SURVEY SAYS: What's the Best Participation Booster?

Worker respondents to that survey favored a generous company match, but expressed support for a number of approaches, including automatic enrollment, accelerated deferrals, and lifestyle/asset allocation funds, as well (see  Workers: “Show Me the Money” to Beef Up Participation ).   This week we asked readers what they thought the best participation strategy was.  

It was nip and tuck throughout the day, but at the “close,” readers who saw automatic enrollment as the best strategy to spur better plan participation outpaced those favoring a generous company match by a margin of 40.63% to 36.46% .   However, the commitment to those notions was borne of a mixture of experiences.  

Automatic Pilots

One who favored automatic enrollment said, “With employees spread all over the state and many in jobs without computers, it is hard to get people to enroll, even with a match.”   Another said, “Automatic enrollment seems like it would be the most successful in increasing participation.   The employees don’t have to do anything to enroll, and that is what they do best–take no action.”   Echoing that sentiment was the reader who noted, “…if they’re too lazy to sign up, they’re too lazy to stop it if automatically enrolled.”

“Automatic Enrollment, preferably into age-appropriate Lifecycle Funds to handle suitability issues” , observed another.   “It’s Big Brother, but if people don’t think participating is important, they won’t do it.”   Still another made a “close to home” observation:   ” I would say automatic enrollment.   Sometimes people just don’t want to fill out paperwork or go out of their way to walk down to HR.   The younger generation is more like this and so is my husband.”

Many spoke from real world experience, including the reader who said, “I have seen automatic enrollment improve the participation rate from 85% to 94%.   Communication is important, especially if eligibility is upon hire.    Part of our explanation for the “automatic” deduction was that: “This ensures that you receive the maximum Company match available to you.”   If they had delayed their enrollment, each pay period lost could mean less Match. “

Yet another voice of “experience” was the reader who summed that up as follows:   “Auto enrollment, only because we’ve tried and/or have in place all of the others!”

There were a number “opposed” to the reliance on “automatic” options, however.  

Match Gains

“Although the best program would include a variety of the options, I know from experience that the company match and education can make a difference,” said one.  “Back in 2001 my company had to suspend its employer match and we lost about 5% of our enrollees.   When the match was restored last year we gained back 5% plus some new hires that never enrolled upon hire because we offered no match.”

That kind of observation – participant behaviors up to (and no further than) the level of the company match – was a consistent comment among those who said that a generous company match was the key to participation success.  “Without question, I think the best strategy to spur participation is a generous company match,” noted one.  “We do almost everything on the list, but it’s funny how contribution rates fall off precipitously after the maximum match is received at 6% of pay.   I don’t think that this is coincidence.”  

Another who opted for the match nonetheless cautioned, “…but I also think employers should look at restructuring their matches. Instead of 50% on the first 6% of pay, how about 40% on the first 8% or even better, 40% on the first 10% of pay. Data show that the majority of employees will contribute at the level that maximizes their match. So let’s look at ways to move that point to a higher level!”

But the reader who most “eloquently” spoke to the motivational sway of a generous match said simply, “Who can argue against free money?”

A voice against the enticement of the match was this reader:  “All the money in the world doesn’t make the person who thinks they can’t afford to save suddenly feel he can give up 5% of his pay.   The behavioral finance folks have it right – we’re wired for instant gratification!”

Other Options

Among the other responses, “other” was most popular, cited by roughly 9%, while better education garnered the support of 6.25%, the presence/support of a financial advisor drew about 4%, 2% opted for peer pressure, and the rest said that a lifestyle fund option could simplify things enough to make a difference.  

“In response to the survey, I would say the availability of a financial advisor,” noted one.  “So many employees just want someone who does understand investing to ‘tell’ them what to do.   So many people don’t want to understand investing or take the time to focus and learn.   I agree that others do want to learn, if they can understand the person doing the educating.”

Among those favoring more education was this voice of experience:  “Let’s see: already tried a, b, c, d, f, g, h, and i. So, I say we go for education, with the materials written, designed, and produced by Pixar.”

