The 1% Challenge: Baby Steps Go a Long Way in Your 401(k)

Monday, January 25, 2021

Jim Sampson, Business Contributor

 

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Increasing retirement plan participation has always been a priority for employers, plan providers and advisors. The motivations behind the push vary, from improving discrimination testing results or increasing plan assets for more bargaining power to simply bettering overall financial wellness. Yet boosting participation is a constant challenge, especially today in the midst of a global pandemic that’s caused many to lose jobs or take pay cuts.

So how can employers drive participation rates?

Many folks point to automatic enrollment and automatic deferral increases. These features have definitely had a positive impact on retirement participation and savings rates. But not all companies embrace the concepts. What’s a better way to move the needle? The 1% challenge.

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The 1% challenge is a powerful yet simple way to increase savings rates over time. Here’s how it works: employees simply bump up their savings percentage by just 1% every year, generally on January 1st or if/when they get a pay raise. Why is this approach so effective?

Retirement plans are very confusing for the vast majority of employees. Most times, employees are asked to save a percentage of their pay instead of a dollar amount each paycheck. And financial pundits are always telling people that they need to save 10%, 15% or more in order to have a successful retirement. 

The problem is that those numbers intimidate many employees, even if they are accurate. Participants may feel like they could never save that much so they start at a lower number, or even put off savings completely. Unfortunately, 401(k) and 403(b) plans can be similar to the local fitness club, where many people go in and sign up but never go back. That means employees often remain at their initial lower savings rate for as long as they work at that company.

By teaching people to start at a comfortable rate today, and then increase by only 1% each year, the impact of the increase isn’t nearly as burdensome as an immediate jump to 10% or 15%. To make it even easier, many retirement plan record keeping systems now have technology that allows an employee to automate this process. That way, it happens every year in case they forget to make the change.

When people do the math on how 1% impacts their weekly paycheck, it ends up being a small amount of money, usually around the cost of a cup or two of coffee or a trip to the local sub shop. The reality is that people generally don’t notice the change, yet a simple 1% increase to their savings each year can help higher savings rates like 10% and 15% become a reality.

Positioning a 1% increase in your regular retirement plan communications can make a big impact over time to both the financial health of your plan and the overall financial wellness of your employees.

 

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Jim Sampson is the Director of Retirement Advisory Services at Hilb Group Retirement Services in Warwick, supporting retirement plans for companies and their employees for the last 24 years, and is the co-author of the book Save Like a Champion Today, A Winning Game Plan for Retirement.

Investment Advisory services offered through Global Retirement Services (GRP), DBA Hilb Group Retirement Services, a registered investment advisor.

 

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