Plan Design Changes Could Boost Employee Participation
Do your business clients complain about low employee participation in their retirement plans—even after improving communication with employees, promoting the saver’s credit, and using auto-enrollment? Then it might be time for them to take a closer look at their plan document provisions. After all, the way a retirement plan is designed can affect employee participation, which in turn affects what a business owner and his or her employees get out of it.
There are two areas where plan document provisions may affect plan participation: eligibility requirements and contribution requirements.
Lower the Bar
Because employees cannot make or receive contributions until they are eligible to participate in a plan, one way to help increase participation is to lower the bar, so to speak, on eligibility. In other words, relaxing a plan’s eligibility requirements may make the plan accessible to more employees. If a plan’s eligibility requirements are the maximum allowed (employees must be age 21 and work 1,000 hours in a year to become eligible), or if a plan excludes certain workers, like those who work at a particular location, an employer can consider easing those requirements, even if only slightly. Another option may be to reduce the requirements for employees to contribute elective deferrals, while maintaining more restrictive conditions for other plan benefits.
Research hints at the possible effectiveness of this approach, showing that at least 25 percent of those ages 28 to 38 were unable to participate in their employer’s retirement plan because they did not meet the eligibility requirements. Imagine how amending your plan document to allow this group to enter your plan could influence participation.
Similarly, reducing or eliminating allocation conditions for receiving an employer contribution—conditions such as a last day or yearly hours-of-service requirement—can make a difference. For example, eliminating a yearly hours requirement to receive an employer matching contribution can motivate rank-and-file employees to start deferring into a plan or to increase their deferrals.
Contribute More
Another plan modification that may help counteract lagging participation is to increase the contributions an employer makes to the plan on behalf of employees. If the employer contribution is a match, and, thus, is contingent on the employee making contributions, this rings even more true. Research from PEW Charitable Trusts shows that full-time employees are more than twice as likely to contribute to a plan themselves if their employer contributes.
While adding or increasing plan contributions, especially an employer match, is an option, it may not be an easy one, or even a viable one for some employers. The contributions made as an employer are deductible on the business’ tax return, but there is still a cost for the employer to contribute.
Think Small at First
The provisions in a plan that pertain to eligibility and contributions may negatively influence participation, which may ultimately have drawbacks for the business owner. But it’s not hopeless. Adjusting a plan’s design to enhance these provisions doesn’t have to be daunting. Consider starting out small with changes.
Every little bit helps. Your plan-sponsoring clients should be sure to consult their third party administrator or other advisors to explore which options might benefit them the most.