I will confess to a certain affinity for the “peer pressure” option – and while the establishment of that culture can be problematic, it can be hugely effective, as this reader noted: “It’s taken a fair amount of time, and a great deal of effort, but we are now to the point where we have peer pressure working for us. Many associates tell me, while they are in my office signing up, they are there after visiting with a co-worker or supervisor about the 401(k). When the message is coming from multiple sources, it is much more effective.”

Those optioning for the “other” category ran the gamut of choices, but generally constitute a hybrid of the other choices.  “Better education is needed, but it is in the area of educating the employees of the necessity of saving for their own retirement…Employees cannot comprehend the amount of money they need at normal retirement to maintain any standard of living.”   Another said, “I think the best way to encourage employees to participate in a defined contribution plan is (i) peer pressure. However, I also think the only way to get to (i) is to provide plenty of (e) better education about the plan/options.   Another in the peer pressure category said simply, “The natural aging process seems to work best with the people I have known.”

But this week’s Editor’s Choice goes to the reader who said, “Human nature has undoubtedly demonstrated our desire to follow the crowd, even against our better judgment.   How else could the Macarena dance or the electric slide become popular?   Therefore I choose (i) peer pressure, though my close second choice would be (j) other–hypnosis.”

Thanks to everyone who participated in our survey!

B -- Automatic Enrollment, preferably into age-appropriate Lifecycle Funds to handle suitability issues. It's Big Brother, but if people don't think participating is important, they won't do it.

Let's see: already tried a, b, c, d, f, g, h, and i. So, I sez we go for e, with the materials written, designed and produced by Pixar.

(b) --- auto enrollment, only because we've tried and/or have in place all of the others!

I think if I had to pick just one it would be A - the company match.   This year the OCC started a 2% automatic contribution to the 401(k) for everyone, whether they have enrolled or not, and we are hoping that will motivate those who haven't contributed to start.   Of course, I personally apply peer pressure whenever I find co-workers that aren't participating in the TSP or 401(k) at least to the point of maximizing the employer match...

Survey response:

Human nature has undoubtedly demonstrated our desire to follow the crowd, even against our better judgment.   How else could the Macarena dance or the electric slide become popular?   Therefore I choose (i) peer pressure, though my close second choice would be (j) other--hypnosis.

Automatic enrollment by far!   Participation can be directly tied to apathy and momentum - once the participation has begun, it stays that way most of the time.   Sign everyone up and wait and see what happens to 401(k) balances - suddenly participants will be shocked they are actually saving for retirement.

I think a) is the best strategy...but I also think employers should look at restructuring their matches. Instead of 50% on the first 6% of pay, how about 40% on the first 8% or even better, 40% on the first 10% of pay. Data show that the majority of employees will contribute at the level that maximizes their match. So let's look at ways to move that point to a higher level!

In response to the survey, I would say F, the availability of a financial advisor.   So many employees just want someone who does understand investing to "tell" them what to do.   So many people don't want to understand investing or take the time to focus and learn.   I agree that others do want to learn, if they can understand the person doing the educating.  

(b) Automatic enrollment.   As a TPA I see all kinds of plans with all kinds of advantages (great match, great funds, great advisors, etc.) and by far the one with the best participation is the one with automatic enrollment.   People are just too lazy to opt out!   Next I'm going to try to convince the plan sponsor to automatically increase the deferral percentage with each pay increase.   They should have excellent participation then!

J - The natural aging process seems to work best with the people I have known.  

I used to think the answer was B, but without a doubt, the answer is E!!

I recently had an experience with a friend that illustrates my response.   She is in her early 30's and works for a large US-based company with locations all over the world.   The company's 401k plan has an automatic enrollment feature, but she stopped the contributions shortly after being hired.   This came to my attention when she made the mistake of mentioning that she was putting money in an IRA instead of contributing to her company's 401k plan.   She said this in front of me, one of my co-workers, and a financial analyst.   And, the worst part was she was convinced she could retire at 55!!   We all looked at her in amazement and we berated her until she agreed to get a copy of the plan's SPD.   A few days later we used and example to make sure she understood what she was missing out on (after that, it didn't take much convincing) and the financial analyst helped her choose between the funds available to her.   She is now taking advantage of the 401k plan and is still contributing to the IRA.   A nudge and some education can go a long way!!!

