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Financial wellness is impossible to achieve without plan participation. Here’s how to address the issue with your employees.

Greg Carpenter

December 29, 2022


The primary reason employees do not participate in 401(k) plans is their personal budget. They simply do not believe they can put money away without a significant change in lifestyle. No matter what other incentives an employer may offer – e.g., matching contributions, financial advisors – budget concerns trump all other considerations. No matter what, they won’t participate if they don’t think they can afford it.

Are employees correct in assuming they cannot afford to save?


Non-participating employees are laboring under two misconceptions. First, they are overestimating the cost of participation. Many do not understand the tax benefit of participation, which reduces the out-of-pocket cost of saving. Also, employees tend to overestimate the effect of smaller take-home pay on lifestyle. Deferring 3% of pre-tax wages can seem like a lot of money when expressed as a concept. “I am spending everything I make now. How can I possibly get by with that big a cut in pay?” Employees may not have the expertise to rationally analyze the true cost of participation.

The other misconception is a focus on short-term planning horizons. Non-participating employees tend to have no financial plan beyond a year or two. With no thought given to longer-term goals, employees tend to undervalue the benefit of saving. Long-term saving is considered a zero-sum game, as any money put away now will be needed to be spent within a year or two. Effectively, saving requires more hassle now and limited benefits – why bother? This is the “Christmas Club” approach to 401(k) savings that leads to early withdrawals and other forms of asset leakage when employees do participate.

What can small business retirement plan sponsors do to address non-participation?

While these observations paint a bleak picture, employers actually have many tools at hand to help employees inch their way toward retirement readiness. The key is to recognize that employees are opting out based on the above misconceptions. Unless these misconceptions are addressed head-on, enhancing benefits and applying behavioral economic approaches will have little impact on participation rates for those with “budget” concerns.

To address the “budget” issue, employers need to reframe the issue as a matter of overall financial wellness. Employees need to see a direct relationship between saving and lifestyle. Employees also need to understand how setting a goal for wealth accumulation – as short as 3 to 5 years – will benefit them over time. Employers need to work toward building the employee’s comfort level with both the costs and benefits of participation. Enrollment communications do an excellent job of illustrating these concepts, but they do not tie the concept into the reality of the employee’s perceived personal budget. Employers need to be aware of that gap and move to fill it.

Employer action steps

First, employers need to clearly communicate the true “cost” of participation. Employees need to see their out-of-pocket costs expressed as dollar amounts, not just concepts. Let’s say your employee is earning $30,000 per year and the company is offering a dollar-for-dollar match on the first 3% of employee deferrals. Show the employee exactly how much it will cost her on a monthly and weekly basis to max out the match. Assuming a 15% tax rate, she needs to understand that her reduction in take-home pay will be less than $15.00 per week and about $64.00 per month to fully participate. Can she work that amount into her personal budget? If not, how much can she afford?

Note: It’s important to recognize that incremental changes have value. Even if employees don’t maximize their benefit, some participation is better than none. Like horseshoes, close counts.

Next, employers need to lay out the benefits of participation over time. The objective here is to try to expand the employee’s concept of long term planning and tangibly demonstrate the accumulation of wealth over time. Start with a 5-year horizon – a planning horizon through retirement can be a bit overwhelming. In our example, the employee saves 3% of gross pay for each of the 5 years, and receives the company match. Assuming a 5% rate of return on assets invested, her wealth at the end of Year 5 will be a little over $10,000! Putting away $15.00 per week will result in a true nest egg in only 5 years. We know she can afford the $15.00 per week. Is she prepared to “own” the goal and commit to participate over time to achieve her goal?

You won’t reach everyone, but you will make a significant positive impact on each one you do.

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