The majority of eligible employees participate in a 401(k) plan, but there’s room for improvement. So says the 2022 Financial Life Benefits Impact Report from Bank of America.
Among all eligible employees, 58% participate in a 401(k) plan, Bank of America found. Gen X employees are most likely to participate (65%). Specifically, Gen X men are most likely to participate, with 70% contributing to their 401(k).
In addition, 401(k) balances continue to grow, but there is a significant difference in savings between men and women. Between 2019 and 2021, the average 401(k) balance grew from $74,000 to $90,000. On average, men have balances of $108,000, whereas the balances for women are around $70,000, according to the Bank of America study. Interestingly, however, Gen Z women have overtaken men when it comes to 401(k) savings. Gen Z women save an average of 103% of Gen Z men’s account balances. Employers should continue to encourage these positive savings behaviors and build on the habits younger women are already exhibiting. This can help women of all age groups gain equal footing with men when it comes to retirement savings.
The Bank of America study also found that employees still need education on the benefits of contributing to a 401(k) plan, including tax-deferred savings and growth. This highlights an opportunity for employers to focus their education and communication efforts in these areas to encourage employees to maximize their retirement account contributions. The study found that 61% of all eligible employees contribute less than $5,000 to their 401(k) each year. Furthermore, less than 1 in 10 participants contributes enough to reach the annual maximum allowable limits.
Implementing automatic features in 401(k) plan design can also influence positive savings behaviors. Auto enrollment and auto-escalation, where participant contributions are increased gradually each year, improve participation and savings rates. According to the Bank of America study, 84% of employee participate in plans with an auto enrollment feature, vs. 37% for plans without automatic enrollment. What’s more, 55% of plans also have an auto increase feature, and 96% increase deferrals at 1% per year. Auto features are impactful when it comes to improving employee engagement and deferrals.
What is more, employees are showing a rising interest in socially responsible investing via ESG funds, which stands for “environmental, social, and governance.” The number of employees investing in ESG funds was 15%; a 50% increase since 2020. Additionally, the average amount invested in ESG funds was $13,400 – a 30% increase since 2020. It’s clear that employees value access to ESG options in their 401(k) plan. Nonetheless, just 11% of 401(k) plans offer ESG funds in their investment lineup, Bank of America found.
Finally, a personalized approach to financial education and assistance positively impacts employees’ financial wellness by engaging them to assess their financial health and take action, according to the study. These trends indicate that employees have a desire to participate in a 401(k) plan, but employers have more work to do when it comes to providing education about maximizing contributions and achieving financial wellness. Plan design features such as auto enrollment and auto escalation, and an emphasis on personalized financial education, can help improve employee engagement and savings behaviors.