I would have to pick (a) - a generous company match.   It follows the theme of the survey, "Show me the money" and it's not very often that you can truly get something for nothing...

I'm very tempted to pick another as none of the choices will work without (e) better education about the plan, but I'll stick with the above since you insist!  

Item (b), if they're too lazy to sign up, they're too lazy to stop it if automatically enrolled.

My response is other.

Better education is needed, but it is in the area of educating the employees of the necessity of saving for their own retirement.   Most employees live for today. The thought of growing old and need funds for retirement has not and will occur to them until they reach 45 or 50.   Then many others still believe that Social Security will take care of them in their retirement.

Employees cannot comprehend the amount of money they need at normal retirement to maintain any standard of living.

I think it's actually j (other), for FEAR.   It may make more of an impact if you can make the potential participants believe that if they don't do this they run the risk of starvation, homelessness and dying from not being able to afford medicine.

Seriously, I think it's a & b.   How can you beat free money?   And if you don't even make it an option my own fear is dispelled a little bit, because hopefully my taxes won't be higher because I have to help take care of all the people who didn't have enough money to live in retirement!

(e) better education about the plan/options All are great strategies to increasing plan participation but are of limited value if the participant is not well educated in or comfortable with their options.

If I had to pick one for us it is clearly (i) peer pressure - we have a very competitive work force many of whom feel compelled to be better than our well communicated average deferral rate.   This has caused a consistent increase of the average deferral as we continue to communicate to each participant what their deferral rate is and what the average deferral rate is.   However a 100% match on the first 3% (a), no procrastination because fund selection is to hard (c), good up-front in person education (e), and an educated well paid work force (j) are also important factors in achieving 100% participation with an average deferral rate of 13% with 24% reaching the $13,000 maximum in 2004.   We also only have 90 participants which also makes it easier to promote the plan.

Although all of those alternatives should be managed as part of an effective 401(k) program, automatic enrollment will likely yield the best results. This is particularly true over a one to two year time period.

Other INR is increasing participation by using online enrollment and using a default Asset Allocation Model for investment selection.

I think the best way to encourage employees to participate in a defined contribution plan is (i) peer pressure. However, I also think the only way to get to (i) is to provide plenty of (e) better education about the plan/options. Even without (i), (e) seems to be effective on its own.

When I came to the bank in 1997, our 401(k) had a participation rate of just under 70%. I would add that benefits personnel here was primarily concerned with making sure the forms were correctly completed and returned. In fact, when she did not receive completed enrollment forms, she sent the employee a completed waiver to be signed and returned to her. Obviously, this was not very effective in encouraging participation.

We currently have a participation rate of just over 87%. We have expanded our 401(k) education efforts a great deal, began offering immediate eligibility with vested match, increased the number of open enrollments from 2 to 4 each year, and began offering an automatic increase program, but we have not increased our matching percentage. We match $.25 on every $1, which is certainly not the highest matching level I've ever seen.

It's taken a fair amount of time, and a great deal of effort, but we are now to the point where we have peer pressure working for us. Many associates tell me, while they are in my office signing up, that they are there after visiting with a co-worker or supervisor about the 401(k). When the message is coming from multiple sources, it is much more effective.

I don't think anything works better than a company match!

Mandatory enrollment reeks of socialism. We all have automatic enrollment now…it's called Social Security!

The best strategy should be education of the masses. But again, how does one get them educated? Even free seminars during working hours are rarely attended by the masses and many who do attend either forget, ignore or just don't understand.

But in reality, the best strategy is a booming economy. If people have more available income, they usually save/invest more for the future. Why? Because they are able to.

I always enjoy your newsletter, articles and commentary. Thank you.

