FiduciaryNews

How (and Why) the 401k Fiduciary Should Act to Increase Employee Deferral Rates

June 24
00:17 2014

(Part one of a four part series.)

Spelling out the annual retirement plan contribution in terms of absolute dollars is the clearest way for participants to set their retirement goals. The industry, as industries are wont to do, uses a different nomenclature to describe contributions. 1020727_76468436_percentage_vs_dollars_stock_xchng_royalty_free_300They call them “deferrals.” What? Did you just ask “What does ‘nomenclature’ mean?” It’s a fancy way of saying “name.” Just like “deferral” is a fancy way of saying “contribution.” Industry folks sometimes forget regular folks don’t use words like “nomenclature” or “deferral.” And yet, chances are if participants sit through an entire employee 401k presentation, they’ll hear the word “deferral” a number of times. Only the most astute presenter will remember to define it in terms of an annual contribution. Worse, the industry describes deferrals in terms of percentages, not in terms of those absolute dollars participants actually pay out every month.

Since it’s described in terms of a percentage, the beauty of a word like “deferral,” though, is it presents the ability to compare savings rates rather quickly. Coincidentally, the company match is usually also spoken of in terms of a percent. Often, you’ll hear something like “a company will match dollar-for-dollar up to the first 3% of your salary.” That’s when using the deferral rate rather than the absolute dollars of the contribution makes the most sense.

This is an unusually lengthy article, so we’ve decided to do something we’ve never done before. Not including this introductory section, we will publish simultaneously each of the remaining three parts as separate articles. This should make it easier to read in multiple sittings. Each part will answer the following questions:

Part II: What is the Average 401k Deferral Rate?
Part III: What is the Ideal Deferral Rate a 401k Fiduciary Should Ask Employees to Work Towards?
Part IV: 10 Incredibly Easy Things a 401k Fiduciary Can Do to Increase Deferral Rates

Just click any of the above to discover how (and why) the 401k fiduciary should act to increase employee deferral rates.

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 FiduciaryNews.com 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

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