Ramping up retirement: 5 ways to increase employee participation and contributions

Employers face many challenges when it comes to benefit plans. The first hurdle is raising employee awareness of their benefits. The second is encouraging employees to opt into retirement plan contributions. The next big question is how to get them interested in managing their retirement investments – or at least giving them some attention.

If the firm has a defined contribution plan, employees are at the door and opportunity is knocking. 68% of private sector employees have access to a plan yet only 51% take advantage. One of the major reasons is they perceive their after-tax take-home pay shrinks because of all the deductions like taxes, Social Security and health insurance. Contributing to a company retirement plan seems to shrink it further, so they opt out. The strategy employers and the benefit plan professionals supporting them often deploy is raising their awareness of how the company is providing a match, so opting out is leaving money on the table.

Why do some employees stick with cash/?

Let us assume some employees opt in but stop there. They either do not allocate the cash to investments or they consciously choose to keep their retirement savings in cash. Why would people make this choice?

1. They see cash as the “safe” option. Cash does not go down in value. (Purchasing power is another story.) It does not have surrender charges. You can’t lose money, although the interest you earn is often very low.
2. You can’t lose money. The stock market is volatile. In 2022, the S&P 500 index was down almost 20% in 2023. (-19.44%). They see the risk of losing money as greater than the reward of making money.
3. They do not understand the stock market. They know it’s out there. They see it on TV. They equate investing with risk. They feel savvy insiders and professionals make money at the expense of ordinary folks. We know them as retail investors.
4. They really want crypto. These employees think the way to make money is to invest in the latest and greatest, the next big idea. They think the stock market is too tame. They are unaware of the risks associated with cryptocurrencies. They feel since almost everyone they know are talking about cryptocurrencies, they should buy them too. These are not available in the company’s plan.
5. They feel they might need cash in case of emergency. They equate retirement savings with their loose cash (free cash balance) in their checking account. They want to stay liquid in case their spouse loses their job, or a family member has a sudden medical expense.

Encouraging employees to put their retirement savings to work

The investment community takes suitability very seriously. If someone breaks out in hives if they think they might lose money, the stock market is not for them. Their benefit plan might offer insurance products within the 401(k) that guarantee their principal. There may be banking products with similar protection. Let us assume this is not the problem.

1. Helping the “cash is safe” employee. Uninvested cash earns a certain return, often the lowest return. There should be time deposits available in the plan. There may be an annuity option. Periodic contributions are part of the accumulation phase, earning interest within the product.
2. What about the “Can’t lose money” person? They need to have a little faith. The stock market has traditionally returned an annual rate of about 10%, when the returns are measured across decades. For a twentysomething employee, retirement is in the distant future. They could take the long view.
3. The employee who does not understand the stock market. They have friends who make money in the market, but trading stocks is all they do in their spare time. That is too much work. The answer is to hire someone else to do it for you. The company plan should have professional money management via mutual funds along with passive investments like stock index tracker funds. Participating in the stock market does not require buying individual stocks.
4. The employee who loves crypto. Imagine this scenario: They want to buy cryptocurrencies. They have no free cash, except in their retirement account. Therefore, that’s where they want to buy their crypto  . It’s not available in your plan. There should be several stock fund options including an aggressive small cap stock fund or a technology fund. These managers might buy into companies making some of their money through involvement with cryptocurrencies. Gradually, mutual fund companies are trying to find ways to introduce crypto exposure. If one eventually comes along, they can transfer money from one fund to another, if they are still interested.
5. The “I never know when I might need cash” employee. First, they need to understand the US government thinks raiding your retirement savings is a very bad idea. To discourage this behavior, they tax early withdrawals as current income and add on a 10% penalty in most cases. Now for the good news: Many company sponsored retirement plans allow employees to take loans against their retirement assets. This person could have access to cash without keeping their retirement money in cash. Unless the employee is a sophisticated investor, there is one more lesson they need to learn. The interest rate paid on cash rarely if ever keeps pace with inflation. Put another way, if you put money in a one-year bank CD and calculated the cost of a basket of groceries, one year later, the groceries would cost more than the earlier cost you banked even with the interest added on top. High quality, large capitalization stocks have traditionally provided one of the highest returns compared to other asset classes.

Related: Employees, we have a problem! How employers can jump-start retirement savings

Employee education concerning financial wellness is not a one-time class. It’s an ongoing process. Educated employees are better suited to making good decisions.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor” is available on Amazon.