You’ve made the decision to establish a 401(k) plan for your small business, but you’re concerned inertia or procrastination will prevent employees from using it. You know many workers think “I can’t afford to save much so there’s no point of saving at all” or “it’s OK for me to postpone savings because I’m not close to retirement.”
So how do you overcome these mental barriers or otherwise incentivize employees to participate in your new 401k plan? Two ways - education and plan design. Employees are more likely to participate today when they understand the cost of delay and when certain plan features are offered.
Education, Education, Education
Saving $100 today is not the same as saving $100 two or ten years from now. Why? The power of compounding. When money is contributed to a 401(k) account, it earns interest. When this money is left untouched, it earns interest on past interest, or compound interest. When participants start saving early, compound interest can result in some amazing growth over the long haul. When participants delay saving, the less time they earn compound interest. It’s critical that your employees understand this and see real life examples of how their money can grow over time.
Employer Matching Contributions
Matching the 401(k) deferrals made by employees is a great way to encourage participation in your plan. After all, who wouldn’t want to get monetarily rewarded for saving? When participants understand that a percentage of their 401(k) deferrals will be matched, sometimes doubling their savings, the decision to participate is simple!
Another method sometimes used by plan sponsors to increase plan participation is automatic enrollment. When a 401(k) plan includes an automatic enrollment feature, employees are automatically enrolled in the plan at a default deferral rate. Since inaction results in automatic 401(k) participation, an automatic enrollment feature can improve employee participation.
Tax Advantages for Participants
Participants who make pre-tax 401(k) deferrals will lower their taxable income. Further, certain low wage employees may be eligible for a tax credit of up to 50% of their 401(k) plan contributions, to a maximum of $2,000. Couples filing a joint return can claim up to $4,000. When employees know they can fund their retirement with amounts they would otherwise pay in taxes, 401(k) participation can be made more attractive.
Make Enrollment Simple
The worst thing you can do is throw a bunch of forms and packets at your employees and talk at them for an hour. This can make 401(k) participation seem intimidating and not worth the trouble. You want to make enrollment simple and brief, but still effective and thorough enough to encourage participation.
Providing online enrollment and keeping your meeting interactive with real life examples of compounding can help. Make sure you ask your provider about their enrollment materials and whether or not employees can enroll online.
It’s Time To Enroll
Now that you understand some of the ways you can encourage participation in your plan, it’s time to promote your new 401(k) plan to employees. The enrollment materials given to you by your 401(k) provider should make this job easy.