How to Turn Your 401(k) Into a Recruiting and Retention Machine
The U.S. economy is nearing full employment. As of March 2018, the U.S. unemployment rate is at 4.1%.While this bodes well for the economy, not everyone is celebrating.
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The U.S. economy is nearing full employment.
As of March 2018, the U.S. unemployment rate is at 4.1%.1
While this bodes well for the economy, not everyone is celebrating.
Most companies – especially those in the hospitality industry – are struggling to attract and retain quality talent. A smaller pool of talent means hotels, restaurants, and related businesses have to raise wages to compete. In 2017, wages for leisure and hospitality workers increased by 3.8%.2
But hospitality companies can't raise wages forever. Raising wages means raising prices, which could lead to a slowdown of bookings and sales. On top of that, higher wages don't necessarily incentivize long-term tenure.
Luckily, there are more affordable ways to make your company more competitive at attracting and retaining talent. Offering higher quality, more affordable, and more comprehensive benefits has never been more important. And one of the most important and affordable benefits that you can improve is your company's 401(k).
In a study by Willis Towers Watson, employees who rated their company's defined contribution plan (like a 401(k)) as being very important were 2.5x more likely to stay with their current employer than those who didn't.
As for employee attraction, 18.2% of employees rated their employers defined contribution plan as being very important to their decision to work with their current employer versus a competitor.3
More simply, the 401(k) has a major impact on attracting and retaining employees.
The problem? Most hospitality firms aren't getting anywhere near the full recruiting and retention benefit from their 401(k). Many are plagued with issues such as low employee participation, ineffective plan design, and huge administrative burdens on their HR teams.
So how does one turn their 401(k) into a recruiting and retention machine? Here are the 3 most effective strategies that we've seen move the needle for our clients.
Maximize Employee Participation
When it comes to 401(k) problems in the hospitality industry, low employee participation is the one we hear about the most.
Low participation causes companies a whole host of problems, the most visible and frustrating of which is that highly compensated employees (HCEs) – oftentimes the company's top executives – can't max out their 401(k) contributions without making the company fail its non-discrimination testing. At the end of the year, plans that fail these tests have to cut checks called corrective distributions to HCEs, returning their excess deferrals. So rather than making tax-deferred contributions to their retirement plan, HCEs receive unexpected taxable income which may push them into a higher tax bracket. HCEs are never happy about this, which means that this issue could have a negative impact on retention among a very important group of your employees.
And it's not just the participating HCEs that might be more apt to leave when your participation is low.
The employees that aren't participating – whether HCEs or non-HCEs – are probably more likely to turn over as well. The 401(k) is supposed to act as a retention tool. You're paying a lot of money and dedicating a lot of resources towards providing this benefit. But if no one's actually using it, it isn't doing its job, and therefore you're not getting anywhere near your return on investment.
So just how does one improve 401(k) participation? Well there's a lot of literature on this, but in our experience there are two powerful tactics that consistently move the needle:
Radically Simplify Onboarding
Simple, easily understood onboarding communications are crucial for driving employee participation.
Employees need to be alerted when their eligibility is approaching. They also need to be informed of what they need to do to join the plan, and how the plan works once they've joined.
Sounds easy enough, right?
Not so fast.
How this information is communicated before and during enrollment makes a huge difference in how successfully it boosts participation rates. Handing them a packet of financial jargon and requiring them to make elections isn't the way to go.
Communications about the 401(k) need to be simple and easy to understand. That means communicating financial concepts using everyday language.
It also means making communications accessible to employees. Many hospitality employees don't have access to a desktop device, so communications should be mobile friendly. That means sending SMS alerts in addition to emails.
Companies should also consider communications for non-English speakers. Hotels, restaurants, and other hospitality companies often employ native Spanish speakers. For companies such as these, it's important to communicate important but difficult topics in the language that their employees are most comfortable using.
Implement Automatic Enrollment
Automatic enrollment is one of the most powerful tools for increasing 401(k) participation.
According to Vanguard, plans that automatically enroll participants when they become eligible had participation rates of 93%. By comparison, plans that required employees to opt-in had participation rates of just 47%. Vanguard also found that automatic enrollment was especially helpful at enrolling young and low-income employees, which is a common pain point for many 401(k) plans in the hospitality industry.
If you want more ideas around how to boost participation and engage employees, download our free Employee Engagement Handbook for a deep dive into how to provide a better 401(k) experience.
Lower Fees
Not every 401(k) is created equal.
The truth is, there can be dramatic disparities between one company's 401(k) and another's – even within the same industry. And the biggest driver of these disparities is the fees paid by the employees.
401(k) fees – often taken as a percentage of the plan's assets – can make a dramatic difference in how much an employee has in their account by the time they retire.
Lowering the fees that your employees pay is as good as giving them free money. For a 35 year-old employee contributing $500 a month, a 1.00% reduction in fees adds over $41,000 to their account by the time they retire at 65. Add in a common employer match of 50 cents on the dollar, and that 1.00% reduction adds about $60,000 to their account.4
While $60,000 over 30 years might not seem mind-blowing, that's an additional couple years of living expenses, which can make a huge difference for a retired employee - especially as life expectancy continues to get longer and longer.
