Is it time for a redesign? Adding certain 401(k) features can spark higher participation
Building in flexibility and offering a range of features, such as adding a financial advisor, are recommended at a time when there is so much competition for workers, says a new report.
Retirement savings plans remain a good way to attract and retain talent, a new report has found, but building in flexibility and offering a range of features are advised at a time when there is so much competition for workers.
The report, Morgan Stanley at Work: Plan Sponsor Research Results, said that good plan design is crucial for companies offering retirement accounts. The report noted that employers who offer a financial advisor or offer additional options such as a Roth IRA are seen as more attractive by workers.
As other studies have also shown, this research suggested that there is an increased need for financial education tailored to the needs of employees (including an awareness of generational differences), along with a recognition of the digital lifestyle of many workers.
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“Plan sponsors recognize the changing terrain of today’s workforce and are challenged with finding ways to recruit and retain talent,” the report said. “A 401(k) can be an effective tool in talent attraction and retention. However, plan design plays an important role in participant enrollment and engagement.
Preventing talent turnover, designing for a range of employees
The Morgan Stanley research found that not all companies experienced turnover at the same rate. “Large to enterprise-sized companies are significantly more likely to experience higher levels of turnover than smaller companies,” the report said. The data showed that small companies (24%) and mid-sized companies (25%) reported above average turnover at lower rates, while large (41%) and enterprise (50%) companies reported higher rates of turnover.
Some themes were repeated when employers talked about recruitment and retention. For example, they agreed different generations have different needs for retirement plans, creating one set of challenges for plan sponsors. In addition, expectations for plan offerings are growing, and employees can come to the companies with big expectations of what is considered “basic benefits.”
And although a 401(k) offering is considered standard for executive talent, 19% of respondents said a 401(k)-plan offering can help with recruitment and retention of intermediate-level workers, and 22% said it is helpful in recruiting mid-level employees. For entry-level jobs, the number was lower—only one in 10 employers said it was helpful for recruitment and retention.
The study found that while high numbers of employees were participating in 401(k) plans, some chose not to. The report said that of those who declined, 62% did so because they wanted their full paycheck immediately, 15% said they didn’t see the value of the benefit, and 22% had other types of investment accounts.
Matches spark participation
One of the interesting findings of the study is that the amount of a company’s match seems to have a significant effect on employee participation. The study quotes an employer who said a common question from new employees has been, “how much are you guys going to contribute?’ “Companies that offer a match of more than 5% are significantly more likely to see higher rates of participation among eligible employees than companies that matched at a lower rate,” the report said.
Only 17% of companies offer that high of a match, however, with 36% matching 5%, and 41% offering between 3% and 5%. The report noted that it is mostly enterprise-size companies that offer a higher-than-5% match. The report said employee education can make even smaller matches look attractive. It quotes a plan sponsor recommending, “A very concise, really powerful graphic/infographic to show the younger crowd, ‘Hey, there’s a 3% matching and look at this: 3%, it may seem like a little amount, but [look at what] this 3% does over 30 years.’”
The research also shows the bigger companies may be taking advantage of their size, offering more options to employees. For example, when comparing which companies offer a Roth plan, 30% of startups and 34% of small companies offer them, but 47% of mid-size companies, 51% of large employers, and 50% of enterprise companies offer the benefit.
Another point the report emphasized is the positives around having a plan advisor available to employees. The report said offering a plan advisor to employees may result in higher employee participation. Of the employers who reported full employee participation in 401(k) plans, 80% had a plan financial advisor and 20% had no plan financial advisor. “The 401(k) plan has been around for decades and is largely the most popular workplace benefit to help employees build their retirement nest egg,” says Anthony Bunnell, Head of Retirement for Morgan Stanley at Work. “The dynamics of today’s economy have changed, with employers and employees alike juggling numerous competing financial needs. So, it’s not surprising that plans with financial advisors are associated with more engaged employees, as a financial advisor can play a central role not just in managing the plan, but in helping employees navigate the markets and invest in their future.”