Why have people stopped investing in their 401k? (thought leadership)

Written by The Peppermint Team

Peppermint was created by a group of business owners, entrepreneurs, and benefits experts who have been on both sides of the table as employees and employers.

April 15, 2022

Having a company-sponsored retirement plan can come with plenty of benefits for employees and employers alike–but only if there’s enough participation. 

If you already have a retirement plan in place and have seen a recent decline in contributions or plan participants, you may be left scratching your head wondering: 

What has caused the trend?

The truth is, there are plenty of reasons why employees may choose to opt out of a retirement plan or cease to invest in their 401ks. 

Common issues that employees face that may contribute to them not contributing to the fund include:

  • Having household bills or student loans that take priority
  • Becoming discouraged when their investments take a dip in the market
  • Not fully understanding how the plan works
  • Becoming overwhelmed by the process

In this article, we’ll go over the main reasons for low participation in a company 401k, and how to encourage your employees to join the fund. 

Getting to the root of the problem

The best way to increase participation in a retirement plan is to not only consider what employees want to get out of a plan, but to see what’s stopping them from joining or contributing as much as they used to.

Differing Priorities

Most of us would tend to agree that saving for the future is a good idea. However, everyday realities often get in the way of allowing people to start saving. 

A recent study has shown that the average American worker lives paycheck to paycheck, and as many as 75% live in debt with no expectation of being able to get out of it. 

The truth of the matter is that employees might have other, more pressing, priorities such as healthcare bills or paying off student loans. Oftentimes, especially if employees are young, retirement seems far off in the future and is the last thing on their minds. They’re just trying to get through the month.

Concerns about the market

Until recently, the average, everyday person did not invest in the stock market. Now with the creation of apps like Robinhood and Acorns, as well as a rising interest in cryptocurrency, everyone is seizing the chance to create their own wealth. That sounds like a good thing, right? 

However, the market is known to have sharp ups and downs, and for the first-time investor–especially one who is already tight on money–seeing their investments make a sudden drop is enough to have them believe it is no longer worth it to contribute their hard-earned money into a future investment.

Advantages to high employee participation

The more of your employees that participate in a retirement plan, the better. Depending on your plan provider, you could receive additional benefits and tax incentives for higher participation rates. Encouraging more employees to participate in the fund can also help you to avoid non-discrimination testing, which can end up being costly and require additional administrative work. 

As an SMB owner, you may be wondering, what is considered a “good” rate of participation? As a rule of thumb, employers should shoot for a minimum of 70% of employees participating in the fund. 

Not only is it important for the reasons above, but it can also improve your employees’ job satisfaction, engagement, and retention. By having the majority of employees contributing to the fund, it will truly feel like it’s meant to help everyone and not just line the pockets of higher-ups. 

How to jumpstart participation

We’ve already discussed why employees might decide against contributing to a retirement fund. By removing some obstacles your employees might face, you’ll see a significant increase in participation, as well as overall employee satisfaction.

Removing financial roadblocks

As discussed earlier, one of the most common reasons employees may choose not to join a retirement plan is due to more pressing concerns. To alleviate some of that pressure, consider the following solutions. 

Ensure employees are compensated appropriately 

If employees are too caught up in worrying about everyday expenses, they might not have the mental capacity to think about saving for their future. Take a look at your compensation rates and ensure that they are appropriately competitive, taking into consideration any recent increases in inflation or cost of living rates.

Help employees pay off student loan debts

Two-thirds of college-educated Americans have student loans, and on average, owes $59,042. Since the pandemic, payments have been put on pause, but soon they will resume and as many as 90% have said they aren’t ready. 

The CARES Act put into effect at the beginning of the pandemic has a little known provision in it allowing businesses to make up to $5,250 per year–tax-free–either directly to the employee or to the student loan provider. 

By taking some weight off your employees’ shoulders, you can help them to stop worrying about today and allow them to set their sights on the future. 

Build healthy financial habits together 

We’ve discussed how money (or rather, the lack of it) can deter many employees from joining or contributing to their 401k. Another reason money might be tight could be due to a lack of financial literacy. You might be surprised to learn how many don’t even have a budget. 

