Boosting Participant Engagement in Your Organization’s 401(k) Plan

A 401(k) plan is expensive for your organization to administer – low enrollment numbers can lower cost-effectiveness. If eligible participants aren’t enrolled in the plan, it may be because enrollment meetings don’t address their needs.

 Enrollment meetings are the participants’ first introduction to 401(k) planning. Tailoring your presentation to your employees can help encourage enrollment in your organization’s plan.

Enrollment meetings shouldn’t take a one-size-fits-all approach. Consider who your employees are and their stage of retirement planning. Low-wage, part-time or early career employees may have less interest in learning about a plan compared to a higher-wage employee who’s close to retirement.

Splitting up enrollment meetings to focus on those two groups could help increase attendance and capture employees’ attention. Plan administrators should carefully document these meetings as well. Educating participants is your fiduciary duty, failure to do so could result in legal action.

401(k) Planning for New Participants

Some employees have never enrolled in the plan before. Maybe they were just hired on, or they’re part-time workers. The SECURE Act 2.0 extended 401(k) eligibility to part-time employees, introducing a cohort of participants to 401(k) planning.  

These participants need a very basic, beginner’s course overview of what a 401(k) plan is. If you provide them with a thorough education, they will understand why a 401(k) is so advantageous. In addition to basics like how to enroll, service or age requirements, and how to learn your entry date, your meeting should cover attractive features, such as:

  • Employer Match Contributions – Your participants will want to know how much they’ll need to contribute to receive the full match as well as any other match requirements. For example, if your plan states that a participant must work on the last day of the plan year to receive any match or profit sharing.
  • Traditional and Roth Contributions – Participants at this stage of the planning process may not be familiar with the differences between traditional contributions and Roth contributions. Discuss how Roth contributions are taxed now as opposed to later and the different tax strategies associated with each.
  • Auto Enrollment – Explain your plan’s auto enrollment and how it works. In case an eligible participant doesn’t want to join the plan, explain how they can opt out and when they need to do so.
  • Selecting Investment Options – Review investment options and explain how participants select investment options. An investment advisor or a service provider should be utilized here. If you don’t have an investment license, you’re not allowed to offer specific investment advice.

Importance of Consistent Contributions, Minimal Distributions

Because they’re new to 401(k) planning, it’s important to thoroughly explain contributions. Explain concepts like the power of compounding, which allows small contributions to add up over time. Starting early is the key to retirement planning. A graph can be a useful visual aid.

Your presentation should also explain the different types of distributions while emphasizing, however, that the purpose of a 401(k) account is to save for retirement. A 401(k) plan is designed for long-term retirement savings rather than short-term or discretionary spending. Pre-retirement distributions should generally be reserved for emergencies like a sudden medical expense.

Explaining the penalties, tax ramifications and the negative impact on compounding can help them understand the consequences. As the plan administrator, you’re also responsible for educating your plan participants. If they take a distribution and later claim that you never told them about the consequences, you will need to provide documentation showing that you did.

401(k) Planning for Experienced Participants

Although employees who are closer to retirement may already be familiar with the basics of a 401(k) plan, enrollment meetings are an opportunity to discuss complex topics in depth.

Investments

Inviting an investment advisor would be appropriate to answer more complicated investment questions. If you’re not licensed to give investment advice, it’s illegal for you to do so. An investment advisor can talk through risk tolerance with participants, so they understand what’s at stake. Explain the benefits of diversification and discuss asset allocation. There are different asset mixes based on when participants are retiring.

Contributions

Maximizing contributions while remaining within IRS contribution limits is also an important topic to cover for these employees. If your organization has an employer match program, explain the benefits of contributing more than the minimum required to qualify. Compare the difference between a 4% contribution with a 4% match to a 6% contribution and the same 4% match.

Vesting

Vesting, and how it works, should also be part of your presentation. Explain the different vesting for each employer contribution type. In a safe harbor plan, those matching contributions will be immediately vested. Profit-sharing employer contributions, however, may have a six-year graded vesting schedule. It’s important to explain what employer money is due to the participant if they leave your organization.

Market Volatility

Participants may be tempted to change their investments after hearing an investment tip. The best practice is to leave the money in the plan rather than chasing the latest high stock. Doing so could end up hurting them. By the time they’ve read something, heard something in a podcast, or saw it on social media, the market has already reflected the price. It’s too late to get in on the ground floor. Reallocation once or twice a year for diversification can be beneficial, but it may come with fees. Your investment advisor can help participants understand what fees they’d be responsible for and how to minimize those charges.

Distributions

Explain the different types of distributions and their tax effects. Participants should be informed that hardship withdrawals typically have additional penalties on top of the tax. They may also want to know how retirement withdrawals are managed. There are several options:

  • Lump sum
  • Cash out
  • Roll over
  • Annuities
  • Installment payments

Required Minimum Distributions (RMDs) begin at age 73. Participants need to be informed in a timely manner. If participants are taken by surprise and miss those dates, it can be extremely costly for their portfolio. Many people work past retirement age, it’s your fiduciary responsibility to go over that information to make sure they’re aware of their requirements.

Plan Guardrails

Participants may not be aware of the safeguards in place to protect their retirement assets. Explain the segregation of duties between the provider, the asset holder, and the record keeper. The plan sponsor manages employee contributions through payroll, which are then  directly transferred to a trust. Plan oversight should also be discussed, including how the sponsor reviews transactions and balances accounts.

Employees may not ask for this information, but if your employee base is financially savvy or experienced, they may have questions about the process. It’s important to have someone knowledgeable to answer these questions. Not being able to answer could have a negative impact on employees’ willingness to enroll.

General Tips for All Employees

  • Ask employees what they’d want to see covered. If one person has questions, others may as well.
  • Share information about how to rollover accounts after a job change
  • Consider putting a Q&A document together with commonly asked questions that can be sent out to all employees.
  • Meet with all employees at least once a year, although the exact frequency will depend on your employee base.
  • Try to help your employees see that 401(k) planning is a benefit that really isn’t different from medical, dental or disability insurance.
  • Let employees know that there are digital and mobile options to review their participant accounts.

Encouraging participation in your organization’s 401(k) plan is possible through meeting participants where they are in their journey. It can also help keep your plan in compliance, improving your audit readiness. For more information on how our 401(k) audit team can help, request a free consultation below to discuss your unique 401(k) audit needs. 

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