June 22, 2017
In a classic study of 401(k) participant behavior by the National Bureau of Economic Research, employees’ tendency to “follow the path of least resistance” was well documented. For example, if new employees aren’t automatically enrolled in a 401(k) plan when they join the company, many don’t bother. But when automatically enrolled — surprise! — they are highly likely to stay in.
Although the study didn’t address it directly, the same point applies to automatically enrolling existing employees during the annual enrollment cycle and putting the burden on them to pull out. The NBER study did document that employees will go with the flow on the default investment option, as well as the deferral rate (provided that it doesn’t give them sticker shock).
Moral of the story: Your plan design should recognize the power of employee inertia, and use it wisely to achieve good results for all concerned. Defaulting new participants off at a relatively modest initial deferral rate is okay if you provide for a reasonable ratcheting up of automatic deferral rates so that employees can achieve the savings they will need.
Keep up the Communication
None of the above means, however, that once you have gotten the ball rolling, employees don’t need regular pep talks and education about what’s going on with the plan, their investments and what it is accomplishing to enable them to reach their retirement goals. And getting the message through requires connecting with them using multiple modes of communication–“an integrated mix of phone calls, e-mails, workshops, one-on-one consultations and direct mail,” according to Fidelity Investments.
Rick Meigs, Founder and President of the 401(k) Help Center, concurs. Research he has seen determined that employees who receive customized communication on a regular basis contribute nearly one percent more to their 401(k) accounts than those who do not.
Raising Comfort Levels
He also stresses the importance of making participants feel comfortable with their investment decisions. Doing so, especially in face-to-face meetings with qualified investment advisors, both helps bring in more participants overall, and inspires existing participants to boost their deferrals, he says.
When choosing retirement plan vendors, Meigs says, small employers need to insist up front on a package in which employees receive opportunities on a quarterly basis to attend a general education session, and at least annually to receive a one-on-one session with an adviser.
Meigs compiled a laundry list of tips on increasing employee participation, and posted it on the 401(k) Center website. He said that many small employers sometimes overlook the fundamentals, particularly if they launched their plan years ago and what was once optional is now almost obligatory. Following are some of those pointers:
- Shorten or, ideally, eliminate enrollment waiting periods for new hires. True, if a new employee is enrolled immediately and doesn’t work out, there will be more hassles involved. But on balance immediate enrollment is the way to go.
- Provide a matching contribution. Employers that eliminated or suspended matching contributions during the recession generally have restored them, recognizing their importance.
- Offer plan loans and hardship withdrawal options. Many employees have a fear of commitment and will be reassured by the knowledge that they can tap their balances in a crisis. “Emphasize these provisions in enrollment meetings,” Meigs says. However, employers should also convey that these options should not be exercised casually.
- Make a broad array of investment options available. With proper accompanying investment education, employees will welcome having 10 to 15 choices “that are well balanced between index funds and managed funds,” Meigs says. Target-date funds are an increasingly popular choice, of course. Even if employees simply “follow the path of least resistance” (as noted in the NBER study) and stick with the default option, knowing they have alternatives helps boost enrollment, according to Meigs.
- Make it clear to employees that you are paying attention to the performance of funds in the investment line-up, with regular reports and commentary comparing performance against a relevant benchmark. The actual replacement of under-performing funds offers the ultimate evidence that investments are being closely monitored.
Getting every last employee to become an active, aggressive 401(k) participant probably isn’t in the cards. But there is always room for improvement.