The biggest hurdle in getting younger workers to put money into a 401(k)
Having access to a retirement plan is not enough. Employers can get them in the game by maximizing their match, aligning their investment options with their beliefs and connecting them to help with their debt.
Most companies offer a retirement savings plan, which is great, but just like a gym membership, simply having access to a plan is not enough – younger employees have to take full advantage of it. When employees are in their 20s, retirement is likely not front of mind. But this is, in fact, the BEST time for them to not only think about retirement, but to begin building up savings for retirement.
Here are simple tips focused on younger employees that will help you to help them get the most out of your company’s retirement savings plan, while still balancing their other priorities and commitments.
No. 1: Get them in the game
A typical retirement savings plan only provides an employer benefit if employees defer money into the plan. This can be the biggest hurdle for younger employees who do not have retirement on their radar. That is why automatic enrollment features are so important: it gets employees started on the right foot, creating a habit of saving toward retirement early on. Once they have a savings-mindset, it can last throughout their career.
If college debt is preventing younger employees from being able to save, there’s good news. With the recent passage of SECURE 2.0, employers can now match payments employees make toward college loans with contributions to their retirement account. Adding this feature creates a win-win situation: young employees make progress toward paying off their debt, while employers help younger employees begin accumulating retirement savings much earlier than they might otherwise.
No. 2: Maximize their match
Even many automatic enrollment plans still only default participants to a deferral rate below the maximum matching level. So, it’s up to participants to act in order to receive the full matching contribution when they enroll. Missed matches is the same as leaving money on the table, so specific examples of how much money an employee is walking away from can be quite powerful. Employees may not respond to messages that they need to save more but might be inspired to do so if told exactly how much money could have been theirs had they simply done something they should do anyway – save for retirement.
No. 3: Up their game
Employees sometimes view the level of deferral that is matched by a plan as a guide for how much to save. In reality, they likely will need to save much more if they want their savings to produce retirement income that is close to replacing the salary they earned while working. Automatically increasing deferrals past the maximum amount matched can help anyone, but it is most powerful for those with many years left before retirement due to the power of compound interest.
It is critical that your younger employees understand saving for retirement isn’t something that can be delayed until their 50s. Starting 30 years earlier gives them 30 more years of investment earnings. Translating the timing of a deferral into potential extra earnings can help explain this important concept. For example, when working toward retirement at age 65, a $10,000 deferral could be worth $18,000 if made at age 55 (assuming an average annual return of around 6%), but a $10,000 deferral would grow to over $100,000 if instead made at age 25, assuming the same average annual return. Examples that show the power of saving early might compel deferring sooner rather than later.
Despite compelling examples, finding room in current budgets might still be difficult, so you might also coach younger employees to consider using a portion of an upcoming raise to increase their level of savings. This allows them to still enjoy a boost in their spending budget while also increasing their retirement savings closer to the maximum amount matched.
No.4: Remind them of a Roth feature
While most plans default participants to pre-tax enrollment, Roth after-tax deferrals may make a lot of sense for younger workers who expect their income to grow over their career. But surveys all show that Roth features tend to be used by older workers who are more knowledgeable about tax laws. So, it’s up to employers to ensure younger workers are educated about the potential benefits of tax-free distributions.
No.5: Highlight the loan provision
Someone just graduating from college might be naturally reluctant to focus on their expected retirement in 2065 given other commitments. But employers can explain that a plan loan provision allows them to access a portion of their retirement savings in a tax preferred method even during their careers. Further, they can repay the money back to the plan at interest rates far lower than most revolving debt.
No. 6: Connect them to help
Many younger employees not only carry student debt but high levels of credit card debt as well. It can be bewildering for anyone, particularly younger employees less experienced in managing their own finances, to prioritize savings and debt repayment. So as part of an effort to improve savings, employers should consider connecting workers with the services already offered. For instance, many Employee Assistance Programs (EAPs) offer free financial counseling provided by volunteer professionals. And many plan recordkeepers are willing to offer debt counseling as well.
No. 7: Align the investment options with employee investment beliefs
Many younger employees are interested in aligning their portfolio with their investment beliefs. Offering funds that integrate ESG (environmental, social, and governance) investment considerations addresses this interest. There are many fund managers that integrate ESG investment considerations into building and managing their portfolios. Including a selection of these funds in the investment lineup allows employees to invest in funds built on investment principles that are important to them.
Related: Is it time for a redesign? Adding certain 401(k) features can spark higher participation
There are three key building blocks to successfully building adequate retirement savings: participation, savings rate, and investment returns. By following the simple tips above, and integrating them into plan design and employee engagement, you can help the next generation be well positioned to get ahead of the game with retirement savings.
Tonya Manning is U.S. Chief Actuary and Wealth Practice Leader for Buck, an integrated HR, pensions, and employee benefits consulting firm.