3 Ways to Boost 401(k) Participation without Increasing Your Costs

Small business 401(k) plans often suffer from poor participation rates. Whether it’s due to a lack of understanding or just plain apathy, many small business owners find their employees uninterested in their workplace retirement plan.

Rather than let the 401(k) you worked so hard to install go unused, here’s 3 ways to boost employee engagement. What’s even better is that these structural changes won’t cost you a dime.

Stretch Out the Company Match

Most 401(k) plans offer some type of company match. This match is actually mandatory if you offer a safe harbor plan.

A typical schedule will match employee contributions dollar for dollar up to a certain percentage of their compensation. Some will then match contributions up to a higher compensation level at a reduced rate.

For example, let’s say that your plan matches 100% of employee contributions up to 5% of their compensation. If you had an employee earning $50,000 who wanted to maximize your company’s match, they’d need to contribute 5%. Your matching contribution would then be $2,500.

But what if your matching contribution was lower, over a larger percentage of compensation? Instead, you could offer a 50% match on the first 10% of compensation. In the case of the employee earning $50,000, your maximum match would be exactly the same: $2,500. But to reach this contribution, your employee would need to contribute $5,000 on their own instead of $2,500.

Your expenses would remain the same, but your matching schedule would incentivize employees to contribute more.

Total Re-Enrollment

Another way to drum up interest in your company’s 401(k) plan is to start over. Re-enrollment cleans the slate, and requires every participant to re-enter their deferral percentages and investment elections. Employees already using the plan can contribute the exact same amount and choose the same investment options if they like. Employees who don’t will have their contributions rerouted to the plan’s default investment option.

Normally, re-enrollment is used by sponsors who are concerned about their participants’ investment choices. For plans with sizable amounts in cash and money market mutual funds, this is a great way to nudge participants into more aggressive investments who might not otherwise be paying attention to their account.

That said, re-enrollment has a secondary benefit too. It drums up interest in the plan. By forcing participants to rethink their retirement investments, your entire workforce tends to reevaluate whether they should be participating. Those who aren’t often develop a fear of missing out, and decide to join the crowd.

Turn On Auto-Enrollment or Auto-Escalation

A rising trend in 401(k) plans across the country is the use of auto-enrollment and auto-escalation. Without auto-enrollment, new employees to an organization need to elect affirmatively that they want to contribute to a 401(k) plan by deferring a portion of each pay check. Auto-enrollment signs up new employees by default. Of course, no one is required to participate in the plan, it just takes a form and a signature to opt out, rather than to opt in.

Auto-escalation features are not dissimilar. Many plans now increase each employee’s deferral percentage a specific amount year automatically. Again, participants may of course opt out of this arrangement, but the idea is jump start participation and employee contributions.

Both features are a great way to increase usage of your 401(k) plan and automate enrollment.

All in all, 401(k) plans can be very flexible creatures. A few subtle changes can reenergize a stale plan and kick start participation without increasing your costs.

But while the suggestions above are all free, make sure they’re allowed in your plan document before implementing any. Your plan document is the backbone of your 401(k) plan, and it dictates what you may or may not do. Disobeying your plan document can have you in hot water with the regulators and can even open the door to litigation risk.

Author: Grant Bledsoe, CFA, CFP®, is a Portland financial planner and the founder of Three Oaks Capital Management. He is an expert in helping small business owners make consistently smart financial decisions. You can also find his work on Above the Canopy, where he blogs about personal finance, retirement, and investing.