401(k)s: Is participation more important than deferral rates?

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While it's been generally acknowledged that a high rate of participation is the appropriate benchmark to gauge the success of an employer-sponsored DC plan, a new research project has revealed that other factors might be better used to measure 401(k) plan success.

Diversified recently polled a swath of plan sponsors and found that, to the contrary, participation rates are no longer seen as the primary driving factor in plan success. This year's survey showed that only 52 percent of plan sponsors judge participation rates as the appropriate benchmark, down considerably from 2011.

Instead, explains John Killoy, VP and managing director of Diversified's Retirement Education and Planning Services Group, more plan sponsors have concluded that average deferral rates are instead a much more important factor in measuring the effectiveness of a 401(k) plan.

"Our common theme in the past had always been to focus on participation, practically since the beginning of time," Killoy explains. "And as recordkeepers and advisors continue to stress the importance of participation, it's less likely to be the sole aspect - which I think is showing some kind of evolution in how we are going to motivate participants to save more."

With that change in direction in mind, Killoy said the best advice for plan sponsors - and retirement advisors, as well - may be to ramp up their educational efforts to help get those participants who do opt to take part in savings plans, to save more.

It's also a good opportunity to re-examine plan features such as auto-enrollment and auto-escalation, which can help to serve both 401(k) plan success metrics.

"Many of the sponsors we deal with are also considering different strategies such as spreading the match they provide - rather than a dollar up front, do it on a 25 cents basis, up to 8 percent, or considering an immediate match," he says.

Contributing more of their paychecks to a still-abstract retirement savings vehicle can be a hard sell to participants, Killoy admits, but sponsors who work harder to get their employees to take more responsibility for their own retirement savings tend to see better results.

"It's all about having a very candid conversation. Telling people, 'Given your current contributions, you may have to work until you're 76' ... well, that's being real with people," Killoy says. "A 4 percent deferral rate is good but ... people should be saving at least 10 percent of their income as a general rule. So maybe we should focus on a 6 percent deferral rate, with an auto-escalation feature built in.

Higher deferrals - not to mention improved participation rates - may also be enhanced through some basic financial educational efforts for employees, which could employ the help of a seasoned advisor.

"Too many times, employees are inclined to react to short-term financial events, and they tend to get upset by what's happening now. Look at what happened in 1972 or even in 2009. But if you look at the 90-year performance of the stock market, even 1972 was very insignificant, and the current market could even be a buy-in opportunity. Either way, they need to stay focused on the long term."

To assist participants in seeing that far-ahead future, many companies have created online tools that help employees figure out what they'll actually need to maintain a reasonable standard of living in retirement, and how much they should be saving now.

Grace Basile, a marketing research consultant with Diversified, says her company's own version is dubbed the Retirement Outlook - participants literally get a weather forecast-styled set of graphics that predict either sunny days ahead (aggressive participation and active investment management) or cloudy weather on the horizon.

"If participants have a goal, that's a great way to get that higher deferral rate and build a higher balance - especially if they know what to shoot for," she says. "And we've generally been successful in getting more participants in the plan, over the past 10 years. But those deferral rates haven't changed."

Killoy said there's also the issue of making it easy for employees to take part in a plan, especially for workers who don't have time to attend enrollment or educational meetings. Quick action cards requesting a follow-up later or reaching out to employees when they're eligible for a match can also lead to higher deferrals.

"That's a great opportunity to engage them," he adds. "Let them know tht they're leaving money on the table if they don't take part. We like to use keywords like 'compensation' and 'you've earned it' as part of those discussions. Mostly, it's about having a goal."



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