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Participation: The First Step to Unlocking Your 401(k)’s Potential

While 401(k) plans can be a key component of your employees’ retirement savings, they only work if employees participate in your plan.  Indeed, a Vanguard paper on this topic found that participation and savings rates were the primary determinants of 401(k) savers’ success, trumping investment returns and fees.  Unfortunately, too many employees who are eligible for corporate retirement plans still are not taking advantage of this benefit.

According to the Department of Labor there were more than 560,000 401(k) type plans in the U.S. as of 2016, the latest data available, with more than 82 million participants accumulating $4.7 trillion in assets.  Those may sound like big numbers, but they need to be as the retirement income burden on individual savers continues to grow.


The first step to promoting participating is to ensure access.  The Bureau of Labor Statistics (BLS) conducted a survey of retirement benefits in 2017, which found that 62% of workers had access to a defined contribution plan.  For firms with less than 100 employees, only 50% had access to a retirement plan.  While contributing to a self-directed IRA is still an option for those without work-based plans, the convenience of the inertia of payroll-deduction is hard to replicate with other retirement plan structures.

Participation Rate

The BLS survey also broke down participation statistics.  Of those employees with access to a defined contribution plan, 72% of them chose to participate.  Isolating just part-time workers or the lowest wage earners dropped the participation rate to 53% and 50%, respectively.  Other studies that focus more on large plans, where wages may be higher and/or plan features may encourage participation, report participation rates to be in the mid-80% range.  Nevertheless, there is room for improvement across the board to encourage eligible employees to take advantage of what a 401(k) plan can provide.

Contribution Rate

According to an in-house study conducted by the Vanguard Group the average salary deferral for defined contribution participants was 6.8% in 2017.  Adding in employer contributions brought the total average contribution rate to 10.3%, roughly in line with where it’s been over the past 15-years.  The average and median account balances were $103,866 and $26,331, respectively, across all participants.  Ensuring continued saving through education and auto-enrollment and auto-escalation features can help increase the odds that employees will meet their retirement savings goals.

There’s no silver bullet to preparing your employees for retirement, but benchmarking and understanding your plan’s participation and contribution rates can be a good start to identifying areas for improvement.  Considering additional plan features can also help.  Even seemingly small measures can make a big difference in retirement savings, particularly if good habits are instilled early to enjoy the benefits of long-term compounding.

Sources: United States Department of Labor: Private Pension Plan Bulletin – Abstract of 2016 Form 5500 Annual Report; United States Bureau of Labor Statistics: Employee Benefits Survey – Retirement Benefits: Access, participation, and take-up rates, March 2017; Vanguard: How America Saves 2018 – Vanguard 2017 Defined Contribution Plan Data