Guest Blog: Employers Need a More Hands-On Approach With Their 401(k)


For too many employers, setting up a 401(k) is the end of their involvement in their employees’ financial health. This shortsighted approach may affect your employees’ retirement readiness and also your bottom line.

Retirement is changing. Past generations funded their retirement through savings, but also through pensions, Social Security benefits, and the equity built up in their homes.

That three-legged stool is not so steady now. Pensions are nearly extinct. Social Security is not as stable as once thought and doesn’t kick-in fully until age 66. And that home that may have been paid off may no longer fetch a tidy nest egg.

The onus has fallen upon individuals to save for their retirements. If they don’t save enough, they have to continue to work. That can be a problem for employers.  

Older employees who are working because they have to, not because they want to, can be a drain on benefits and morale. According to Merrill Lynch’s recent Work in Retirement study, 43 percent of retirees who have to work are not satisfied with their job. Disengaged employees have lower productivity and may be less innovative.

One of the problems in the workforce is that employees were not prepared for retirement. The tact “set it and forget it” when it comes to a 401(k) will no longer cut it. Employers should help prepare their employees for retirement.

That preparation will be driven by how the fund is designed and the message you send to your employees.

There are three key goals that employers should strive for when setting up a 401(k) —getting employees in the plan, increasing company contributions, and engaging employees in their financial health. To achieve these goals, employers can:

1.     Implement auto enrollment. About 75 percent of those eligible participate in a 401(k). That can be increased with auto enrollment. When employers implement auto enrollment, where employees have to opt-out of the plan, 97 percent stay in it. This doesn’t have to be for new employees only; you also can auto-enroll existing employees.

2.     Have employees increase their deferral rate. One way to do this is to automatically increase the deferral rate. For example, every year the rate of contributions goes up 1 percent until it reaches a maximum — say 18 percent.

Another tactic is to redesign the employer match. The typical employer match to 401(k) is 50 percent on the first 6 percent of employee contributions. In other words, employers contribute 50 cents for every dollar up to a maximum of 6 percent of employees’ contributions. So the employer’s contribution is 3 percent. In this set-up, employees had to stay at 6 percent to get the full match, which brings them to personal savings of 9 percent. But what if it is set up so that employers contribute 25 cents on the dollar up to 12 percent? Now we are deferring 15 percent of your money. The employer is still contributing 3 percent — so there is no increased business cost — but the employee is now deferring more of their own money to get 100 percent of the match.

3.     Provide employees with vetted financial advice. Whether it is a financial adviser who comes in to do a lunch-and-learn or an online program, employee education and communication is key. Many people don’t have access to sound financial advice and it is something you do to help your employees.

Overall, as an employer, the message you are sending to your employees is that you are interested in their financial health.

Marie Vanerian is a senior vice president at Merrill Lynch in Troy. She works with defined benefit and defined contribution retirement plans, foundations, endowments, religious organizations, and private family offices in providing institutional consulting services.