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10 Incredibly Easy Things a 401k Fiduciary Can Do to Increase Deferral Rates

June 24
00:20 2014

(Part four of a four part series.)

“Just as many people are apathetic about their 401k plans as they are about escalating their deferral rate,” says Sean Ciemiewicz, Principal of Retirement Benefits Group in San Diego, California. “They just accept the 3% company match 1208043_15183565_going_green_stock_xchng_royalty_free_300but never think about how much they’re putting in. The whole idea is to get them actively thinking about their plan. The best piece of advice I can offer is to keep it simple. Try not to overthink it, but make sure that you’re contributing as much as possible. I’ve never heard one person complain about having too much money in retirement. The earlier you start and the more you contribute are the keys.”

Like a medical doctor trying to advice his patient to lose weight, such is the lament of the financial adviser trying to advise his clients to increase their annual salary deferral rate. But wait, there’s an alternative. Deferral rates aren’t solely in the hands of plan participants. Plan sponsors can adopt policies and alter plan designs to encourage higher deferral rates. Other plan fiduciaries can help, too. Here are some ways to do it.

1. Encourage Employees to Begin Deferral the Moment they are hired.
The greatest time to start increasing deferring rates begins on the very first day an employee starts at a company. Kevin Conard, Co-Founder of Blooom, Inc. in Overland Park, Kansas says, “The best thing for a participant to do is to pretend that whatever salary they are offered for their first job (let’s say $30k for this example), pretend that they ‘only heard’ $27,000. This way they will start off day one putting 10% of their paycheck into their 401k. From there on out, they will always be saving 10%.”

2. Stretch the Matching Formula So It Continues to Match at Higher Deferral Rates.
Academic researchers have shown changing the structure of the match can increase the matching threshold. “A match is the best way to ‘bribe’ an employee to put money into the 401k plan,” says Bruce T. Yenk, a Retirement and Estate Planning Specialist with the American Prosperity Group in Old Bridge, New Jersey and also President of the Greater Central New Jersey Chapter of the Society for Financial Awareness. “I would rather see a match of 10 cents on the dollar up to an 8% deferral than a 50 cent match on a 5% deferral. The magic number of 8 is higher than 5%. Let’s not forget that it is in the best interest of an employer to get his non-highly compensated employees with a high average deferral rate, so that the highly compensated can hit their maximum amount allowed to contribute. Otherwise, the employer would have to elect the Safe Harbor method to get their maximum deferral into the plan. In the past, we have tried new methods of employee education like giving away prizes if they answered a 401k question correctly at the end of a 401k meeting.”

3. Adopt Auto-Enrollment and Auto-Escalation Policies as Part of the Plan.
Many more 401k plans are now featuring both auto-enrollment (to increase initial savings) and auto-escalation (to increase deferral rates).  “Most of the 401k plans we manage have over 12% average cumulative deferral rates,” says Nathaniel C. Propes, Vice President of Capital Management Advisors in Atlanta, Georgia. He achieves this “by adding both automatic enrollment and an aggressive (2% per year) automatic increase program.” What’s more, by combining this with educational services, Propes says “very few employees opt-out of either program.”

Sean Moore, Vice President of Alter Retirement Planning in Boca Raton, Florida says, “The most effective method we have seen used to increase deferrals is the automatic increase. Some plans will allow the employee to set up increases in contributions to take place automatically at preset intervals.” Without auto-escalation, he says, “The next best bet is to increase your contribution as soon as you get a raise. If planned properly, you can defer the raise into the 401k, keeping your check the same and adding to your retirement account.”

4. Show Participants How to Reframe Goals So They are Much More Closely Aligned to Real Situations.
Of course, without auto-escalation, half the battle is convincing workers they need to save more. Gregory S. Ostrowski, Managing Partner of Scarborough Capital Management in Annapolis, Maryland, uses the lessons learned from behavioral economics (q.v., Goldstein, Daniel G. and Hershfield, Hal E. and Benartzi, Shlomo, The Illusion of Wealth and Its Reversal (January 28, 2014). Available at SSRN: or ). “We presented clients with a picture of their retirement in various contexts,” he says. Ostrowski provides this example: “Say you’re on track to retire at 62 with $1million. Sounds good right? How about retiring on $40-50k income? Doesn’t sound so hot. The reality is it’s the same thing. He feels advisors “need to look at simple, innovative ways to communicate to (and with) clients on how important it is to be on their best behavior (saving and investing behavior, that is) over time!”

5. Use Raw Numbers Bluntly.
Rather than using numbers as a concept, Andrew Carrillo, President of Barnett Capital Advisors in Miami, Florida, on the other hand, uses them as a cruel hammer of reality. He talks to “participants about their expenses, cash reserve, other liquid assets, and current cash flow. In many cases they are saving much less every year then they are paying for other bills such as real estate taxes, kids college, car payments, and cable. I ask them, ‘How much have you saved for your financial independence?’ I then break down their savings into years of income. For example if they have $300,000 in investments for financial independence and they earn $100,000 per year, that’s only 3 years’ income. These two combinations can help people realize they need to save more. This conversation has been very effective in increasing deferrals.”

