Hickock & Boardman Retirement Solutions

Increase 401(k) Knowledge and Participation with Ongoing Communication

Fri, 11/14/2014 - 10:33 -- Shaun.King

You know 401(k) plans are essential to future retirement goals, but do you communicate regularly with your employees about the necessity and the benefits? While industry predictions vary, most studies show the average person needs to save 60 to 80 percent of their pre-retirement income for future retirement. 

Social Security benefits can cover a portion of this need, but the dollars are not enough. Yet, when the benefits are combined with a 30-year 401(k) plan, employees can potentially meet this goal, according to EBRI (Employee Benefit Research Institute). EBRI’s recent study shows: “participation in a retirement plan mattered: 90 percent of workers participating in a retirement plan had saved for retirement, compared with just 1 in 5 of those without a retirement plan.” (Check out more thoughts on retirement readiness in this recent NAPA Net article.) 

One of the best ways you can help your employees understand the benefits of retirement plans is with ongoing communication. This means going beyond the enrolment period, by offering consistent and useful information throughout the year. The truth is many employees don’t know or fully understand all the benefits of their 401(k) and the enrolment window is not always long enough for people to grasp the concepts and ask good questions. 

Consider providing monthly or quarterly tips to broaden your retirement plan communication. Here are four key benefits every employee should know, but may not realize: 

1. Power of compound interest 

  • Compound interest means interest on the principal contributions plus interest on the interest.
  • The greater the 401(k) contribution and principal, the greater the interest and the greater the long term account balance. 

2. Dollar cost averaging 

  • Stock market fluctuations can make saving difficult for many. 401(k) plans with dollar cost averaging remove the guess work and stress by making automatic adjustments. When stock prices are high contributions buy fewer shares, and when prices are low contributions buy more shares.

3. Tax breaks 

  • 401(k) contributions are not included in gross income, thereby lowering taxable income.
  • 401(k) earnings are not taxable until a withdrawal takes place.
  • Upon retirement, 401(k) withdrawals are taxed at a person’s current income level, which will be a lower tax rate. 

4. Portability and accessibility options 

  • If a participant leaves the company, 401(k) contributions can be rolled into another 401(k) plan or an IRA, keeping retirement savings tax-deferred.
  • In an emergency, participants can access their 401(k) funds (but there will be penalties and tax implications).

Sound plan communication and education are two of the most effective ways to bridge the gap between engaged and non-engaged participants. The bottom line is the more educated participants are about their retirement plan benefits and features, the more likely they are to utilize the plan to its full potential. You can help by reviewing your participant program and look for ways to supplement your current communication. Ensure you communicate plan benefits and features on a regular basis. If you’re not sure about your options, ask your 401(k) team for an overview of the types of education, tools, programs and support your retirement plan provider offers.