Finance executives know the issue all too well, as do retirement experts: the pressing need for employees to contribute to a 401(k) plan or some sort of similar structured, tax-deferred account, such as a 403(b), to take them through their post-employment years. But for all of finance's best efforts, it can amount to an arduous uphill slog.
Recent government statistics illustrate the problem: As of March 2016, just 54% of the civilian workforce was participating in or contributing to a retirement plan, according to the U.S. Bureau of Labor Statistics (BLS). In the private industry subset, the number was even lower: 49%. Among the two major categories in the civilian workforce surveyed by the BLS, only one—state and local government workers, at 81%—showed a healthy participation rate.
The numbers don't get much better when converted to dollars and cents, based on U.S. Census figures for net worth and asset ownership. "Here's a scary fact: The average person at age 65 and up has only $41,800 on average in a 401(k) or Thrift Savings Plan," said Keith Baker, CPA, CGMA, program coordinator for mortgage banking at North Lake College in Dallas. And that average, by the way, "includes people like [billionaires] Warren Buffett and Michael Bloomberg."
Still, Baker and other experts maintain there's much companies can do to get their employees on the right retirement track. Here are seven ways finance departments can boost employee participation and investment in 401(k) plans.
- Initiate auto enrollment. A U.S. Department of Labor report states that automatic enrollment plans could raise employee participation in 401(k) plans by cutting in half the rate of eligible workers who choose not to participate (30% vs. 15% with automatic enrollment). "With automatic enrollment, employees still have the option to not join the 401(k), but they have to proactively opt out rather than proactively opt in," said Dan Hernandez, a senior financial representative at Lincoln Investment in Voorhees, N.J. Automatic enrollment typically involves a default savings rate and investment portfolio, which can reduce potential savings. "But it's better to have default settings, and possibly a lower average savings rate, than for employees to not save at all," Hernandez noted.
- Share the advantages of tax-deferred investments. You know them, of course—but do your employees? One way to teach them, Baker said, is through "charts that show the tax-deferred nature of the pretax contributions and earnings compounding over different time periods, versus similar comparisons where after-tax dollars were used with the same after-tax earnings comparisons."
- Improve the lines of communication. Employees who have trouble contending with a 40-page retirement guide will respond better to proactive support from the finance team. "Encourage interaction," Hernandez said. "Today's employees don't want to be talked at. They want to discuss and engage about a topic either online or in person." He added that other helpful measures include offering 24/7 access to plan information and customizing communications wherever possible so that they are less general and more focused on the individual. Examples he suggested include "doing a 'retirement ready' seminar for participants over 50 or 'investing for the long haul' seminar for participants under 30."
- Address the 401(k) as part of overall financial wellness. Employees may not think they can afford to increase their retirement contributions until encouraged by their employers to look at the bigger picture. "Office workers may feel pressure to splurge on the latest gadgets and getaways to keep up with around-the-office chatter, but this type of discretionary spending can eat away at funds that could otherwise be put into a 401(k)," said Scott Mann, owner of the Mann Financial Group in Houston. Daunting levels of student loan debt may make younger workers believe saving for retirement is impossible.
By providing education about financial issues outside work, finance can set the tone for productive conversations about retirement investing. With employee input, set up presentations around subjects they care about that affect their retirement plan participation, such as how to budget, reduce debt, and save for short-term and long-term goals. The AICPA's program at 360financialliteracy.org offers many useful resources for such educational efforts.
- Encourage employees to get in on the organization's match. If you're looking for a powerful message to convey with your improved communication, the pluses of an employee match mark a great start. Tell employees what they're missing, and chances are more will participate in your company's matching program—and thus put money into their 401(k)s. "A very common truism of financial planning is that workers should take advantage of employer matches in 401(k)s but often do not. In failing to contribute, individuals are leaving money on the table," Mann said.
- Change your company match threshold. By doing this, you'll put subtle pressure on employees, both those new to matching and those who've long done it, to invest more, Baker said. "If you're matching dollar for dollar up to 3%, try changing the threshold to a 50% match for up to 6% of your salary," he said. "Or if your firm is already at a 50% match up to 4% of salary, consider changing this to a 25% match up to 8% of your salary."
- Show, don't tell. Baker recommended that companies set up information sessions that tell two kinds of stories. In targeting those employees who respond better to the stick than the carrot, your company's retirees "can share stories about folks they know that didn't plan well."
But make sure the retirees doing the talking are positive role models: Nothing speaks to retirement success quite like a former all-star returning to rally the team. As Baker put it, "Recently retired and admired folks who planned well with a 401(k) can come back to information sessions to share some stories about how this plan allowed them to retire with dignity."
Lou Carlozo is a freelance writer based in Chicago. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.
