How to encourage 401(k) enrollment

Offering a 401(k) plan can be a powerful tool for recruitment and retention—but offering a plan is just the first step in empowering your employees. Getting them to take advantage of it can be challenging. Luckily, there are some steps you can take to help encourage 401(k) enrollment at your company.

If you’re asking, “What exactly is a 401(k)?” the simplest answer is that a 401(k) falls under the category of defined contribution plans and allows employees to contribute a portion of their salary to investment accounts. 401(k) plans offer numerous benefits, especially regarding taxes. For employees, the advantages include tax-deferred growth on contributions and earnings. This means taxes are paid upon withdrawal, not during accumulation.

Understanding the challenges of 401(k) plan enrollment

Employees may hesitate to enroll in 401(k) plans for a number of reasons. This could be due to a need for more awareness about the benefits, the perceived complexity of the plans, or financial constraints such as tight budgets or existing debt. Additionally, many employees might need more clarification on how 401(k) plans work, leading to hesitation. 

Addressing roadblocks such as these may help to increase participation rates. Starting employees on their financial journey can have long-term, indirect benefits as well. When employees save for retirement, they may reduce future financial stress and dependence on social security or other government programs. 

Strategies to increase 401(k) participation

As an employer, you can help more employees to take advantage of 401(k) plans by:

• Providing educational resources (the Human Interest Learning Center is a great place to start!)

• Simplifying plan design and onboarding to make benefits clear and the sign-up process less intimidating

• Offering flexible contribution rates to help employees see how even small contributions can grow over time 

Below are a few specific strategies that may help employers realize more participation in their 401(k) plans. 

Simplify the enrollment process

There is a strong correlation between an easy enrollment process and higher participation rates. If you can streamline the sign-up process, a 401(k) can become much more user-friendly and accessible. Oftentimes, simplification means removing obstacles that might otherwise prevent employees from taking the crucial step of enrolling. 

Another advantage of simplifying the enrollment process is that companies may increase their 401(k) participation. For example: 

• A user-friendly online platform enables employees to quickly sign up and manage their accounts.

• Automatic enrollment helps ensure employees are enrolled by default.

• Minimizing the paperwork required makes the process faster and less daunting.

• Providing clear, step-by-step instructions and support can help guide employees through the enrollment process.

Making the enrollment process as easy as possible can help maximize participation, and working with a tech-forward 401(k) provider can enable your employees to benefit from a streamlined onboarding process. Ultimately, a seamless process can help ensure that all employees — regardless of financial literacy — can easily enroll and benefit from your 401(k) plan. 

Reevaluate plan design options

Struggling to inspire enrollment in your company’s 401(k) plan? It might be time to reevaluate your plan design. Eligibility rules can determine who can participate when they can participate, and when they begin receiving employer contributions (if you offer a matching or nonelective contribution). While some small business employers may restrict participation to those who have reached milestones (i.e., one year), waiting periods may impact satisfaction and retention. Your employees might view the lack of immediate benefits as a disadvantage, and delaying access means your employees could miss out on potential savings and compounding benefits. 

You can also compare the advantages and disadvantages of opt-in vs. opt-out plans. Opt-in plans leave it up to employees to enroll, which may result in lower participation rates. With opt-in plans, however, employees may be confused about how (or why) they should start. Because opt-out 401(k) plans automatically enroll employees, they often lead to higher participation rates. With auto-enroll becoming mandatory beginning with the 2025 plan year for new plans started after 12/29/22, it may make sense to get ahead of the curve. While plans can delay adding auto-enroll for now, they'll be required to amend their plans when that time comes.

Auto-enrollment can be a proactive plan design feature that increases engagement and satisfaction. It can help counteract psychological inertia, or the tendency to stick with a default option due to the lack of effort required to choose differently. This approach may help reduce hesitation and indecision amongst your team, ensuring participants who might not voluntarily defer contributions are enrolled.

