401(k) plan design important for increasing employee investments

While 50 million employees in the U.S. are invested in a 401(k) plan, research shows that these individuals are not using their plans as well as they could be. About 8 million employees don’t participate in their company plan at all.

According to the 2012 Workplace Benefits Report from Bank of America Merrill Lynch, not only are employees more aware than ever that they are responsible for funding their own retirement, but most of them want to do something about it.

In its research, Bank of America found that 82 percent of employees surveyed are willing to give up a portion of their salary to secure guaranteed retirement income, but procrastination, inertia and lack of knowledge about how to take advantage of the benefits offered prevent many employees from maximizing contributions and investing wisely in their 401(k) plans.

Nearly 70 percent of plan sponsors surveyed felt that they were somewhat responsible for helping employees understand their retirement options and when considering financial benefits in the workplace, 88 percent of employers place a significant importance on a plan’s usefulness to employees.

Because employers are scrambling to make their retirement plans more effective, plan design has become even more important. Research has shown that better outcomes can result from plan design strategies that drive such positive participant decision-making as enrolling, contributing and improving financial wellness.

To raise participation rates, many plan sponsors are turning toward automatic enrollment.  Many employers have offered auto enrollment to their new hires, but Bank of America recommends extending that feature to all eligible employees. The report also recommends that companies integrate their 401(k) plan enrollment with their annual health care enrollment.

Increase contribution rates by offering automatic increase for all eligible employees. “Allowing participants to schedule gradual contribution rate increases over time makes it easier for them to commit to saving more and helps put them on an even better retirement track,” the report stated.

Among its clients, Bank of America Merrill Lynch has seen a 23 percent increase in plans offering automatic increase in the past year.

Plan sponsors should combine automatic enrollment with automatic increases to maximize the effectiveness of both tools, the report said. They also should raise the automatic increase threshold, pushing employees to save enough for retirement. Redesigning the employer match is another popular feature. Instead of employers matching 100 percent up to 3 percent of a participant’s contribution, they should change it to 50 percent of 6 percent or 25 percent of 12 percent, to make employees want to contribute more to earn their “free” company match.

Offer help with financial wellness. Bank of America’s 2011 Workplace Benefits Report showed that 79 percent of employers foresee greater demand from employees for investment advice on their benefit plans. In turn, this year’s study revealed that 56 percent of sponsors now offer access to professional advice.


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