401(k) Participation Rates

8 MIN READEditorial Policy

Federal data indicates that about 42 million people work for employers with fewer than 100 employees, according to the U.S. Government Accountability Office. Unfortunately, only about 14% of small businesses sponsor some type of retirement plan for their employees.

Hopefully, you're a small business owner that offers—or is preparing to offer—your employees a 401(k) plan. If you don’t have a current a plan, check out how our 401(k) solution can help make retirement investment a benefit that you provide to your employees. Once you have a plan in place, make sure your workforce takes advantage of the opportunity to save for their retirement by participating in the 401(k).

This article explores average 401(k) participation rates, the factors that contribute to those rates, and what you can do to increase participation rates among your employees.

What are average 401(k) participation and contribution rates?

Information from the U.S. Department of Labor (DOL) indicates that about 33% of eligible workers don’t participate in their employer's retirement investment plan.

When it comes to contribution amounts, investments made by employees don’t differ much based on the size of the business:

  • Large companies: Employees working at large companies contributed an average of $4,331 per year to their defined contribution plans in 2006 and had an average plan balance of $36,662.

  • Small businesses: Employees working at small companies contributed an average of $4,474 per year to their defined contribution plans in 2006 and had an average plan balance of $32,058.

Source: U.S. Small Business Administration, Small Business Retirement Plan Availability and Worker Participation report.

What factors contribute to low retirement plan participation rates?

Given the numerous tax and savings advantages of a 401(k), why is it that so many employees choose not to contribute?

When it comes to participation rates, it’s important to understand exactly why employees aren’t participating because that’s where you can have the most impact. A variety of factors affect participation, including:

Complicated processes: For many employees, the process of investing in their retirement plans feels very complicated. In a survey conducted by AARP, 52% of adults surveyed said they had made an investment with an adverse outcome (e.g., unexpected taxes or an early withdrawal penalty) because they "didn't understand" an investment. Also, 54% of those surveyed said they don't read financial literature because "it's too hard to understand."

Relevant articles:

Planning only for the short-term and a lack of financial literacy: For many people, the 401(k) will provide a significant part of their retirement income. But that can be hard to understand if you’re only focused on the next paycheck, or your financial goals for just the next five years. Focusing on only short-term goals has a negative impact on participation rates. In a report published by the Social Security Office of Policy, analysts found that “the most important thing affecting participation and contribution decisions is the planning horizon. Employees who plan for periods of less than five years are much less likely to provide for their retirement than those who have a longer perspective.”

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While factors such as income can also impact participation rates, those aren’t areas over which employers have much (if any) control. But through communication and education about 401(k) plans, an employer may be able to make positive changes when it comes to complicated processes and short-term financial goals.

How can we increase contribution rates?

Auto-enrollment: With automatic enrollment, employees still have the option to not join the 401(k), but they have to pro-actively “opt-out” rather than pro-actively opting in. Automatic enrollment typically involves a default savings rate and a default investment, which some argue reduces the potential savings. However, others argue that it’s better to have default settings (and possibly a lower average savings rate) than for employees to not save at all.

The DOL reports that automatic enrollment plans could reduce the 30% non-participation rate to less than 15%, which would significantly increase overall retirement savings

Communication and education: A compelling, engaging communication and financial literacy strategy can help you inform participants about what's available; you can also use it to motivate action and increase participation. Communicate about your 401(k) in a way that makes employees want to listen:

  • Provide 24/7 access to plan information

  • Make information easy to digest. Forget about that 40-page guide!

    is a great resource for this.

  • Customize the communication for individual relevance

  • Encourage interaction—today's employees don't want to be "talked at", they want to discuss and engage about a topic either online or in person

  • Offer online or in-person education about the basics of retirement savings. Human Interest offers built-in investment advising and training so employees and employers can feel secure in knowing they're following best practices for risk management, asset allocation, and more.

Once you’re providing a 401(k), getting employees to participate is the next most important thing to do. You’ve invested in the benefit, so help make sure your employees get the most out of what it has to offer. If you’re struggling with low participation rates, ask your 401(k) provider for help—they may have tools you can use, best practices they can suggest, or strategies to offer. With some dedicated effort to increase participation rates, chances are you’ll see improvements that make your efforts—and your plan—even more worthwhile.

If you're looking for a great 401(k) for your employees, click here to request more information about Human Interest.

Liz Sheffield has more than a decade of experience working in HR. Her areas of expertise are in training and development, leadership development, ethics, and compliance.

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