How to Tempt Your Workers to Sign Up for Your 401(k) Plan

Named after a section of the US Internal Revenue Code, the 401(k) plan has become a mainstay of the American retirement system since the demise of traditional pension schemes.

By agreeing to have a percentage of each paycheck paid directly into an investment account, participants can enjoy a range of tax advantages and ensure they have enough to live on come retirement.

For 2021, the annual limit on employee contributions was $19,500 per year for workers under 50. For 2022, it will be $20,500 per year, meaning people can save a substantial amount into their post-work pot.

However, many employees are still not signing up. According to the US Bureau of Labor Statistics, 23% of workers in private industry with access to a retirement plan had failed to take advantage of it in 2019. The figure was even higher for some industries and in companies with fewer than 100 staff.

This isn't good news for employers, as the IRS has safeguards in place and annual compliance tests for businesses to ensure eligible employees are saving enough for retirement.

In the long run, it could also leave bosses with an aging workforce forced to remain in their jobs because they can’t afford to retire. Indeed, according to Senate figures, over-55s will make up almost a quarter of the labor force by 2026, which may mean higher costs for companies.

So, what can be done to ensure that if you have a 401(k) plan, your workers are signing up for it? Here are a few suggestions that could tip the balance in your favor.

1. Make the compensation irresistible

Ensuring your compensation package is rewarding is the first step toward greater sign-up rates. If the rewards look paltry, employees may feel there's no point investing at a time when they have other bills to pay.

According to SmartAsset, the oft-quoted gold standard of retirement savings ($1 million) may only cover retirement expenses for 15 years in some cities, so make workers aware your 401(k) will do better and offer them a good quality of life in their golden years.

2. Match their contributions

Being generous and matching employee pay-ins could be another incentive, with the average matching contribution 4.3% of a person's pay. However, some employers match dollar for dollar up to a maximum amount of 3%.

You could also consider initiatives to help staff still paying off student loans, as they may not want to sign up for something else while still setting money aside for those. Around 42.9 million Americans still owe an average of $37,105 for their federal student loans, which might be holding them back from being 401(k) participants.

3. Opt out, not opt-in

Under the Pension Protection Act, the federal government made it possible to automatically enroll employees in 401(k)s, so make the most of this to avoid any apathy or procrastination that could prevent people signing up. This will require some additional time and cost for administration, however.

4. Make someone your dedicated 401(k) counselor

Investments can be a big step, so employees will likely have a few questions before signing on the dotted line. To prevent this having an impact on your income as HR or other departments pick them up, it may be better to make someone a dedicated benefits counselor and pay them for this role, even if it is just an hour's 401(k) consultation each week.

5. Make retirement saving clearer

Finally, if you want better sign-up rates, you might need to give employees the 411 on your 401(k) and ensure they understand how saving for retirement really works. Investment can appear notoriously complex to the layman, which may be putting some people off taking the plunge.

For example, according to the Employment Benefit Research Institute, 54% of people in a poll said they don't read financial literature because they think it's too hard to understand, while others reported that a prior investment with an adverse outcome had deterred them from future ventures.

In another survey, 14% of Americans who weren't investing said it was because they didn't know how, while 18% were afraid of losing money.

This was despite a 2019 report discovering that nearly half of employees see saving for retirement as a top source of stress when it comes to their household's financial wellbeing.

It may also be that some members of staff just don't appreciate how much money they'll need to live on when they finish work, which goes back to what we touched on above. By simplifying your 401(k) plan, perhaps through a clear presentation or company literature, it could help those who don't understand retirement saving realize it's easier than they think - and in their best interests - to make a start.

By following this advice, hopefully you should start to see interest in your 401(k) plan growing - and that could lead to a more satisfied, less anxious workforce.