Minor 401(k) design changes can have a major impact

Most experts agree that workers should be contributing at least 10% of their paychecks to their 401(k) plan. But if the majority of your employees fall well short of that mark, you’re not alone.

The good news is that a few minor changes to your 401(k) plan’s design can really bolster workers’ savings.

A more effective starting point

While there’s no doubt auto-enrollment is an effective way to get people enrolled in a 401(k) plan, it’s also part of the problem in many cases.

Reason: Once workers’ are signed up, many tend to stick to the default rate the plan enrolls them at, which is usually just 3%.

And because the default rate is something that was ultimately set by the employer, many employees are under the impression that this rate is a sufficient amount to contribute to the plan and retire comfortably.

Since it’s already been determined — in countless retirement studies — that many workers will stick to the default rate, it makes sense to consider bumping up that default rate.

To what percentage? Of course, there are a number of factors to consider here. But Dallas Salisbury, the CEO of Employee Benefit Retirement Institute (EBRI), suggests a 6% default rate is a good place to start when auto-enrolling workers in a 401(k).

Restructuring the employer match

The company match is another area where slight design changes can really help to maximize workers’ retirement savings.

The most common 401(k) match companies offer: 50% on the dollar up to 6% of an employer’s contribution.

But again, a little experimentation can go along way with this plan feature.

Here’s another way to structure your match to drive greater employee participation:

• Match employees 100% on the first 1% of their contributions
• Match 50% on the dollar for the next 5% of deferrals, and
• Offer a 4% non-elective employer contribution to set up a base or “floor,” for workers.