Getting 401(k) participation back on track in 2021
How plan sponsors can use the setbacks of 2020 to encourage employees to participate in their retirement savings plans.
As human resource and benefits managers know all too well, 2020 was a year of disruptions. That’s why a good theme for 2021 is how to get retirement savings back on track.
Understandably, retirement savings got pushed further down the list of priorities for a lot of people in 2020, given the other challenges the year brought. One year of reduced or even missed retirement contributions does not have to doom anyone’s retirement savings, as long as it does not set a pattern for future years.
This article will review some of the disruptions that retirement savings programs faced in 2020, and then focus on specific steps that HR and benefits teams can take in 2021 to build 401(k) participation back up.
What happened in 2020: Setbacks on multiple 401(k) fronts
HR professionals wage a never-ending battle to encourage their employees to make full use of benefit programs like 401(k) plans. After all, the more the workforce participates in those programs, the more likely they are to appreciate them. Also, fuller participation can mean lower cost ratios for all.
Unfortunately, a year like 2020 can be highly disruptive to the long-term benefit participation goals that HR professionals are trying to attain.
Making a mess out of 401(k) metrics
When you think of the most common metrics HR departments use to measure 401(k) participation, 2020 provided a challenge to attack each one of those metrics:
1. Participation rates. The most fundamental measure of employee utilization of a 401(k) plan is participation rate: the percentage of eligible employees that are participation in the plan.
When employees are experiencing employment gaps due to furloughs or reduced incomes due to schedule cuts, they are less inclined to divert part of their remaining paychecks to retirement savings.
2. Deferral rates. A key tool in getting employees to direct a greater share of pay into the 401(k) plan is the incentive of employer matching contributions.
Unfortunately, due to financial challenges in 2020 some employers were forced to cut back or suspend their matching contributions. A survey by the Plan Sponsor Council of America found this was most likely to happen in smaller companies. Of course, those are often the same companies where HR resources are already the most stretched.
3. Balance levels. Working to boost participation and deferral rates both build towards the long-term goal of raising employee plan balances. The looser restrictions on 401(k) early withdrawals passed as part of the CARES Act represent a direct hit on balance levels.
Besides the specific disruptions to these metrics, 2020′s multiple personnel challenges of things like layoffs, extended illnesses and remote working left HR departments less time for their usual efforts to encourage 401(k) utilization.
Once again, younger employees represent the biggest challenge
As human resource professionals know all too well, younger workers are generally the biggest challenge when it comes to encouraging retirement plan participation. Years of data from Vanguard’s How America Saves survey show that participation and deferral rates of younger workers habitually lag those of older cohorts.
2020′s challenges only increased the difficulty of getting younger employees to participate in retirement plans. These employees typically have the least amount of savings reserves to fall back on and are struggling with the largest student loan burdens.
A survey by consumer finance site MyBankTracker.com, COVID-19’s Financial Effect on Millennials, found that 30% of employees aged from 25 to 34 experienced some kind of career setback in 2020. Retirement savings are often the first casualty when money gets tighter.
Getting Your Employees Back on Track in 2021
Beyond your general efforts to encourage 401(k) participation, in 2021 it might be worth including specific suggestions to address the setbacks of the year before.
1. Restoring – or boosting – deferral levels. Employee inertia is one of the ongoing challenges HR teams face. The specific risk in 2021 is that employees might simply allow their deferral reductions from 2020 to carry over.
The opportunity to address this comes from the fact that COVID restrictions led many people to spend less in 2020. The MyBankTracker.com survey found that more than half of 25-to-34-year olds spent less during the pandemic.
One tip to share is for employees to use that reduced spending as a means for raising their retirement plan deferrals.
2. Paying back CARES Act withdrawals. The CARES Act allowed employees to withdraw up to $100,000 from their retirement plans without the usual 10% tax penalty. However, these withdrawals are still subject to ordinary tax liability unless repaid within three years.
Avoiding that potential tax liability should be the incentive used to encourage employees to restore their 401(k) balances.
3. Revisiting progress assumptions. All participants should periodically revisit their retirement plan projections to see how reality is tracking with their assumptions.
Coming out of the topsy-turvy conditions of 2020, this is a good time for human resource teams to remind employees to take a fresh look at their retirement projections. This can include a pitch for employees to use retirement planning tools and other resources that are offered as part of the 401(k) program.
Using 2020 to reinforce your 401(k) participation message
While 2020′s conditions are not likely to be repeated, the experience does illustrate the value of two retirement planning lessons retirement professionals have been teaching for years:
1. Expect there to be setbacks along the way. As noted, some employees were forced to cut back on retirement plan contributions in 2020, and some employers had to suspend matching contributions.
This is why it is wise to strive for higher deferral rates under more normal conditions. Rather than staying just on track towards retirement goals, employees should be encouraged to get ahead when they can. That way they’ll have a cushion when the inevitable setbacks to retirement savings occur.
2. The market often rewards those who stay the course. During volatile times, HR teams have to do a certain amount of handholding with employees who are nervous about their retirement investments.
Between a pandemic and a recession, it might have seemed like 2020′s investment conditions couldn’t have been much worse, and yet the US stock market enjoyed an above-average year. Heading into the last week of 2020, the S&P 500 was up better than 14% for the year. This is an example of how long-term investors can miss opportunities if they panic in and out of stocks or tap into their retirement funds during an emergency.
2020 was a very hard year, but it may be that its extreme conditions can be used to prompt employees to finally take these lessons seriously.