Additionally, auto-enrollment can establish positive social norms: a Human Interest study revealed that 81% of respondents would enroll in a plan or increase contributions if they knew most of their coworkers were already enrolled.

Read more about 401(k) plan design.

Integrate financial wellness and employee education into your plan

401(k) providers with modern technology can help simplify the enrollment process for you and your employees. Look for an online platform with a user-friendly interface that enables quick sign-ups and easy selection of contribution rates. Interactive tools, such as retirement calculators or scenario planners, can also help employees visualize different savings outcomes and make informed decisions.

Additionally, online portals and tools should provide easy access to account information and real-time updates, increasing engagement by keeping employees actively involved in their retirement planning. Personalized communication through emails and notifications can remind employees about key milestones, and in-product nudges can help them make proactive adjustments to their savings.

Employer contributions may help encourage 401(k) contributions

Companies may consider using the power of employer contributions to motivate employees to enroll in a 401(k) plan. Not only does an employer match help attract and retain employees, but it’s also proven to help drive participation in plans. In fact, workers rank company 401(k) employer contributions as the most important factor when reaching retirement goals.

The specifics of the matching formula vary by company, but  matching formulas typically follow two common structures:

• Dollar-for-dollar match. For every dollar an employee contributes to their retirement account, the employer also contributes an equal amount, up to a certain limit or percentage of the employee's salary.

• Percentage match. This is based on the employee's contribution percentage. For instance, if the employer offers a 50% match, they contribute 50 cents for every dollar the employee contributes, again up to a specified limit. 

Benefits of employer matching

You may have questions about employer matching but know that a key benefit is that they can help amplify employee contributions, effectively providing ‘free money’ towards their retirement savings. This incentivizes employees to contribute more to their 401(k) accounts to maximize their employer's matching contribution, ultimately accelerating their retirement savings growth.

Employer matching may also help foster a sense of loyalty and commitment among employees, demonstrating your company's investment in their long-term financial well-being. Employees are more likely to perceive their employer positively and feel valued when they receive matching contributions to their retirement savings.

Additional 401(k) incentives

In addition to employer matching contributions, companies can offer various other incentives to encourage 401(k) participation:

• Making it easy to access funds: While retirement plans are generally designed for participants to hold until retirement, short-term 401(k) loans can potentially act as an incentive to drive plan participation by offering greater flexibility. Participants can borrow up to $50,000 or 50% (whichever amount is less) of their vested balance within a 12-month period. Unlike a 401(k) withdrawal, loans aren’t subject to taxes and penalties if participants pay back that money, including interest, within a specified timeframe (generally five years).

• Offering small, immediate financial incentives: SECURE 2.0 legislation made it possible for employers to offer small, immediate incentives—such as low-amount gift cards—to encourage participation. Human Interest offers the industry’s first cash-back program to help incentive plan participation. In addition to free financial education, (k)ickstart™ offers 3% cash back (up to $250) on contributions made by qualifying employees (limitations apply - see terms).

Inspiring participation beyond the dollar

There are a few ways to support your employees’ 401(k) participation. Offering financial education and counseling, such as workshops and one-on-one sessions, can help empower employees to make informed financial decisions. Recognizing and rewarding employees for 401(k) participation fosters a positive savings culture, motivating others to contribute.

How to communicate the value of 401(k) plans

Regular and clear communication about the benefits and mechanics of 401(k) plans can help maximize employee participation by ensuring they understand the value of their retirement savings options. You can use emails, newsletters, and internal portals to provide detailed explanations and updates, to keep employees informed and engaged. To further enhance understanding, some employers even organize informational seminars or workshops covering topics including:

• How 401(k) plans work

• The advantages of employer matching

• Strategies for maximizing retirement savings 

Interactive elements, such as Q&A sessions and real-life scenarios, can make these events more engaging and effective. Prioritizing consistent communication and offering educational opportunities helps employees make informed decisions and feel more confident about retirement planning.

At Human Interest, we help employers offer 401(k) retirement plans that make it easier for employees to save for retirement. Contact us today to get started.