Many companies offer a 401(k) plan as part of a benefits package to lure talent to their organization, but generating employee participation from lower-income and entry-level employees is not always easy.
There are two primary challenges to overcome when encouraging lower-income employees to save for retirement. First, any money taken out of someone’s paycheck for tomorrow is taking money out of their pocket today. Saving for retirement can be challenging for those who are just starting out, trying to pay off student loans, or saving for a home. Any deduction in net pay is felt by lower-income employees and working parents who need every dollar for diapers, clothes, pediatrician visits, daycare, etc.
And second, entry-level employees are typically younger and further from retirement than professionals established in their careers, so why would they consider retirement? But the longer someone waits to save for retirement, the more difficult it will be in the future.
IMA People Analytics found the biggest factor to employees contributing to their 401(k) plans is their salaries.
- All employees: 71%
- $0-$50k employees: 63%
- $50k-$100k: 76%
- $100k+: 86%
Unfortunately, entry-level and lower-income positions are less likely to take advantage of a company’s 401(k) plan than workers making more than $100,000 a year, but it’s these early years that are pivotal to retirement savings.
This poses an interesting challenge for HR and management – how does leadership encourage lower-salaried workers to join a 401(k) plan? To help, here are three strategies to inspire entry-level employees to contribute to your company’s 401(k).
1. Provide Education – What Is a 401(k) and How Does It Work?
Not everybody knows how 401(k) plans work and why they’re important. Educating your team on these points is the first step to increasing enrollment. After all, why would someone sign up for something when they don’t know what it is?
A 401(k) is a retirement savings plan offered by one’s employer. When an employee joins their employer’s 401(k) plan, they can choose the percentage of their paycheck they’d like taken out every pay period and invested in the market, usually mutual funds. Employees can choose the investment option that meets their needs and risk tolerance.
2. Offer a Financial Wellness Program
Offering a financial wellness program at your company to educate employees on the importance of saving for retirement and the basics of 401(k) plans is the first place to start. Showing someone what their 401(k) could be worth at retirement will demonstrate what investing now can mean in the long run.
Quick tip – When an entry-level or lower-salaried employee signs up for your company’s 401(k), suggest a contribution rate below 10% at the outset but with the strategy of increasing the contribution rate by one percent each year. This will help them start the habit of saving.
When designing a financial wellness program at your company, consider the following common questions around 401(k) plans and retirement savings.
What’s My Ideal Contribution Rate?
Perhaps the most common question when saving for retirement is, “How much should I be saving for retirement?” The typical strategy is to save 15% of your total gross monthly income. And remember, the total gross monthly income is the amount paid before taxes, and other deductions (health insurance benefits) are taken from your paycheck.
Keep in mind this is a general rule of thumb and not a one-size-fits-all approach to retirement planning. It’s important for everybody to consider their situation and goals when planning for retirement. Consider working with a financial advisor to determine your ideal contribution rate.
How Does a 401(k) Make Money?
When an employee signs up for a 401(k) plan, a percentage of their paycheck is removed and invested in the plan. Immediately, this is forced savings because it’s money that can’t be spent. But the money is not put into a low-interest savings account as you’d find at a bank. The money is invested in the stock market by buying mutual fund shares.
Mutual funds typically pay quarterly dividends, which means that for every share someone owns, they receive a payout. That payout is then reinvested in the fund by purchasing more shares. As employees buy more shares with every paycheck deduction, these dividend payouts increase in size and buying power. This is the magic of compounding. While it’s slow to build at the start, the more shares someone has, the more dividends they’ll receive and the greater their retirement portfolio will become.
What is Company Match
The other way 401(k) plans make money is with company match. Matching 401(k) contributions are additional contributions made by one’s employer. Many businesses will contribute to their employee’s 401(k) plans because it is a tax deduction for the business, and it is an attractive benefit. Matching contributions from an employer is typically a percentage of what the employee contributes. Employees are encouraged to take the full match because this is free money and can dramatically assist compounding.
When employers offer a company match plan, it’s often discussed in percentages, but showing people actual dollar amounts helps employees understand the value. For instance, a common example is a 50% match up to 6% of an employee’s salary. In this example, employees earning $60,000 annually are eligible for 6% of their salary, which is $3,600, to be matched. For every dollar this employee contributes, the employer will contribute $.50 up to $3,600. That’s $3,600 an employee wouldn’t have without the match.
What Happens to My 401(k) When I Switch Jobs?
Some workers, especially those starting their careers in entry-level and low-income positions, may be hesitant to join a 401(k) program because they don’t intend to spend their professional years at a given company, not understanding that 401(k) savings can travel with you from job to job.
Employees often think they’re investing their money in the company or their investments are tied to the job. In reality, the money is invested in the stock market. When employees change jobs, their investments can be transferred to a private brokerage company, such as Fidelity or TD Ameritrade, or rolled over into the 401(k) plan at their new job so they don’t lose the power of compounding.
3. Adjust Company Match Rates to Favor Low-income Participation
After you’ve started a financial wellness program at your company and begun educating your team on 401(k) plans and retirement savings strategies, look at the company match program at your organization. For starters, does your company offer a company match? If not, starting a match program with generous contributions is a great way to encourage enrollment.
If your company already offers a company match, how is it structured? Is it the same policy for everybody? If so, consider offering a higher percentage match to lower-income workers. Since their paycheck is less than your top salaried positions, the money matched still won’t be as large as the smaller percentage paid to your top earners.
When people enter a bar or restaurant and see a wall of options, it’s common for someone to order the house red because the wine list is intimidating. People hesitate to ask questions or try new things because they fear making mistakes or looking foolish. The same insecurity exists when discussing saving for retirement, company match, and 401(k) – these terms can be confusing and shrouded in mystery.
The best way to encourage your team members to participate in your company’s 401(k) plan is to demystify it. By offering a financial wellness program, where concepts are explained and discussed simply, you can encourage workers of all levels and financial backgrounds to set themselves up for success in retirement.