Having worked with plan sponsors and participants for many years, I’ve learned that the main reason people don’t engage in the retirement plan can usually be tied to some sort of misunderstanding about how 401(k) Plans actually function. It’s human nature to fear what we don’t understand. Therefore, it’s one of our responsibilities as fiduciaries to educate the employees on the features and benefits included in the plan. I’ve found that employees often only have one or two misconceptions about retirement plans that keep them from enrolling. Once we explain that their objections are usually based on simple misunderstandings, we usually see an increase in participation. Other employees know that they should be saving for retirement but they just need some reassurances.
The simplest form of employee communication is the enrollment meeting and ongoing educational meetings. We typically recommend hosting these meetings once or twice a year for the staff. The seminars are generally run by your advisor but sometimes the plan’s recordkeeper will also run these meetings. In my experience, these presentations are most effective when the speaker is fully transparent as to how the plan has been designed. This would include eligibility requirements, any employer contributions, vesting schedules, investment options, participant fees, etc. Likewise, I always suggest reviewing the benefits of pre-tax versus Roth contributions as well as the concept of compounding interest. This is where the employees generally start to see the full power of this tax-advantaged program. We generally suggest having a Q&A session to conclude the presentation as this is where we will address any potential misnomers or hesitations about participating in the company’s 401(k) Plan.
Group enrollment and ongoing educational meetings are extremely valuable but if the employees take no action as a result of the presentation, what did we really achieve? This is why we recommend individual consultations immediately following the group meeting. If any of the employees had questions or concerns that they didn’t feel comfortable voicing among their coworkers, they can now discuss them one-on-one with the advisor. Likewise, if the employee would like some personal guidance on how much they should contribute, how they should contribute (pre-tax, Roth, or a combination of the two), and various investment strategies, the advisor can help them with these options. By scheduling individual break-out sessions after the group meeting, we tend to see higher enrollment rates as the “unknowns” have been addressed and personal guidance has been offered to each employee.
Regardless of how many meetings I’ve ran over the years, it always amazes me how many employees will never show up to a group meeting or meet with the plan’s advisor for assistance. For these employees, there are some resources that will help educate them on the 401(k). First, your plan provider should offer an enrollment kit highlighting the plan’s features, the investment options, and how to enroll. Second, the plan’s website should include your Summary Plan Descriptions (SPD). The SPD provides an overview of the retirement plan in simplified language that most employees should be able to digest. Finally, your plan providers will generate the Employee Fee Disclosure for any employees or participants who would like to learn more about the fees being charged to their accounts.
Enrollment meetings and ongoing education meetings would be considered a significant event in your fiduciary process so we recommend documenting them and referencing them in your Fiduciary File. This shows that you are not only performing your duty to design a sound 401(k) Plan for the participants but you are also effectively communicating the features of the program to the employees.
This class concludes your junior year at 401K University! At this point, you have learned about 401(k) Plan basics, how to design the right plan for your specific set of employees, and how to address your fiduciary responsibilities to properly oversee the program. Enjoy your summer break and join us next week when we kickoff your senior year focusing on the investment options available to you.