When your company's 401(k) has much lower fees than your competitors', communicating what that means can go a very long way towards attracting and retaining talent. For instance, if a job candidate knows that signing on with your company versus a direct competitor could result in an additional $60,000 in their retirement account in 30 years, they may be more likely to choose your company. Think of it like giving them a really large delayed signing bonus!
After hiring and onboarding a new employee, further communications can be sent reminding them how much better off they are with your 401(k) rather than the average plan. This can go a long way towards warding off turnover.
This begs the question: how exactly can hospitality firms lower their 401(k) fees?
In our experience, optimizing the fund lineup is one of the best ways to lower fees.
Over the years, many of the clients we've worked with had actively managed funds mixed heavily into their investment lineups. The problem with that? Actively managed funds are very expensive – especially when compared to passive index funds.
As of June 24, 2015, the average dollar-weighted expense ratio of actively managed domestic small-cap funds was 1.24%, compared to just 0.22% for passive index funds.5 Looking at our previous example, switching from the active funds to passive funds alone can fully account for your employee's additional retirement savings of $60,000.6
With such a high price tag on active funds, they'd better perform a lot better. In aggregate though, data shows this to be anything but the case. Standard & Poor found that 61% of all actively-managed domestic equity funds underperformed their benchmarks.7
So effectively, actively-managed funds actually perform worse. Switching these out for lower cost alternatives could be the easiest way to lower your plan's fees.
Optimizing your fund lineup is just one way to lower your fees. To figure out the best approach for your company, you'll need to perform an in-depth analysis of all the fees you're paying.
Doing an analysis of your plan's fees is a lot of work. If you'd like us to do the legwork for you for no charge, find and upload your 408(b)(2) fee disclosure to receive a personalized fee analysis.
Optimize Your Employer Match & Vesting Schedule
Having an employer match is one of the most powerful 401(k) levers you can pull when it comes to increasing recruiting or retention. Offering an employer match is a very powerful recruiting tool, as employees essentially view it as free money.
An employer match can also be a powerful retention tool. Adding a vesting schedule to an employer match is an excellent way to incentivize the employee to stay with the company longer.
With a vesting schedule, the employee's ownership of the employer match increases at set intervals of time. There are a variety of vesting schedules that companies can implement. For instance, with cliff vesting, and employee owns 100% of the matched funds after a set period of time. So, with 3-year cliff vesting, after 3 years, the employee becomes 100% vested in all employer match funds from that point forward.
By contrast, an employer can implement graded vesting. With graded vesting, the employee's ownership of the match increases slightly at regular intervals. For example, one vesting schedule might be to give employees an additional 20% ownership of match every year, so that by the end of year 5 of their employment, they own 100% of the employer match.
Determining the best vesting schedule for your company depends on a lot of different variables. Talk to your advisor about the best way to vest your 401(k) plan's matching contributions so as to maximize the plan's recruiting and retention power.
Outsource Plan Administration
Running a 401(k) takes a lot of work.
In order to offer a 401(k), companies' HR teams have to track employee eligibility, reconcile the company's payroll with the recordkeeper, archive important plan documents, validate the employee data, and more. For hospitality companies, who have large high-turnover workforces spread across multiple locations, this can be a huge headache.
We estimate that companies spend an average of 15 hours a month on plan administration. When the HR team's time is taken up by the 401(k), that's less time that they can spend on recruiting, improving the employee experience, or other initiatives that will attract and retain employees.
The easiest solution to this problem? Outsource plan administration to a 3rd party.
Some 401(k) advisors offer 3(16) fiduciary services, which means they become fully responsible for handling the administration of your 401(k). In the event of any mistake on their part which puts your plan out of compliance, they're the ones who foot the bill. A new generation of 401(k) advisors like ForUsAll automate a lot of this work, which means they can offer these services for little-to-no cost to your company.
Ultimately, if you're able to free your HR team from countless hours of error-prone manual processes, doing so could have a significant impact on your business's ability to attract and retain talent.
Conclusion
The economy is cyclical. Full employment won't last forever, but given the high cost of employee turnover, driving employee attraction and retention might be the single most important thing you do for your business.
Improving your company 401(k) plan might be the most impactful and cost-effective way of improving your recruiting and retention benefits. When employees and candidates know they'll be well taken care of and more financially secure with your company, they'll be apt to stay longer and work harder.
The best part? Turning your 401(k) into a recruiting and retention machine might be easier than you think. Talk to us today if you'd like to find out how.
- https://tradingeconomics.com/united-states/unemployment-rate
- https://www.bls.gov/opub/ted/2018/compensation-costs-for-private-industry-workers-rise-2-point-6-percent-for-the-year-ending-december-2017.htm
- https://www.towerswatson.com/en-US/Insights/Newsletters/Americas/insider/2005/how-do-retirement-plans-affect-employee-behavior
- Assumes starting balance of $0, monthly contributions of $500, a 1.02% reduction in fees, a 50% employer match and a 3% yearly investment return.
- Morningstar. Based on the dollar-weighted average expense ratios for all funds tracked by Morningstar within each category.
- Based on assumptions in footnote 4.
- S&P Dow Jones Indices, "S&P Indices Versus Active Funds (SPIVA®) U.S. Scorecard," March 20, 2015.
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