Employee benefits and retirement plan solutions Trends and Insights How to make saving in a 401(k) plan hard (to avoid)

How to make saving in a 401(k) plan hard (to avoid)

Retirement plans today tend to be designed with features so the average person can begin saving with little effort. Yet, it’s seemingly not working for many employees. Instead of easier, do we need to make it harder to avoid?

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5 min read |

When 401(k) and other defined contribution (DC) plans came into existence, the industry focused on access. The thought was that if only employees had these plans available, everyone would immediately become retirement and investment experts on their own. That generally didn't happen. So, we spent the last 10-20 years focusing on making the process to save for retirement easier for employees. The use of automated features, including automatic (auto) enrollment, and Qualified Default Investment Alternatives (QDIAs) was used by plan sponsors to help take advantage of human inertia and get people enrolled in their plans. Target date funds (TDFs), which are built to help ensure asset allocation would adjust automatically over time, have typically become the standard QDIA for many plans. The problem now is that while this helps, it doesn't solve the issue for everyone. That same inertia that is counted on to get people into the plan can also be what keeps people out of the plan, particularly if they miss the auto enrollment period.

The “easy button” plan features haven’t been working

The reality is nearly half of U.S. workers don’t participate in a retirement plan.

Many employees don’t enroll in their employer’s retirement plan due to a lack of information and confidence in basic investment terminology. Only 30% say they’re comfortable investing money. Unsurprising, age and salary impact the decision to contribute to a retirement plan. Many also say they have too much debt and need to pay down some or all their debt before they can start to save for retirement.

I have not started to save for retirement


Gen Z (ages 18-27)


Salary < $50,000

Auto enrollment of newly eligible employees has helped increase participation but isn’t being utilized as the industry expected. It was assumed most plans would add it to their plan design, but less than half (47%) of employers offer auto enrollment. And unfortunately, many plans operate in such a way that if an employee says, “no” to the retirement plan once, they aren’t asked again.

It’s a similar story with a plan’s QDIAs, which are typically a TDF. Committees, investment advisors, and consultants, including plan designers, all spend hours determining the right TDF and applicable glide path for the plan’s participants. Yet, once it’s selected, there may be no follow-up to help ensure employees stay in the plan’s QDIA. It’s not unusual for participants to change their investment allocations from the TDF being used as the plan’s QDIA for distinct reasons (sometimes in a panic during a market downturn) and then forget to change back again.

The plan design challenge—make it hard not to save for retirement

It’s one thing to make the retirement plan easier to participate in, but I challenge all of us to make it hard for employees to avoid the retirement plan and save for their future.

Auto enroll and sweep in all eligible employees each year. Make it hard to not get into the plan. An annual re-enrollment would have them decide each year whether they want to save for their retirement as they would have to consciously decide to opt out of the plan each year. A new hire's choices may be quite different from the choices the same person makes after a few years.

An auto sweep may also catch those who stopped contributing for some reason but forgot to re-enroll or catch those who didn’t know they were eligible. For employers conducting the full sweep each year they tend to do this when annual reviews and raises occur to help keep any difference in take-home pay to a minimum.

Research shows that almost half of nonparticipants would be interested in learning more about their benefits during their performance management period and nearly 1 in 3 would continue to defer when auto enrolled.

Auto increase aggressively. Make it hard to not save enough. Consider designing the plan so everyone saving below 15% (not just those who were auto enrolled) is auto escalated by 1% each year until their deferral rate hits 15%. Most employees need to save more than they do.

Re-enrolling employees into the QDIA at least every 5 years. Make it hard to invest poorly. Monitor where your employees are positioned in their asset mix versus the glide path selected. This can be seen with a simple review of how many participants are in the QDIA compared to those who aren’t. By re-enrolling participants into the plan’s QDIA, their accounts would be back on the glide path. And like automatic enrollment, they would have the opportunity to opt out of the re-enrollment.

Hypothetical participant scatter plot analysis

Glide path ranges vs. Equity allocation pre and post retirement

A hypothetical participant scatter plot analysis showing the S&P target date index glide path.
the Glide path for the S&P Target Date Index
5% equity band range above the glide path
5% equity band range below the glide path

Shown for illustrative purposes only.

Source: Principal Asset Management. The above data represents a sampling of participant data for a hypothetical 401(k) retirement plan. It does not represent returns of any individual portfolio or product. Exclusive reliance on the above is not advised. Asset allocation and diversification do not ensure a profit or protect against a loss.

Build a retirement savings culture. Make it hard to not know the retirement plan. Don’t assume all employees have the same financial literacy. Adding the automated features can help get people into the plan, but let’s help them understand why they should take an active role in their retirement savings. Encourage the use of the financial wellness programs made available by plan service providers. Now that they’re saving for retirement, how do they also pay down their debt? Are they saving enough for retirement? Help them in using online tools and resources available to them via the retirement provider website.

Employee choice remains

Some employers feel it’s too controlling and paternalistic to implement automated features into the plan design. I argue the opposite. Being paternalistic to me means helping and educating employees to make the best decisions for themselves and their future. Nothing suggested above disallows employee choice. Those employees who are actively engaged in their plan, choosing their investments and savings rate can continue to do so. Those who decide time and again to avoid the plan can continue to do so, but it’ll become much harder to make that choice. Time counts in a defined contribution plan. Every year someone fails to save in the employer-sponsored retirement plan in their 20’s could decrease their future income by thousands of dollars. Let’s do the right thing and make retirement savings hard to avoid.

Discover more

Dive deeper into why employees don’t take advantage of their employer’s retirement plan with our new research, Principal® Retirement Security Survey—Nonparticipants.

It’s important to work with a retirement service provider who understands and has the expertise to consult on options to help deliver the desired results. If you’re looking for options that could work in building a more robust retirement plan—reach out to your Principal® representative.