Why 17% of employees don’t participate in 401(k) plans

We all know saving for retirement is critical, and a 401(k) plan is a foundational part of that. According to the Department of Labor, however, only 51% of the workforce contributed to an employer-sponsored 401(k) in 2021, despite 68% of private workers having access to a plan. So, why is it hard to convince employees to contribute to their own futures?

Many HR company leaders are busy training employees to do their jobs and making sure they have all the tools necessary to succeed. So, they often lean on benefits brokers or advisors to provide 401(k) resources. However, 401(k) providers might be sending employees confusing pamphlets with no explanation, and their websites and data might be intimidating to many employees.

To overcome these problems, it would be beneficial to sit down with employees one-on-one. But many brokers see employee interactions as expenses rather than opportunities. The more time spent engaging with participants, the more expensive it is to operate a plan. Many advisors are comfortable mailing packets, sending videos, and then letting employees figure things out.

Most websites are clunky and aren’t intuitive to navigate, and reviewing 401(k) pamphlets involves reading lengthy fee disclosures and confusing investment fact sheets. None of this builds trust and confidence to encourage employees to take proactive steps and save for retirement.

That’s why it’s critical for HR leaders to take the initiative to make 401(k) planning easier for their employees.

Why should employees start saving for retirement now?

There are a few reasons why encouraging employees to save early is essential. The first and most important is developing a saving habit, which builds confidence. Saving for retirement and emergencies gives people freedom. An emergency fund, for example, offers employees the freedom to pursue new opportunities or take time for themselves.

Related: Let’s talk benefits! How to grab (new) employees’ attention

Saving for retirement early and often lets them retire when they want. Early retirement provides the option of pursuing new career paths, working part-time, or simply relaxing and living off savings. Finally, compounding investment returns means even saving a little early on in a person’s career makes a major difference in their life at retirement age.

For example, if a younger employee simply saves $250 per month for a decade (for a total of $30,000), their portfolio will amount to over $500,000 after 30 more years. However, when we flip the investments and an employee invests nothing for the first 10 years of their career and then $250 per month for the next 30 years, the $90,000 contribution only grows to roughly $375,000.

That’s a huge difference, and it’s one of the many reasons HR leaders should encourage teams to start — and continue — saving for retirement through the 401(k) plans their companies offer.

Benefits of a 401(k) made simple

HR leaders have a responsibility to help employees understand how to retire. It not only helps employees, but also the company as a whole. Employees who are not comfortable with their finances might be more stressed at work, leading to more distractions and more mistakes.  It’s expensive to pay for those employees. And if employees aren’t saving, they might stay at the company past their desired retirement age. That’s not a recipe for a motivated, happy, or dynamic workforce.

Of course, the responsibility to educate doesn’t fall solely on HR leaders, and with a 401(k) made simple, employees are incentivized and encouraged to save for themselves. It’s a lot of hard work to simplify the 401(k) experience for employees, but you can work with providers — especially advisors — who specialize in these plans.

A 401(k) specialist has the time and processes to dedicate to your employees. However, whether you handle things internally or decide to outsource, there are two key areas to make the initiative a success:

1. Give employees useful information. Although a 401(k) is complicated in a lot of ways, user experience is where businesses and service providers can make the most progress for employees. No matter how complicated the actual plan is, the choices, pros and cons, and actions employees must take should be as simple as possible. Handing workers a 25-page legal document is not helpful, but giving them a two-slide overview of how the plan works and what exactly they need to do is useful. Make sure to focus on the important points of how they can participate to relieve any anxiety around retirement planning.

2. Provide one-on-one assistance. Many employees are often left to navigate 401(k) enrollment websites on their own, which can be confusing. They might not understand or be comfortable with the risk and uncertainty of investing. They might fear clicking the wrong button or picking the wrong amount or investment options. That often leads people to avoid the decision altogether, so they don’t make the wrong one. However, not making a decision is the worst decision for employees when it comes to retirement. In my experience, it’s striking how much you can increase participation rates, savings, and good investment choices simply by sitting down with employees individually. Finding a service provider who can sit down with employees — or familiarizing yourself with the intricacies of the 401(k) plan and doing this yourself — can give your team confidence and increase engagement with your 401(k).

Getting your team started with 401(k) planning

Workers who are secure in their finances are happier and more productive because they know they can safely retire when and how they want. This makes their last few years much easier on their co-workers and the companies they work for. But they often need assistance from HR or the benefits service provider to get there.

Providing 401(k) assistance benefits your company and its employees. If your employees are confused and feel nobody is helping them, they won’t participate. But if you can simplify your 401(k) plan, it can secure the financial future of both employees and the business.

Matt Baisden (CFA, QKA) is a retirement plan advisor at Plancorp, a full-service wealth management company serving companies and families in 44 states and managing more than $5.5 billion of client assets.