6. Reduce Withholding if Participants are Overpaying Taxes.
There are other tricks employees can use to “fool” themselves into saving more. Joshua Duvall, a financial planner for Capital Financial Services in Glenville, New York, suggests one way to increase 401k contributions is “to create extra cash flow via a change in the employees W-4. If an employee gets a large tax refund each year, they are withholding too much from their checks each pay period. Increase the allowances on the employee’s W-4, which will allocate less to taxes and you can use that extra money to contribute to your 401k. Obviously this will remove your large tax refund each year, but now you are getting a year’s worth of tax-deferred growth in the 401k and you are also eliminating the interest free loan you’ve been giving the government every year.”

7. Contribute All or Most of Year-End Bonus Money to the Retirement Plan.
Another trick to play involves year-end bonus money. Wayne Bland, owner of Bland Retirement Services in Charlotte, North Carolina, says, “I encourage plan sponsors that offer end of year bonuses to offer their employees the option to contribute all or a portion of their bonuses into their 401k up to the allowable limit. This increases their annual deferral without reducing take home pay.”

8. Use Silly Props of Lure Participants with Promises of Candy.
Sometimes props can be a most effective – and entertaining – tool to convince employees to defer more. Joshua Scheinker, Senior Vice President at Scheinker Investment Partners of Janney Montgomery Scott in Baltimore, Maryland, likes to “kill them with chocolate.” To make his presentations fun, especially for younger employees, he brings out a Zero candy bar, a Nestle $100 Grand candy bar, and a Milky Way Bar. “I lay them out on the participant’s desk. I say, if you don’t start saving more now, this Zero bar is perfect for you…if you start now at 5% this $100 Grand bar will come in handy…and if you really are focused on retirement, the big winner gets the Milky Way bar….because your assets could soar to levels out of this world!”

9. Conduct One-on-One Participant Meetings.
Scheinker implies something that really is a key element to success. Courtenay Shipley, Chief Planologist at Retirement Planology, Inc. of Alexandria, Virginia, states it outright: “Sitting down with employees one-on-one to talk through their plan and path to get there is the best way to convince 401k investors to increase their deferral rate for several reasons. One, because they have a tangible goal to shoot for — closing the gap between what they want in the future versus what they are on track for now. Two, they are taking the time out of their schedule to focus on it so that inertia doesn’t win again. Three, they are able to ask questions about their particular situation and get holistic help about their finances.”

As much sense as Shipley makes, there’s one other cold-slap-in-the-face common sense tactic that we’ve saved for last.

10. Do Something Totally Outrageous (As Long As it Contains an Element of Truth).
Kevin Hall, President of BenePAY Florida, located in Clearwater, Florida, witnessed a most unique way to prod employees to increase their deferral rate. He was sitting in on a company 401k meeting when “the owner asked if anyone had ever been to a Walmart and seen the greeter at the door. Almost everyone in the room raised their hand. The owner proceeded to pull out an application for employment to Walmart and a deferral form for the 401k. He clearly stated, ‘You can complete either this application for employment to be a greeter at Walmart in your later years or you can complete this deferral form to increase your contribution to your retirement plan. One or the other will likely be your financial future. It is strongly recommended you complete the deferral form unless your desire is to be a Walmart greeter in retirement.’”

Blunt. To the point. And, according to Hall, effective.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His forthcoming book Hey! What’s My Number features his usual whimsical dialogue in a face-to-face talk with a plan participant mixed with the combined wisdom of the financial professionals he’s interviewed over the years. Be sure to subscribe to so you can be to the first to hear when this book is available to the public.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Sharon Trabbic
    Sharon Trabbic June 30, 14:17

    Christopher – you’ve left out one important thought — maybe the employee isn’t stupid but just can’t afford to save for his/her retirement yet. Perhaps he/she’s living paycheck to paycheck. Maybe they have a high credit card balance they are attempting to pay off. Maybe one of the people in their household is under-employed and they need every penny from the other’s paycheck to feed their families. Maybe their child is sick; maybe they are taking care of one of their parents; maybe they have to decide between 401(k) deferral/contribution or paying the premium for their family’s health insurance. Everyone knows they need to save more for retirement – but your article implies that people can do it but don’t because they aren’t as smart as you, or need help understanding the English language.

    It’s not just you, by the way – it’s your industry, your colleagues, your co-CTFP’s.

    If our 401(k) investment advisor showed up at an employee meeting at my company and started passing out applications to work at Wal-Mart, I would immediately start looking for a new firm to help us with our investments.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author June 30, 16:22

    Sharon, thanks for the comment. You’re certainly right. For some, there are extenuating circumstances. I don’t think this article is intended for those folks. I’ve sat down with people in situations like you describe and most of them are aware of their circumstances, as you say. Rather, the article is meant to address the recognized problem that people who can afford to save don’t seem to be saving enough. This isn’t just the industry saying it, it’s the government statisticians and academic researchers. It doesn’t have anything to do with smarts, it simply has to do with human behavior. In fact, the first few points in the article come directly from academic studies that proved these particular techniques can work.

    BTW, I, too, was shocked by the Wal-Mart comment. I can’t imagine an advisor having the guts to do that. The significance of the story, though, isn’t that the adviser did it, but that the firm’s owner and plan sponsor did it. I work with a lot of small companies and you’d be surprised how sincere they are about helping their employees save for retirement. I can easily see these folks, speaking in the blunt reality tone of a father, sitting their employees down and making this stark statement. That is the ultimate example of a pure fiduciary – someone who always has the beneficiaries best interests at heart and isn’t afraid to speak frankly when necessary.

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