Turbocharge 401(k) Participation: Two Smart Strategies for Advisors to Turbocharge Retirement Plans

Two Resources, Two Effective Tactics, Two Essential Steps

By Vestwell Staff

Meet Allison. At 24, she is a second year auditor in the Boston office of a regional consulting firm. When Allison joined the firm, she sat in a room with 40 fellow recruits to listen to a mandatory presentation about the firm’s benefit package. Squeezed between inventory training and the happy hour, that session was a blur of legalese. How was she supposed to pick the right funds if they all looked the same? On her way out the door, Allison tossed the thick 401(k) paperwork package into her desk drawer. That’s where it still sits, two years later.

Robert, the IT support team leader with an office a few doors down from Allison’s desk, has his own retirement worries. Robert is a baby boomer, and fears of being unable to retire are looming large on his radar. He is a well-respected professional with a long, successful career, yet his contributions to the company’s 401(k) plan have always been just the bare minimum. While Robert worries about his lifestyle in retirement, without a clear understanding of his investment options or tools to make intelligent decisions, he struggles to find the motivation to invest more.

Allison and Robert are not alone. According to the Bureau of Labor Statistics, 55% of the American workforce has access to a 401(k) plan, yet only 38% of them choose to participate. And it is not only Millennials that are not adding to their savings. Half of baby boomers, many of whom are already past their peak earning years, have retirement savings of less than $100,000.

We believe that a major source of this problem is the way that retirement plan options are presented to employees.

Many employees just like Allison and Robert are discouraged from enrolling in their company’s 401(k) plan or using it to its full advantage. Common obstacles include the cumbersome onboarding processes, confusing investment fund options, cryptic language and intimidating systems.

It does not have to be this way.

At Vestwell, we envision a future where companies can rely on retirement planning advisors to offer a new generation of plans.

Here is what the future looks like.

Retirement Plans Must Offer Customized Solutions

The problem with traditional 401(k) plans is that employees are limited by poor choices when it comes to fund options. Many 401(k) offerings have excessive costs, poor performing funds and not enough diversification opportunities to allow investors to properly manage risk. Put bluntly, these “off the shelf” product offerings force employees into portfolios that are just not good enough.

Then there is the lack of independence. Too many 401(k) plans still lock employees into proprietary funds. This practice dates back to the early 1990’s when many of the 401(k) platforms were offered through large mutual fund companies. At the time, investment options were limited to the affiliate’s funds in part because the record keeping technology did not allow a broader spectrum of investment products. Technology has since advanced, but many providers remain stuck in the past.

The solution is clear. Plan sponsors need a modern platform that will allow them to offer a wide range of independent investment options. Otherwise, underperforming and poorly managed funds will continue to limit the potential of plan participants to save enough for retirement.

Streamlined Onboarding and Plan Maintenance Are Key

Pensions were once the gold standard of retirement planning. A guarantee of retirement income was provided in exchange for years of service. Today’s 401(k) participation is anything but automatic. Employees must complete numerous paper forms and read through hundreds of pages of boilerplate disclosures. The convoluted enrollment process, combined with complex terminology, means that many employees fail to opt into their company’s 401(k) plan participation out of sheer confusion.

But it is not just employees who are exasperated and confused by the status quo.

The first 401(k) plans were launched back in 1982, yet the volume of paperwork that plan sponsors have to deal with has only increased. They also have to manually track enrollment status and participant changes and there is a stubborn lack of visibility into the fee structure of funds, which makes it difficult to compare costs across providers.

The maintenance of a 401(k) plan has become a full-time job for sponsors and the results (measured by plan participation and fund returns) leave much to be desired.

What would it take to turn 401(k) plans into the valuable engine for retirement savings that they were intended to be? We believe that the answer lies in maximizing the use of technology. If vendors and partners could automate the time-consuming and error-prone processes of enrollment, account maintenance and reporting, plan management would become much easier. Adapting the design of the plan to fit the changing needs of the plan sponsor should take a few clicks, not dozens of forms and weeks of waiting.

The benefits of automation should also extend to plan participants. Vestwell’s research shows that companies with automatic 401(k) enrollment can double employee participation rates. Other surveys have shown that employees with automated enrollment begin saving for retirement earlier. They also report that saving for retirement is easier. A strong 401(k) savings plan can go a long way towards retaining valued employees, recruiting new promising talent and creating better retirement outcomes.

Tips for advisors to turbocharge retirement plans

The current state of retirement savings enrollment is costly, cumbersome and confusing. If your company’s retirement plan participation statistics are disappointingly low, maybe it is time for a new approach. The 401(k) may not be the magical cure, but when used correctly it can be a powerful tool for creating peace of mind in your employee’s retirement.

Contact us at info@vestwell.com for more information about turning your 401(k) offering into a benefit that is easy to administer and manage.