How to encourage employees to join your retirement plan

Like many business owners, you may have devoted a lot of time and effort to finding a retirement plan for your company. The right retirement plan can make your company more attractive to potential hires, discourage turnover and reward loyalty — while contributing to your team’s financial wellness.

But your plan can only benefit your company if your employees actually join the plan — and make the most of it. “The best way to get employees to participate is by choosing a plan that’s a good fit for your team and by fostering a culture that supports healthy financial habits,” says Judith Anderson, Retirement and Personal Wealth Solutions at Bank of America.

Being ambitious when it comes to the percentage of employees you aim to enroll and doing periodic check-ins on your progress can help you keep the growth of your plan on track and determine if you need to do more to promote it to employees. It’s best to aim for a 100% participation rate or close to that because higher participation in this cost-effective benefit can lead to more engaged employees.

Choose a plan that will make it easier for employees to save

Most retirement plans for small businesses fall into two buckets: retirement plans based on individual retirement accounts (IRAs) and those based on 401(k)s. These types of plans can encourage employees to save in different ways. Understanding what sets them apart and their requirements for participation can help you choose the one that’s best for your team.

SIMPLE IRAs

In a business with 100 or fewer employees where many employees are just starting to build their nest eggs for retirement, a Savings Incentive Match Plan for Employees (SIMPLE) IRA plan is often ideal. SIMPLE IRA plans let owners and their employees make pre-tax salary deferral contributions of a certain amount in addition to receiving an employer contribution to the SIMPLE IRA. Check IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) for more information on the specific contribution limits. While employers are required to make annual contributions, you can choose between matching what employees contribute, up to 3% of their compensation, or contributing a flat 2% of each employee’s annual compensation regardless of whether the employee contributes. There are limits on the maximum amount of annual compensation that can be taken into account. To jump-start participation, you can set up automatic enrollment for eligible employees, although employees may affirmatively elect not to have the default salary deferral contribution made on their behalf.

Educate your team about SIMPLE IRAs

SIMPLE IRAs offer a couple of benefits that are worth mentioning when communicating about your plan with your team.

No minimum age requirement

One benefit of a SIMPLE IRA if you have a younger workforce that wants to start saving early is that the IRS does not impose a minimum age requirement for participation.

SIMPLE eligibility

Any employees who have earned at least $5,000 during any two years before the current calendar year and who are reasonably expected to earn at least $5,000 in the current calendar year are eligible to participate in a SIMPLE IRA plan.

Simplified Employee Pension (SEP) IRAs

If employee contributions are not of interest, you may want to consider a Simplified Employee Pension (SEP) IRA. With SEP IRAs, employers make all the contributions. Employer contributions are discretionary ― they need not be made each year. As the sponsoring employer, if you do choose to contribute for the tax year, you generally must contribute the same percentage of compensation to all eligible employees in your SEP IRA — say 5% of compensation for everyone, including yourself. Employees also may be able to roll a traditional IRA into the SEP IRA account.

Many smaller businesses find that SEP IRAs are appealing because they’re relatively uncomplicated to set up and maintain, but businesses of any size can take advantage of a SEP IRA. They typically offer a range of investment options but are self-directed, meaning you as the business owner don’t make any investment decisions for your employees.

SEP IRAs have two disadvantages when it comes to building plan participation. First, employees cannot borrow against them or any other type of IRA. Beyond that, employees cannot make salary deferral contributions (see SIMPLE IRA).

Educate your team about SEP IRAs

SEP IRAs have two powerful advantages worth mentioning when you discuss your plan with employees.

Higher contribution limits than a traditional IRA

SEP IRAs allow for a maximum annual contribution of 25% of compensation (or 20% of your net earnings from self-employment), but no more than a specific annual limit established each year. There are also limits on the maximum amount of annual compensation that can be taken into account. Information on these limits is updated annually and can be found in IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).

Lower salary requirement than a SIMPLE IRA

You can offer participation in a SEP IRA to employees who have reached age 21, have worked for you in at least three of the last five years and earned at least $750 in 2023, with lower salary requirements for eligibility for previous years. The employer can use less restrictive requirements if they choose.

401(k)s

For businesses with employees who want more flexibility and plan features, a 401(k) plan is also worth considering. 401(k) plans allow employers to make contributions, including matching contributions (thereby encouraging employee participation), offer plan loans and have a vesting schedule.

As with the SIMPLE IRA, you can design your 401(k) plan with a potentially powerful tool to encourage employee participation ― automatic enrollment. If you automatically enroll employees in the plan at a relatively low salary percentage, such as 3% to 4%, research shows your participation rate will jump. Employees must be given the freedom to opt out or choose a different percentage to contribute.

However, there is one potential drawback to 401(k)s ― they can be more costly to offer and maintain than IRA-based plans.

Educate your team about 401(k)s

401(k)s have several advantages that could encourage participation. Highlight them when you communicate with your team about your plan.

Higher contribution limits

For 401(k)s, employees can contribute up to a certain amount that can change annually, and people 50 and older at any time during the calendar year are permitted to contribute an additional amount. Employer and employee contributions cannot exceed the lesser of a contribution limit set each year or 100% of their salary. For additional information on limits, see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). There are also limits on the maximum amount of annual compensation that can be considered.

More structured investment options than IRAs

Participants have a chance to choose their investments from a menu offered by the plan.

Availability of loans

One particularly popular feature of 401(k)s, Anderson says, is the availability of plan loans. If offered by the plan, the concept of employees being able to borrow from their 401(k) if needed and repay it over time can be very appealing to those who may be hesitant to “lock” their contributions away. “Saving for your retirement should be the long-term focus and loans a consideration only as a last resort,” she says.

5 ways to encourage employees to use your retirement plan to save

1. Make sure you offer many opportunities to learn about your plan. Sharing information about it on posters, flyers, company intranet, e-newsletter, a company podcast — or wherever you communicate with your team — will help remind them to join.
2. Make it easy to join. If you have a waiting period before team members can join, make it as short as possible and boost participation by enrolling new employees automatically, with a chance to opt out or choose a different level of salary deferrals.
3. Hold multiple open enrollment sessions and make them easy to attend, whether they’re virtual or in-person. That way busy employees won’t miss out.
4. Help employees learn about investing. Share webinars from the plan sponsor or host educational events such as lunch-and-learns, providing employees an opportunity to learn more about financial wellness and investing.
5. You can take this idea one step further by hosting an investing club, providing employees with a personal interest in the subject to get together on company time and share insights and strategies.

Think long-term

Bear in mind that employees may not be receptive to participating in your plan the first time you mention it. The more you remind them of the potential rewards of tucking away money in a retirement account, the more likely you are to get them excited about the idea — and to find them actively using your plan to save. Ultimately, your efforts to promote your plan will help both you and your team in the long run.