Due to a perceived lack of interest, (b) automatic enrollment seems like it would be the most successful in increasing participation.   The employees don't have to do anything to enroll, and that is what they do best--take no action.

I would think it differs by the profile of the workforce. By that I mean a company with a lower educated workforce would likely find Automatic Enrollment the most successful vehicle, those with a higher educated workforce would benefit the most from a generous company match.

Given that you want us to pick one, our company would benefit the most from a generous match. Since, as you know, we already have one, we probably will look to automatic enrollment to catch the laggards - and we do have them.

A. Generous company match.

Who can argue against free money?

The best strategy is still (a), although I'd modify it to say ANY company match.

In the companies that I deal with, a generous match is the easiest sell to ensure participation. At enrollment meetings I use the illustration of going to a casino and every time you put a dollar into the slot machine you get 2 dollars out. Who wouldn't do that all day long?

B.   Auto enrollment - the inertia factor works wonders.   Why not use it to their advantage?

(b) automatic enrollment - So many employees just never get around to signing up for the 401k plan - this forces a decision to either save or opt out.—

Although I have never implemented the strategy, based on what I have read option b) would be the best for increasing participation today.   Maybe it's just a false assumption on my part that "the grass is always greener", since I have tried almost all the others (not sure about "exciting" fund options, to most employees that would be an oxymoron) without much success.  

Without automatic enrollment, the best I ever experienced was a consistent 94% participation rate in a plan prior to 401(k), without loans, minimal formal communication (in fact, we only sent statements out once a year), no financial advisor and six year graded vesting.   It did have $1 for $1 vesting to 8% however, the reason it was so popular was word of mouth.   It was a topic of conversation at the "water cooler".   I guess you could call it "peer pressure", since coworkers (and some bosses) questioned anyone's intelligence who didn't participate.   That probably would be politically incorrect today.

First thought was (a) based on the argument that you immediately get a decent investment return via the company match.   However, assuming that there is a match of some level, I believe that (e) is the most important since most employees cannot calculate the potential accumulations and tax savings.

I would say automatic enrollment.   Sometimes people just don't want to fill out paperwork or go out of their way to walk down to HR.   The young generation is more like this and so is my husband.

I am totally against it, but b) automatic enrollment would spur better participation.   One of my sister companies has automatic enrollment and they find that since the attitude is do nothing, their workforce tends to forget to disenroll - they currently have 96% participation in their 401(k).

I think a) a generous company match would trigger interest with my employees.   Anything they can get "for nothing" really excites them.   I passed out clip-on side shields yesterday and even the employees that didn't wear glasses wanted them - anything for nothing.

No doubt in mind on this one:   Automatic enrollment.

All the money in the world doesn't make the person who thinks they can't afford to save suddenly feel he can give up 5% of his pay.   The behavioral finance folks have it right - we're wired for instant gratification!   You don't need to look at retirement plans to see that.   Think BOTOX.

The match comes second - and works best when the message links back to the instant gratification angle.   You put in X% and you get an INSTANT payback of $X.  

Although the best program would include a variety of the options, I know from experience that the company match and education can make a difference.   Back in 2001 my company had to suspend its employer match and we lost about 5% of our enrollees.   When the match was restored last year we gained back 5% plus some new hires that never enrolled upon hire because we offered no match.   While it's true that a majority of employees remained in the plan, for 5%+, the match is what made the difference.   More recently I ran an enrollment campaign targeted at non-highly compensated employees touting the employer match, ease of enrollment and the need to save for retirement via postal home mailings and email.   Results were 20% of contacted employees enrolled in the plan.   I think the moral of the story is just like any other benefit offered, you have to resell the 401(k) plan periodically from different angles to reach different employees.

b) I have seen automatic enrollment improve the participation rate from 85% to 94%.   Communication is important, especially if eligibility is upon hire.    Part of our explanation for the "automatic" deduction was that: "this ensures that you receive the maximum Company match available to you".   If they had delayed their enrollment, each pay period lost could mean less Match.  

