Financial Information Can Increase 401(k) Participation, Contribution Rates

February 28, 2005 ( - A new study from The Wharton School is bringing support to the notion that enhanced financial communication programs can be an effective method of raising participation and contribution rates in personal retirement plans.

The largest impact on participation and contribution rates, according to the study, was the use of Web-based tools as an information and financial education platform. Firms that used Web-based tools reported higher participation rates (81%) than those who stayed away from this method of information dissemination (74%).

Firms that provide details financial information – such as retirement income projections – can also raise participation and contribution rates. Firms that use educational materials more often report higher participation rates (80%) than those who don’t (75%). The actual content is less important than providing Web-based tools, however. Contribution rates follow a similar pattern. Employees who are given plan information most often contribute an average of 7.7% of pay (or $4,467) per annum, while average contribution rates are 6.9% or ($3,290) for those who receive this information less often.

In companies that offer access to projection modelers and retirement income projections to a broad cross-section of employees, contribution rates are 7.4% versus 7.2% in companies with limited access to projection information, according to the study.

The study also indicates that the match rate and the match threshold of a 401(k) plan are important factors in influencing participation and contribution rates. “There is a consistent pattern of increasing 401(k) plan participation at successively higher match rates,” the study reported. When no match is offered, participation rates hover around 50%, the study said; however, when matching contributions rise above 25%, average participation rates went above 75%. However, the study found that when matching contributions are introduced, the average employee contribution rate actually falls between 1.9% and 1.4%.

Not surprisingly, both contribution and participation rates rise as older segments of the workforce are viewed in isolation from younger groups, the study reported.

“Generally, enhancing a financial communication program can boost employee enrollment as much as sweetening the company match rate,” according to the study. Improved financial communication may be more effective in encouraging employees to save than increasing the employer match.

The study – The Importance of Financial Communication for Participation Rates and Contribution Levels in 401(k) Plans – was produced by Steven Nyce for the Pension Research Council, and is available here .