The Effects of Cost-Optimizing Your 401(k) Plan For Higher Participation and Employee Engagement

Do you know what percentage of Americans on average were enrolled in a 401(k) in 2019?

Only 38%

Indeed, some jobs do not offer retirement savings, but many of the remaining 68% are American workers actively deciding not to take part in their provider’s 401(k). One of the culprits for this low enrollment rate is over-inflated 401(k) fees which eat away the investment returns.

According to Tony Robbins, these unnecessary fees are known to reduce long-term investment returns by as much as 60%, making saving for retirement both intimidating and difficult. When employees opt out of their 401(k) plan, they’re less engaged with their employer and have a higher probability of job-hopping.

But what if you could cut the unnecessary fees and improve your employee’s financial health? In this article, we’re going to look at what cutting these costs looks like and the positive effects doing so has for both your workers and your bottom line.

Trends towards greater savings

The good news is that you don’t have to blaze a new trail here. Many companies have already begun optimizing their 401(k)’s by eliminating unnecessary fees using proven methods. 

So what do these cost-optimized plans look like? 

A 2019 survey report by Callan, a plan services firm, found that while many companies still kept their 401(k) fee structure the same after initial review, nearly 30% took steps to reduce costs by negotiating or changing service providers. They found that 28% of employers covered administrative fees by themselves, while 39% split the costs between the plan sponsor and their participants. 

Employers can also choose to match 401(k) contributions, and the share of sponsors that altered their company match policy increased from 2% to 22% between 2017 and 2018. These structural changes are more than just trends, and will likely continue. Employees want to get a good return on their investment, and a cost-optimized 401(k) plan is much more enticing than a conventional plan serviced by a commission-based sales rep.

So offering a better 401(k) plan will make investing for retirement more attractive for your workforce. This is great, but where does it leave your bottom line?

How cost-optimized 401(k) plans affect employers

A top-of-the-class 401(k) plan is significantly correlated with higher revenue and improved profitability for companies. 

In 2018, T. Rowe Price found that companies with high-performance 401(k) plans have 20% to 80% higher corporate profitability than companies with average plans. Conversely, companies with underperforming 401(k) plan typically have 80% lower corporate profitability than companies with even just average plans. 

Studies have also found that facilitating larger 401(k) plans help lower overall costs, as the average total plan costs as a percentage of assets for large retirement plans were .93% compared to 1.24% for smaller retirement plans. 

For modern employees, the idea of being financially stable after retirement is an attractive one, which incentivizes them to participate in their company’s 401(k) plan. Facilitating a proper 401(k) plan will not only incentivize current employees to take part but also lure more applicants to your company while keeping retention rates high. 

Workers take comfort in knowing that their employer has programs in place to secure their financial future, and companies have an incentive to grow their retirement plans to decrease overall costs. 

If you would like to craft the ideal 401(k) plan for your company or pursue other employee financial-wellness initiatives, click here to learn more.