Plans enticing 401(k) savings even without employer contribution

Many workers might not see the point of participating in a company-sponsored retirement plan without some sort of employer contribution. The employees of The Farfield Co., however, clearly do.

Workers there participate in — and aggressively contribute to — the construction company's 401(k) plan even though the company doesn't offer an employer contribution of any kind.

In fact, their rates of participation and deferrals would make most plan sponsors envious. Farfield employees contribute an average 11% of their paychecks to the $20 million plan with 82.7% of the company's 197 eligible employees participating. That compares with average deferral rates of 7.1% and average participation rates of 60% for small plans with up to $20 million in assets, according to Vanguard Group Inc. research.

Kathleen Long, Farfield's vice president of human resources in Lititz, Pa., attributes the strong metrics to employee education, flexible plan design and online investment tools. In addition to auto enrollment and auto escalation, the company allows participants to change their deferrals rates throughout the year, with many reducing their contributions during the holidays "to put more money back in their paychecks," she said.

The flexible deferral feature permits participants to make changes as frequently as every week simply by going online to the retirement plan website. "We have worked to make participation as painless as possible," Ms. Long said.

Farfield is among the thousands of small plan sponsors that due to cost considerations and other reasons do not offer employer matching or non-matching contributions. While they do not kick in money of their own, they nevertheless want to give employees the opportunity to save for retirement and more importantly want them to be aware of the benefits of participating in an employer-sponsored plan, according to industry observers.

Of 11,300 small plan sponsors with up to $20 million in assets, 23% do not offer any type of employer contribution, according to Vanguard's small business edition of the 2019 "How America Saves" report. For startup companies, the percentage not offering a contribution rises to 27%.

Cost is one of the biggest factors preventing companies from contributing money into employee retirement accounts. "The employer may not have consistent earnings or profits that would allow it to make and sustain a financial commitment to fund a future need such as retirement," said Jack Towarnicky, executive director of the Plan Sponsor Council of America in Columbus, Ohio.

Companies backed by venture capital or private equity, in particular, tend not to provide contributions because they're either trying to grow their startups or simply "trying to keep afloat," said John Steiger, president and founder of retirement plan and wealth management firm Wealth Planning Resources LLC in Waltham, Mass.

"It's not in their budget to offer a match," he said.

Mr. Steiger cited a medical device company that he serves as an adviser. The startup, whose identity he declined to disclose, had been in "growth mode" for several years and is likely to be sold soon. While the company had many high-end employees who valued the 401(k), it "didn't have the funds to offer a match," he said.

Cost, however, is not the only reason plan sponsors do not to contribute. Many — like Farfield — feel that they should let employees decide how to use their total rewards, industry experts say. Employers may decide that instead of allocating a portion of their total rewards to the retirement plan they'd rather allocate it to wages, giving employees greater say in how they spend the money, Mr. Towarnicky said.

Farfield's Ms. Long noted, for example, the company must pay its trades people required rates for state-funded construction projects, a portion of which can be allocated to fringe benefits, such as the 401(k) plan.

"We choose to give the employee the most money back in their paycheck that we can," she said, adding that the rates for construction workers, electricians and other trades people are very high.

"Their rate of pay is so high that they're not feeling that issue with the match," she said.

Other plan sponsors cite other reasons for not contributing. Some employers may perceive that retirement is not a priority for its workforce, Mr. Towarnicky said. Part-time and seasonal workers in high-turnover industries such as retail and employees in dual-income families, for example, might have a higher priority for health-care coverage, he said.

Whatever the reason, employers not providing contributions should not be viewed in a negative light, according to Jean Young, senior research associate at the Vanguard Center for Investor Research in Malvern, Pa. "These are the good guys," she said, noting that they should not be compared with employers that provide contributions but rather with those that don't offer a retirement plan at all.

About a third to a half of private-sector workers don't have access to any type of workplace retirement plan, Ms. Young said. "The value of these plans is the fact that it makes saving so easy because it's automatic out of your paycheck and the plan sponsor fiduciary is vetting the investment options and choosing the provider," she said.

Still, it's harder to generate enthusiasm for plans that don't offer contributions than it is for those that do. To overcome that barrier, non-contributing plan sponsors often build automatic enrollment and escalation into plan designs and couple that with educational initiatives.

One of Mr. Steiger's clients — a private-equity-backed importer and exporter of gift shop items — for instance opted to implement automatic enrollment, a move that helped "move the needle" on participation in the $1.3 million plan, Mr. Steiger said.

The company, which he declined to disclose, couldn't offer a match but was concerned about its employees' retirement readiness. The addition of the auto-enrollment feature in 2016 boosted plan participation to 50% from 30%, Mr. Steiger said.

His medical device startup client decided to take a different route, opting instead to double down on employee education to boost plan participation. The company was "adamant about communicating the program and why employees need to participate even if there is no match," he said of the $3 million plan. The educational initiative, which launched in 2018, consisted of an email outreach campaign that introduced employees to Mr. Steiger. As a result of the initiative, participation in the plan rose to 55% from 48%.

Indeed, simple education about the basic benefits of a 401(k) can go a long way in persuading employees to participate even when there is no employer contribution. "It's a way to get a tax deduction right out of your paycheck," Mr. Steiger said. In addition, employees can contribute $19,000 annually to a 401(k), more than three times the $6,000 they can put into an IRA, which is not always tax deductible. A married employee whose spouse participates in an employer-sponsored plan may be disqualified from participating in a tax-deductible IRA.

"If their spouse has a plan or they make a certain amount of income, their only tax deduction is through their 401(k) plan," he said.

Employer-sponsored plans also offer fiduciary protections that help encourage plan participation, according to Mr. Towarnicky.

Knowledge that there are civil and criminal penalties if plan providers "screw around" with participants' money makes it "a lot easier for folks to say, 'Oh you know, I'll participate in this employer-sponsored plan,'" Mr. Towarnicky said.