While it really does depend on the particular situation at each company (employee demographics, what the Co. has already done, what the participation rates are at the Company, etc.) for our Company, I think "b" - automatic enrollment would work best.   The groups we have poor participation in are young, low-earners, spread in small groups across most of the country.   Those who have a more professional, better educated workforce will have a different strategy, and those whose employees are based at large facilities have the advantage of on-site meetings and events, and therefore, again will have different strategies.

Option B, automatic enrollment.   With employees spread all over the state and many in jobs without computers, it is hard to get people to enroll, even with a match.

Automatic Enrollment - anything that overcomes inertia and does things for the participant is the key.

I have to pick "other" and then list "have someone else do it for me" as the answer, and by someone else I mean an investment professional.   Investor behavior tells me that I am incapable of doing it myself, on average, and since I really want to have enough money at retirement to last the rest of my life, I better make sure I have the best opportunity to make that happen.   And that means I need professional assistance, not more education.

Definitely other.   Employees need to be shown how they can actually get more in their take home pay by deferring a percentage to their 401(k).

Without question, I think the best strategy to spur participation is a generous company match.    We do almost everything on the list, but it's funny how contribution rates fall off precipitously after the maximum match is received at 6% of pay.   I don't think that this is coincidence.   Show them the money, and most people (70 to 80%) will participate.   No matter how hard we try, some will never get it, yet we keep knocking ourselves out trying to convert the other 20%, which I politely call the savings challenged.   If 50 cents on the dollar doesn't work, nothing will.

My response is other.

Better education is needed, but it is in the area of educating the employees of the necessity of saving for their own retirement.   Most employees live for today. The thought of growing old and need funds for retirement has not and will occur to them until they reach 45 or 50.   Then many others still believe that Social Security will take care of them in their retirement.

Employees cannot comprehend the amount of money they need at normal retirement to maintain any standard of living.

Automatic enrollment is the most effective. We've had a generous match for years and have made no significant changes to our plan except for automatically enrolling employees since 3 years ago and participation is up from 64% to 80%.

Plans have educated employees for years and continuously monitor and improve plan services/offerings.   Experience has shown the majority of employees don't move unless you move them.   Therefore, I believe the best way to increase plan participation is (b) automatic enrollment.

J - Participants taking a little responsibility for their own financial futures.   What a change that would be!

Automatic Enrollment does not require the participant to do anything.

All other options require the participant to do something, education about the plan and it's options do not mean much if the material is not read or even if they read about the options if they have to fill out a form or call the provider to sign up, if they don't find the time to do that, they often do not participate.

(j) Other - At my former employer (now out of business, but that's another story) the employer contributed 10% -no employee participation was required.   You would be surprised how many people still did not contribute any of their own funds.   This is the only way I know of to have 100% participation

I vote for (e) education. However, you have to know your group.   What works for one, may not work for another.   We have a very aggressive education program and great participation without automatic enrollment or loans (88.25% with an average deferral of 7.91%)   We think that keeping things easy administratively for employees to enroll and increase contributions is key and we've been reminding employees for several years about increasing their contributions when they receive an increase, at tax time when it's on their minds and multiple other times throughout the year.

Survey: b) Automatic Enrollment, we've proven it!

j) Other: basically scare tactics:   Educate your employees about the current state of Social Security retirement possibilities & the importance of personal saving beginning as young as age 18 to 22, or, on the other hand, encourage them to have many children so that at least one or some of them will support them in their old age. Certainly educate them to lower their expectations as to what the "Golden Years" will bring without doing a lot of personal saving as the prospects of a continuing Social Security program are looking somewhat grim.

b- Automatic enrollment.  

Retirement is a long-term goal and folks have trouble seeing the need to start funding it at a specific time.   We instituted a mandatory (non-voluntary) contribution a few years ago of 5% of pay and we were astonished by the extremely low number of folks who adjusted their voluntary contributions to take this into account (400 were affected and only about 30 adjusted their voluntary contributions and most did not reduce them by the full 5%).   Non-participation, at least here, seems to be due to inertia.