Employees may not understand how a 401k works or the advantages of contributing to their fund. Contributions to a 401k fund are made pre-tax and can reduce the amount of taxable income saving employees money on every dollar deposited. Employees may even go down tax bracket because of it. Not to mention that choosing not to contribute to a plan that offers employer-matching is essentially leaving money on the table. 

As an employer, you can help foster a culture of financial well-being by offering resources not just on planning for retirement, but on all aspects of personal finances. Consider hosting seminars, whether in-person or virtually, that give employees a chance to learn and ask questions, as well as providing online tools and information, so they can better understand their finances.  

Streamline enrollment 

Besides financial obstacles, an unexpected roadblock you might not have realized is your employees’ ability to actually join the retirement plan. The good news? 

There are some simple ways to streamline the enrollment process.

Shorten or eliminate waiting periods

It’s long been commonplace to have a waiting period in place before allowing new hires to contribute to their plan, but in doing so, you run the risk that paperwork for the plan gets lost, misplaced, or thrown out in the meantime. 

Consider shortening or completely doing away with waiting periods, so employees can start contributing right away. 

Assign a point of contact

In addition to making it easier to join the plan, also make sure someone is available to answer any questions employees may have. 

401ks can be complicated matters, and it’s not uncommon to feel overwhelmed by the process. Having someone available to answer even the simplest questions about retirement will encourage employees to learn how their plan works instead of throwing in the towel when things get confusing. 

Partnering with a trusted Pooled Plan Provider, like peppermint, can help bring clarity to the process for both you, as the employer, and for your employees. Talk to one of our advisors today to learn more about how we can make offering a 401k easy. 

Choose the right plan for your business

Whether you already have a retirement plan in place or are looking into offering one for your employees, it’s important to make sure you have a plan that will be the most beneficial and ensure maximum participation for you and your employees.

Seek employee input 

If you have a retirement plan in place and participation is low, it could be an indication that employees want more out of the plan than what is currently offered. Consider asking employees for direct feedback on their plan and how you can help them reach their goals for retirement. From there, you can adjust your offerings accordingly. 

Similarly, for employers looking to offer a retirement plan for the first time, getting input from employees can help determine what plan options will work best for your business.

Consider matching employee contributions

Offering employer matching is a great way to get more employees on board with joining the plan. It can be scary for employees to invest their own money, but offering to match their contributions makes it worth the risk. Otherwise, they are essentially leaving money on the table. 

There are different ways to offer matching, including through vesting plans where the employer can decide after what period of time the employee takes full ownership of the employer’s contribution. This is a great way to reward loyalty and encourage long-term retention. 

Here, at peppermint, we have several options for matching. You can go here to check out which option might work best for your business. 

Automatic enrollment

Instead of letting employees opt-in to a retirement plan, it’s becoming more and more common to have them opt out. This means that all employees will initially be automatically enrolled in the plan, and if that’s not what they would like to do, they will need to take steps to withdraw from the plan. Here’s the deal:

Having to take action to be removed from the plan causes employees to pause and consider what they are giving up and they may decide to change their mind.

An additional benefit to employers in activating automatic enrollment is the tax credit. You may be eligible for up to $1,500 over the course of three years!

Reminders to join

It’s important to keep sending out reminders to employees who are not on the plan that the option to join is still available. You never know why an employee may have initially chosen not to join. 

It could be that money was tight at the time or they were hesitant to put their money into a fund they didn’t fully understand. 

Over time, if you continue to provide your employees with information about the retirement benefits you’re offering, they may have second thoughts. In any case, it will be indispensable for them to know when and how they can join once they are ready. 


Final Thoughts

Retirement plans are a great asset for SMBs when it comes to recruitment and retention, but only if it’s one that employees actually want to use. 

Make sure the plan you choose has the right options for you and your employees to maximize participation, whether that’s offering contribution matching, selecting a more appropriate vesting schedule, opting for automatic enrollment, or all three. There are plenty of options to tailor your retirement plan to your unique needs. 

Here at peppermint, we offer three great options for a 401k retirement plan. Check out our guide to help you get started, or ask one of our experts for advice.

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