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How can we increase employee savings in our 401(k) plan?
This question comes from a benefit manager of an organization that sponsors a 401(k) plan that provides a 25% match on pretax contributions up to 6% of pay. Two-thirds of the employees participate in the plan, and the average employee savings rate is about 4% of pay.
Senior management of the organization is concerned that some baby boomers will not have sufficient financial resources to retire. Their actuary has projected the retirement income under defined benefit and defined contribution plans and Social Security and has found that at current savings rates, only one-third of the workforce will have sufficient income to retire at age 65. Management is concerned that ultimately the company will be pressured by employees for significant benefit improvements in the defined benefit plan.
The benefit manager has been asked to recommend a cost-effective plan to increase employee savings in the 401(k) plan. She is contemplating a recommendation for improved employee communications regarding the plan but is skeptical communications really will boost savings. The company currently only communicates account balance information to employees through periodic statements. The alternative recommendation being considered is a modest increase in the level of match, perhaps to 50%.
Watson Wyatt has studied the impact of employee communications on 401(k) plan participation and savings rates and has found that targeted employee communications will motivate employees to save at a much higher rate. Furthermore, the study found that targeted communications and a dollar-for-dollar match will produce about the same employee participation and savings rates.
The study looked in detail at the 401(k) plans of 15 U.S. companies, ranging in size from 700 employees to 10,000 employees.
To find out what factors drive employee savings and participation rates, the study looked at several variables:
Age and salary level of employees.
Employer match rate.
The level of other company provided pensions.
The quality of employee communications.
With regard to employee communications, the study classified them into three levels.
The first level of communication consisted of only distributing plan enrollment forms and required periodic statements of account balances. All plans in the study provided this level of communication.
The second level of communication provided workers with generic newsletters related to 401(k) plan participation. These statements typically discussed current financial trends and personal investment strategies.
The third level of communication involves sending workers materials specifically tailored to the company's 401(k) plan. These materials generally give more detailed information about the employer-sponsored 401(k) plan and may even suggest appropriate savings levels, given the 401(k) plan, Social Security and any defined benefit plans.
The data on these 15 plans then was used to construct a multivariate model of participation and savings rates in 401(k) plans. Two of the more interesting results from the model are shown as Figure 1 and Figure 2. Figure 1 shows the expected participation rate in a 401(k) plan by employee pay level for three plans. Two plans have only the first level of employee communications, one with a 25% match and the other with a 100% match. As you would expect, participation in the plan with 100% match is higher.
Figure 1 also shows a plan with a 25% match but with all three levels of communication. The startling result is that this plan's participation rates are almost identical to the plan with 100% match.
Figure 2 shows similar results for employee savings rates. The plan with a 100% match and only level one communications has virtually the same savings rate as the plan with a 25% match and all three levels of communications.
The takeaway for the benefits manager is straightforward. The word can be mightier than the match. Targeted employee communications can produce employee behaviors similar to a high match and are much more cost-effective than the higher match.
Free copies of the study are available from Watson Wyatt; call 800-243-1349.
Would you like advice from an experienced colleague on a risk management, benefits management or actuarial problem? Four quarterly features in the Perspective section of Business Insurance can give you some answers.
Ask A Casualty Actuary, Ask A Benefit Actuary, Ask A Benefit Manager and Ask A Risk Manager answer written questions from readers on risk and benefits management issues and actuarial problems.
This month's column on actuarial issues in the benefits field is written by William J. Miner, an actuary with Watson Wyatt Worldwide in Chicago. Richard E. Sherman, president of Richard E. Sherman & Associates Inc. in Ashland, Ore., answers actuarial questions in the casualty field. Christopher E. Mandel, director of risk management for KFC Corp. in Louisville, Ky., answers questions on risk management. Dennis J. Nirtaut, managing director of compensation and benefits for Andersen Worldwide S.C. in Chicago, answers questions on employee benefit plans.
Address your questions to ASK, Business Insurance, 740 N. Rush St., Chicago, Ill. 60611. Please give us your name, title and employer; however, Business Insurance will consider unsigned letters.