their DC plan and gain an advantage in attracting and keeping talent," said Dave Amendola, senior director for retirement at WTW. "Employees prioritize flexibility and choice in their benefit package … and want more help from their employer with planning for a financially secure retirement. Employers that enhance their DC plans with features that target these preferences can better meet their employees' needs while differentiating themselves as a true employer of choice."

Pandemic Put Focus on Savings

For many workers, more time at home due to the COVID-19 pandemic "gave them more time to engage with their finances," Fidelity Investments reported. The firm's February survey of 2,557 adults found that 63 percent of respondents improved their investing habits in some way since the start of the pandemic:

  • 20 percent started investing more money.
  • 19 percent changed the types of investments they make.
  • 9 percent started investing for the first time.

More U.S. adults who use their company's retirement plan would rather receive a higher employer match contribution (57 percent) than more paid time off (43 percent), a Fidelity fact sheet noted.

Other research also supports the idea that while the pandemic caused economic uncertainty, it may have also strengthened employees' resolve to save. Kevin Busque, CEO and founder of Guideline, a provider of small-business 401(k) plans, said his firm's research shows that "retirement savings remain a priority for participants."

Guideline analyzed data from its more than 27,000 clients and reported that the average monthly 401(k) contribution from participants last year was $783, up from $646 in 2019.

"Employees of small businesses are continuing to take advantage of their employers' 401(k) offerings," with an average employee participation rate reaching 82 percent last year, Busque noted.

Focusing on Fees

DC plan sponsors are focused on reducing plan fees, according to institutional investment consultancy Callan. The firm's 2022 Defined Contribution Trends Survey, which was conducted in fall 2021 and received responses from 101 DC plan sponsors, showed that plans took the following steps last year to reduce fees:

  • Benchmarking. Eighty-three percent of respondents benchmarked plan fees, with consultant databases being the most commonly used method.
  • Analysis. Thirty-three percent reduced fees after their most recent fee analyses.
  • All-in fees. These encompass a variety of expenses for services including administration, participant transactions, compliance, custody and communications. Nearly 7 in 10 respondents calculated these fees within the past 12 months for benchmarking purposes.

Fees are also a top priority for 2022, with 58 percent of respondents likely to move to lower-cost investment vehicles and 39 percent likely to renegotiate service agreements with record-keepers.

"Plan sponsors have more access to detailed fee data, allowing them to take a deeper dive when reviewing fees," said Jamie McAllister, senior vice president and defined contribution consultant at Callan. "While there is a greater level of fee data and transparency, it is still surprising that 43 percent of sponsors don't know if indirect revenue is evaluated as a part of their fee review. This can be a meaningful amount."

Revenue-sharing fees, for instance, are charged by some actively managed mutual funds and silently deducted from employees' holdings to pay for plan administrators' services.


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