Five Ways to Increase Retirement Plan Participation Among Millennials

Millennials — loosely defined as those born between 1981 and 1996 — are quickly becoming the largest generation, slated to surpass Baby Boomers later this year. But unlike Boomers, many of whom are exiting the workforce with the proverbial three-legged retirement stool at their disposal (i.e. defined benefit plan, defined contribution and personal savings, and Social Security), the majority of Millennials haven’t saved a penny for retirement and likely do not have a pension plan, which makes it critical for plan sponsors to make efforts to increase millennial participation.

However, this may not be cause for alarm yet—after all, the youngest Millennials are only 22 years old. However, if this trend continues, this generation could find itself in a bind in another decade or two as retirement begins looming, reducing the benefits of time and compounding, and pensions become less common. The trick to getting your workforce’s youngest members to begin contributing to a retirement plan in earnest lies in just a few key principles. Read on for five ways plan sponsors can increase retirement plan participation rates among their Millennial employees.

1) Offer a Match

One of the easiest ways to encourage participation in a retirement plan is to offer a match—and to make sure your employees know that failure to contribute to at least the match level means leaving additional compensation on the table.  A match in combination with an auto enrollment process is an even stronger way of increasing participation levels.

Many employers will match employee contributions dollar-for-dollar up to a certain percent, doubling the total amount the employee contributes to retirement while generating a deductible business expense. As an alternative, or to encourage an even higher savings rate, employers may opt to stagger the match—for example, offering a 100% match up to three percent and then a 50% match from three to ten percent. And certain business structures can benefit the most from offering profit-sharing, generating an annual deposit into each employee’s retirement account.

By ensuring that even the smallest contribution receives a match, you’ll encourage participation from employees who might otherwise not be able to set any funds aside.

2) Illustrate the Power of Compound Interest

When it comes to generating a hefty retirement nest egg, compound interest and time have far more of an impact than the amount invested. Someone who puts aside $1,000 per month from age 25 to 35 (at 7% annual return rate) will have more than $1.4 million by age 65, whereas someone who sets aside the same amount from age 45 to 55 will end up with just a hair under $375,000 at age 65.

Young employees should know that getting an early start on savings, even if they can’t save much, can exponentially increase their future retirement balance.

3) Make Eligibility and Portability Easy

Many younger workers aren’t overly focused on retirement to begin with. Forcing them to jump through multiple hoops to enroll in a workplace retirement account or to vest in their “match” funds can often shut them out of the process entirely. Whereas long vesting periods were once the norm, more and more companies are moving toward a shorter vesting period to widen the net of employee plan participants. In addition, allowing part-time employees to contribute to a retirement plan can also significantly increase your plan participation rate.

4) Highlight Tax Advantages of Saving

Putting aside funds in a 401(k), Health Savings Account, or another pre-tax account will often have a modest impact on an employee’s paycheck. Because these tax-advantaged contributions aren’t subject to federal and state income taxes or FICA taxes, the reduction in an employee’s taxable income (and, therefore, a reduction in the tax withheld) can largely offset the additional investment amount withheld.

Meanwhile, employees who invest in a Roth 401(k) or Roth IRA on an after-tax basis may see more of a paycheck reduction but will enjoy the hard-to-beat benefit of tax-free growth. It’s impossible to predict future tax rates, so having both pre- and post-tax retirement accounts can provide workers with a hedge against uncertainty.

5) Lower Fees, Increase Returns

The real-life math problems used to demonstrate the power of compound interest all depend on achieving a certain rate of return. Each percentage point paid in plan fees takes a bite out of an investor’s return, and an investment account that earns five percent per year and assesses a one or two percent management fee isn’t likely to even outpace inflation over time. Offering an array of low-fee plans can boost participation and encourage employees to continue contributing as they watch their balances rise over time.

Take the Next Step

If you are ready to consider ways to enhance participation in the retirement plan you offer to employees, PlanPILOT can help. As an independent Registered Investment Advisor, PlanPILOT is not tied to any investment fund or recordkeeper. We offer plan sponsors unbiased assistance to control their retirement plan risks and deliver benefits effectively. Plan sponsors also rely on us to review fund lineups and provide scorecards of investments, highlighting any changes recommended. Feel free to contact us at (312) 973-4911 if you would like to learn how PlanPILOT can help with your retirement plan and plan participants.

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