How to Increase Participation in a 401(k) Plan Among a Young Workforce

Here’s a known issue, at least in my experience: Most 27-year-olds can’t be bothered to save in their 401(k), unless you bribe them with a 401(k) match. “No match, don’t bother me.”

Rather than give up on 401(k) participation among 27-year-olds, let’s think through what would make it “inevitable” that they save. The first step to increasing participation in a 401(k) plan involves analyzing this as a sales problem.

Sales Obstacle #1: We insist on selling 401(k)’s to 27-year-olds as a retirement vehicle.

If they retire at 70, they’ll retire in the year …. 2052. For most 27-year-olds I’ve worked with, “2052” is just not relevant – yet. 2052 as the focus? No sale.

Solution: Sell the 401(k) plan as a savings vehicle to 27-year-olds in a way that is compelling to them.

HR Role in 401(k) Participation – Selling the 401(k) Plan

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How do you make a retirement tool appeal to young folks? Okay, this may sound like sacrilege, but don’t sell a 401(k) plan as a retirement savings vehicle. It clearly doesn’t work for most.

What’s the alternative? Get the 27-year-old interested in the 401(k) as a vehicle to save for when they’ll need it most: when their paycheck stops.

Here’s an approach I use with a young audience:

“Use the 401(k) as insurance against the time when your paycheck stops. Sometimes it stops for a good reason, like you’re going back to grad school or moving to Albuquerque to start your own business. And even, truth stranger than fiction, retirement in 2052. And also, sometimes your paycheck stops for a not so good reason, like you’re laid off due to the economy or a merger or disability, etc. The point is, you’ll have savings – that you will not have spent – for the times when you need them most. Right now, where else are you doing that saving?”

Sales obstacle #2: We insist on selling 401(k)’s to 27-year-olds by trying to sell “features.”

You may remember from a sales class or seminar, features describe what a product is or does. Benefits describe how a product’s features will make your life better. Here’s a golden rule of sales: benefits sell, features don’t.

The problem is that it’s grimy work translating features into benefits. It’s much easier to describe features and be done with it. It just doesn’t lead to an “inevitable” increase in 401(k) participation by our target audience of 27-year-olds.

Review the 401(k) brochures available to you. Are they trying to sell features or benefits? Let’s take a look. Which of the following statements describe features, and which benefits?

1. Save with pre-tax dollars!
2. Enjoy the convenience of payroll deduction!
3. Your earnings grow tax-free!
4. Get the advantage of mutual funds, with no buy-in or surrender fees!
5. Put the principal of compound earnings to work for you!

Hint: In my view, these are all “features.”

How to Increase Participation in a 401(k) Plan by Promoting Benefits

To translate these into benefit statements, you have to answer this question: how will each of those five “features” make your life better. I told you it’s grimy work, so let’s try our hand at translating:

1. “Save for your 401(k) and still be able to afford movie night on the weekends!”
2. “Through payroll deduction, you’ll actually get used to the budget hit. Many like you find that, as a result, they actually save successfully for the first time in their lives. Savings success feels really, really good.”
3. Find yourself actually, successfully funding your future life goals. You’ll be in that new house, getting your grad degree, or again, truth stranger than fiction, enjoying a great retirement life on the beach in Hawaii …”
4. “You’re savings will grow significantly and competently without you having to be sole expert – and voila, you find yourself maybe in 5-10 years (remember, 27-year-olds!) with $25-50,000 saved up, painlessly, and find that that security means you sleep really well at night, even in an economy like this one.”

These aren’t perfect sales statements – if we were working on these together, we could make them better – so the point isn’t perfection, it’s illustration. Each of these statements is an attempt to activate the underlying benefit of 401(k) participation for a 27-year-old.

Another Advantage of Non-Traditional 401(k) Education

One more advantage to selling “life-funding”: It opens the door to better investment education.

This education includes selling 401(k)’s to 27-year-olds as “life-funding,” including retirement, rather than only retirement funding. This idea not only sells more effectively; it allows you to educate them so that they get – at a core, central nervous system level – a concept that is critical for their investment decisions:

It’s not “how old you are” or “how long before you retire,” it’s “how long before you’re going to spend the money.”

Example #1: Roberta is 63 years old, will retire from her UW teaching job in 2 years, but won’t spend any of her retirement money until probably 85 at the earliest. Roberta’s uncle left her a fortune! What’s her investment time horizon?

Example #2: Tommy is 29 and already has saved $15,000 in his 401(k), but plans on using his 401(k) to fund his grad school in 3 years; what’s his investment time horizon? Even given his age, with his plans is he a high risk investor?

Hopefully, you can see how selling 401(k)’s as “life funding” is a concept that you can use to make investment time horizons a compelling guiding issue for even a 27-year-old.

Final Thoughts on HR’s Role in 401(k) Education

The goal of this post is to provide you with food for thought. The real point is that in typical 401(k) participant education, we to follow some steps even when they aren’t fully effective. Isn’t that the joke definition of insanity? Do something over and over and, this time, expect a different result. Hopefully, this post provides you with some ideas – or at least stirs up some new ones within you – on how to get better results.

And if you want to share any of those ideas that may have been freshly stirred, please do. Our blog operators are standing by.

Regards,

Stuart Jennings

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Comments

While taking a full distribution will result in tax and penalties, some (k) plans have loan features allowing employees to access funds temporarily. During the term of the loan, interest is paid into the employee's account, and if repayment is made according to the loan terms, the employee's funds are not subject to tax or penalty.

Posted by: Lori | 10/27/2009 at 11:05 AM

Jennifer and Nora, we may disagree on "how" yet I think we fully agree on the goal: to better serve young potential participants; the impact on the company is a very minor byproduct. So two questions for you both:

1) What would you say to those 27-year-old participants who were thrilled at 32 when a merger did away with their jobs, but they had enough in their 401(k)'s to fund a great transition? True example. Would you applaud their effort, or critique?

Especially when:
a) Many were able to go off and do exactly what they wanted, instead of being forced to run for the next "sorta-adequate" job out of necessity.
b) For many, their 401(k) was their only "permanent" source of significant savings, because they were like most of us and tended to "spend well" (vacations, cars, houses, etc.) what they saved in their "bank" savings accounts.

2. Was the participant who had $10,000 after taxes and penalties ($25,000 was more common in the merger example above) in better shape than the non-participant who had less than $1,000 in savings, because they hadn't saved enough?

Again, hopefully we share the same goal, in that we all want to better serve the young employee; if so, if we can't "reach" them, how can we serve them? Have you had successes with other approaches in reaching a significant audience in young investors that we could learn from? (Absent the match, which many companies choose not to fund).

Either way, thanks for thinking this through with me - again, because the goal is how best to serve the younger employee. I look forward to your additional comments.

Stuart

Posted by: Stuart | 10/13/2009 at 08:11 PM

Interesting how you don't talk about taxes and penalties for early withdrawal. Tommy doesn't have $15,000 for grad school; he'll be lucky to get $10,000.
How about saying it's "life funding" for when you want to stop working at age 67?

Posted by: Nora Brendler | 10/13/2009 at 12:26 PM

This is the most horrible article I've ever read. How dare we tell our associates that a 401k should be used as a rainy day fund when they'll be taxed at their current tax rate plus a 10% penalty for early withdrawel. Only truly selfish companies would mislead their younger associates like this.

Posted by: Jennifer | 10/13/2009 at 12:21 PM