Why Are Many Workers Missing Out on Their Employer’s Defined Contribution Matching Monies?

Friday, November 30, 2012

PLANSPONSOR's annual 2012 Defined Contribution Survey, “Looking to the Stars” reports that upwards of 27% of eligible employees do not participate in their employer’s defined contribution plan and a third do not receive the full employer matching monies available to them.  As part of an organization’s total reward system, defined contribution plans such as 401(k), 403(b), and 457 constitute a significant financial and organizational commitment by an employer to its workforce.  For over a quarter of eligible employees to fail to take full advantage of such benefits certainly has a personal financial impact on the employee’s future retirement plans.  However, let’s not lose sight of why employers have implemented such plans, competition to attract, retain, and motivate the talent which drives their enterprise.

I have stood up in front of large and small groups of employees in an effort to communicate the value of defined contribution plans.  I have emphasized the dual concepts of employee self-control and direction.  I have used phases like, “It’s Free Money”, referring to the employer’s match.  I have used examples of starting out with small contribution percentages and upping that contribution rate over time.  I have displayed the charts and graphs which tells the story of how money grows over time.  I have explained how Social Security was never meant to be a stand-alone retirement system.  I have discussed the roles of public and employer sponsored plans, and private savings.  Yet contribution and participation rates generally remain low.

Low contribution and participation rates are concerns for employers, governments, regulatory agencies, and employee advocacy groups.  Governments and regulatory agencies have responded with automatic enrollment safe harbors, employers have responded by taking up those features, and advocacy groups have lobbied for more communications and disclosures.  The Profit Sharing/401(k) Council of America  is now reporting that as many as 54% of employers have adopted automatic enrollment.

Brigitte C. Madrian, Aetna Professor of Public Policy at the Harvard John F. Kennedy School of Government, argued in a July 2012 paper that a defined contribution plan’s matching threshold was a greater contributor to participation and contribution percentages than a higher matching rate.  Madrian also maintains that non-financial features such as “automatic enrollment, simplification, planning aids, reminders, and commitment features” produce higher rates of participation and contribution than financial incentives, and at lower costs.

At least when comes to defined contribution plan participation and contribution, Economic Man turns out to be his own worst enemy in his efforts to save for retirement.  So, if increased financial rewards will not persuade a quarter of eligible employees to take full advantage of their defined contribution plan, how do we proceed?  Targeted communications focused on segments of the workforce and product branding.  As we would segment and target any consumer market in an effort to promote a “brand” product, consider the same approach for workers.  As with most things today, one size does not fit all.  The same is true for marketing and branding employee benefits, including defined contribution savings plans.  Thus, the old adage holds true: communicate, Communicate, COMMUNICATE!