Increase Participation and Contributions

According to the Department of Labor, the key variable in plan participation rates is plan design: Implementing Automatic Enrollment increases the average participation rate in small to mid size plans from slightly less than 70% to 90%. The Vanguard 2015 report, How America Saves – Small to Mid-size Plans, shows even more dramatic figures. A survey of their plans show a participation rate of only 54% for voluntary enrollment that increases to 90% for plans with Automatic Enrollment. Efforts to recruit participants make little difference in the level of participation; design is the key.

In this case the easy answer is the best answer: let the plan design determine employee participation and forget about the time and expense your company puts into running recruiting drives.

Plan design plays an important role in increasing participants 401(k) contributions as a % of their salary. Under the traditional model of voluntary enrollment, voluntary contributions and company matching, contributions tend to cluster around the maximum company match. Thus if a company matches dollar-for-dollar the first 3% contribution and $.50 per $1 of the next 2%, participant contributions move toward the 5% level. If the company’s matching contribution changes to offering $0.50 for every dollar contributed up to 10% of the employee’s salary, employee contributions move up toward 10%, nearly double their current contributions.

The most effective strategy, however, is to implement an automatic contribution rate and include a 1% increase for each of the first three years. 

Unfortunately many plans, especially those designed using a simple template, are structured to minimize obstacles to attracting a plan sponsor . Finding the right design for your company takes thought; the goal is to use design to contribute toward a better future, not an instant customer.