Increasing Employee 401(k) Program Participation

Case Study Investments

A private equity firm purchased two companies in the environmental services industry. The firm’s goals in this merger were to: effectively combine the processes of the two groups, consolidate overlap in C-Suite positions and the assets of their corporate headquarters, and create efficiencies in each office location, which included increasing participation in the company’s 401(k) programs. Additional goals included increasing the benefits package to increase retention while also attracting new employees, lowering the overall cost of the package.

With a very limited HR staff responsible for more than 3,000 employees in multiple locations across the country, the company was structured in a way that made communication between upper management and the main workforce difficult. These communication issues created a lack of knowledge and education when it came to the benefits package, including the retirement program, which did not encourage employees to participate in the program.

High levels of turnover among entry level employees and major changes in senior leadership only perpetuated the cycle of poor communication and low plan participation. Low participation rates also limited the personal contribution levels of the highly-compensated employees to just over two percent. The plan continued to fail the actual deferral percentage (ADP) test each year.

Summit was initially selected as one of three finalists to help develop efficiencies for merging companies as it relates to retirement plans, creating processes for both companies that could be adhered to with a single charter. What separated Summit from the other finalists was our initiative in establishing a formalized Retirement Plan Committee for the group and committee members, our emphasis in acting as a fiduciary on the plans, and the development of an investment policy statement (IPS) process. The company’s decision to move forward with Summit was the result of numerous conversations and meetings that took place over 18 months.

Summit’s Solution
After initial meetings, we found that outside consultation provided by our team should be paired with a shift in mindset from within the organization. Employees needed to see encouragement and engagement from their company leadership to feel confident about contributing money from their own paycheck into their employer-offered retirement plan. Therefore, the company added an employer match into the program.

Over the course of several meetings, Summit ran scenarios for automatic enrollment and the number of employees who opt out of auto-enroll. Summit based their responses on experience and proven industry statistics, which showed the positive effect automatic enrollment would have on overall employee participation in the plan. With the addition of automatic enrollment, participation in the plan could grow to be somewhere between 70-80%. With this information in-hand, the company:

  • Instituted an employer discretionary match of up to 4% of pay.
  • Added an automatic enrollment program which started at 4% for all employees.
  • Implemented auto escalation of up to 10% of pay, which was an annual step-up plan that added 1% each year to employees in the automatic enrollment program.

During the two-month implementation of this plan, Summit coordinated with the company and provider to ensure proper notices were sent to all employees on a timely basis. Automatic escalation occurred in conjunction with annual performance reviews so employees would be provided with a raise around the same time contributions increased.

Following the implementation of the plan, plan participation and employee retention increased. Highly compensated employees were able to begin increasing their contributions to more than 2%, C-suite executives would benefit over time and other employees will be saving more at retirement. This resulted in employees gaining a sense of confidence about their plan for retirement, and assurance from the fact that their employer had an active and engaged role in helping them save for the future.

Kaci Skidgel

President- Corporate Retirement Plans

These results are for illustrative purposes only and should not be deemed a representation of future results. Circumstances, solutions, and/or results are based on specific facts tied to unique client situations. Favorable results cannot be guaranteed even in a similar scenario. Each specific set of circumstances will differ depending on client needs and profile. Actual results may be more or may be less than those shown. Past performance does not guarantee future results. This assessment is that of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives.