Ways your 401(k) plan could do more to help middle-class employees

April 26, 2023

The passage of the 2023 Consolidated Appropriations Act, which included the provisions of SECURE 2.0, made several impactful changes and enhancements to 401(k) plans and similar employer-provided retirement plans.

That’s good news, considering many Americans struggle to achieve a financially secure retirement and plenty more can be done to improve retirement plan participation rates. According to the Department of Labor, as of March 2022, only 48% of private sector employees and 19% of state and local government workers participated in a defined contribution (DC) plan offered by their employers.1

And while 86% of state and local government employees had access to defined benefit plans, only 15% of private sector workers could say the same in 2022.1 Employee participation in DC plans hasn’t yet created widespread levels of retirement savings to convert into income streams that compare with the employer-provided pensions many private sector workers once relied on.

The U.S. Census reveals that only 34.6% of people owned 401(k) or similar DC plan accounts in 2020, and the median value of those accounts was just $30,000.2 Considering the U.S. median household income was $70,784 in 2021, it’s plain to see many Americans are not saving enough for a financially stable retirement.3

It’s fair to say in general that employees need help improving their retirement readiness — and employer-provided DC plans provide a starting point for the work at hand.

SECURE 2.0 put more tools in plan sponsors’ hands

When DC plans maximize features that eliminate barriers and incentivize saving and investing, they can be even more attractive to plan participants. Tax deferral provides an immediate benefit to participation and payroll deductions automate the process to eliminate work and decision-making steps. Employer matching funds can have a fast, visible impact on employee account balances — an effect participants can find motivating. But even these longstanding DC plan advantages haven’t yet convinced all eligible workers to participate. Adding new features and benefits could help sponsors improve plan participation and performance.

Among the many changes SECURE 2.0 will bring, several can help make an employer-provided DC plan even more effective at promoting retirement savings. Auto-enrollment and auto-escalation, for example, could help increase participation and improve plan performance while nudging individuals to save for retirement in the first place — a step they might not otherwise take on their own.

Early-career employees also have on their side the benefit of compounding over time, which can help them build retirement wealth with early contributions — even small ones. Many plans offer simplified diversification with target-date funds and similar options. And when participants terminate employment, choosing to roll over funds preserves their tax-deferred status.

Here are several questions to ask as you look for ways to help employees make effective use of your DC plan offering:

1. Are all eligible employees aware of your retirement benefit offering?

Not all employers offer retirement benefits, and awareness is an important first step toward improving participation and plan performance. What do you do when employees become plan-eligible to inform them of the steps they need to take to start participating?

2. Are your lowest-paid employees earning enough to save?

High inflation impacts lower-earning households more, since they spend a larger proportion of their income on essentials like rent, food, medical care and utilities. By share of budget, lower income households face higher rates of inflation.4 How has high inflation affected your lower-wage employees?

3. Are auto-enrollment and auto-escalation a fit for your plan and people?

Auto-enrollment changes plan participation from an opt-in model to an opt-out decision, so by default, eligible employees become participants unless they make an active choice not to. Similarly, auto-escalation can help increase employee plan contributions in a way they may be less likely to “feel.”

4. Could you do more to educate employees about saving for retirement?

Not everyone shares the same financial literacy level, and when concepts such as deferral, compounding and diversification aren’t well understood, plan participants may miss out on important opportunities to improve their retirement security. And that’s just the tip of the financial education iceberg. When individuals improve their overall financial wellness, they may become able to divert more of today’s income toward their retirement.

Along those same lines, do your older employees know about increases to catch-up contribution limits? When plan participants terminate employment, are they informed of their rollover options?

5. Do plan fees need a second look?

As a plan fiduciary, it’s your responsibility to make sure fees are reasonable, and to disclose the information to participants. Even a high standard of diligence can leave you looking at a range of fees that fall within the definition of “reasonable.” Given market volatility and high inflation, employees can use all the care they can get to ensure that plan fees don’t impede their retirement accounts’ growth.

6. Should you start talking about emergency savings accounts?

Starting in 2024, employers can begin offering emergency savings accounts as a component of their retirement plan. Currently, nearly a quarter of U.S. consumers have no emergency savings and 39% have less than a month’s income set aside for emergencies.5 Yet having emergency funds on hand could help plan participants avoid the costs and risks associated with borrowing from their retirement accounts.

7. Could you help address employees’ student debt?

Also in 2024, employers may choose to apply 401(k) matching contributions to participants’ student loan payments. It may be worth a conversation and a close look at participant demographics to determine whether to add the offering to your plan.

8. Do your plan’s investment options appeal to diverse employee interests?

It can be challenging to construct a plan that offers “something for everyone,” but your advisor and plan provider are here to help. A wider array of investment options like target date funds, managed funds and ESG investments can help appeal to a broader range of participants’ interests.

9. Could your employees benefit from in-person financial coaching opportunities?

Financial education should be offered in a wide variety of mediums — and occasional in-person, one-on-one coaching sessions can be just the impetus some employees need to start participating, to increase their contributions or to reevaluate investment allocations. And amid volatility, increasing interest rates and high rates of inflation, employees may perceive the offer as a gesture of concern and caring about their financial wellbeing.

Reach out to our team to learn more about plan options and their potential implications on participation and plan performance. We’re here to help.

1BLS.gov, How do retirement plans for private industry and state and local government workers compare? January 10, 2023.
2Census.gov, New Data Reveal Inequality in Retirement Account Ownership, August 31, 2022.
3Census.gov, Income in the United States: 2021, September 13, 2022.
4BLS.gov, Inflation Experiences for Lower and Higher Income Households, December 2022.
5Consumer Financial Protection Bureau, Emergency Savings and Financial Security, March 2022.