I would have to say that my favorite option is i - peer pressure! Besides once you are able to pressure them into participating the rest of the benefits really have a way of "unveiling" themselves - like WOW what a great match we have or WOW do we have some great funds and I didn't know how much information our FA really had.   Sometimes it is just getting them to see it for themselves.

I believe the automatic enrollment is the best way for employers to increase participation. In our firm we have 3 financial advisors in addition to the 4 Account executives. We insist on our clients using our "Financial Advisors" to help participants for full "investment advice".

Even so, we are not seeing an increased participation as we would like, especially the low income participants and in many cases inaction from the people that could easily afford to contribute or contribute more than they do. When confronted they always say I'll get it done tomorrow.

Education without action means little other than a lowered retirement income for all.

One thing, we have noticed where our clients that have elected automatic enrollment, hardly any of the participants elect not to continue those contributions.

I would have to go with (a).   I only have 4 employees out of 41 eligible that are not contributing...and those who are, are contributing an average of 5.93%....we match 5%.   I think that speaks for itself.

(a) A generous company match.

Too many companies think a 2% of pay match is enough to lure workers into participation.   When you're at the low end of the totem pole and struggling to pay your bills each month, the prospect of a few hundred dollars a year (that you can't spend on your bills) isn't all that enticing. It's amazing to me that more companies don't understand that.

(a) -- because money talks.

Automatic enrollment, applied retroactively.

(a) - a generous company match.   Free money!   Who can beat it!

a). Generous company match.   Our company has a generous profit sharing contribution, and therefore a very small match.   I believe we need to reverse the policy to get employees to save more of their own money.

(J) Other.

Back when I first started working I wish there had been more education about saving for retirement and investment options, because knowing what I know now, my poor son has to deal with me "pounding" savings, 401(k) and investment information into his head.   I want him to start as soon as he gets a job and not wait until he's in his late 20's like I did!   Because "tomorrow does come and things happen, so you have to plan for it because maintaining your pre-retirement lifestyle is not an entitlement"

b- "Automatic enrollment," because people are frozen to the point of inaction like a deer in headlights Why? Because they don't think they can afford it, or there's too many investment options and they don't want to "mess it up."   It can take someone year's to feel comfortable enough to save and allocate properly. That's years they could have been saving and they'll never be able to make up for.   With auto-enroll, they're in and they're more likely to "let it ride."

I'm going to say J - other.   I think education on the consequences of not saving or not starting now would be most helpful.   I remember one of the most powerful illustrations that I saw about 20 years ago showed the difference between 2 people - one started saving $2000 each year for 10 years and then stopped, the other starting saving $2000 each year after waiting 10 years, and continued saving for 30 years until retirement.   While the second person ended up contributing much more he never did catch up to the balance of the first person.

I think people have to buy into the need to save for retirement. You can automatically enroll someone or automatically increase their contributions, but if they don't buy into the need, they'll just take a distribution when they change companies and buy a boat.  

b - Automatic enrollment.   Given the plethora of choices, and general investor indecisiveness and lack of confidence, automatic enrollment pays homage to the "Pay Yourself First" theory of retirement planning.  

b) Automatic enrollment

And I would make participation mandatory - a condition of employment.  

10% ee contribution, 10% er match.   No loans, hardship withdrawals, or cash available - even after separation of service unless they reach a certain age - say 55 or 59.5.   

These rules would not apply to ee contributions above 10%.   Loans, hardship & cash at separation would be available.

I think b) automatic enrollment is the best way to increase participation.   At 3 or 4%, most people would never notice the small amount coming out of their pay, but would at least have something going into retirement.   Those who are more zealous can always increase. To those who would truly feel $25 or $50 a paycheck, can opt out.  

My great grandmother told me 30 years ago to put something away in savings before I spent a penny of my paycheck, even if it was only $25 a month, because without any pain you would have savings for when you needed it.   The same holds true with automatic enrollment.   Lack of inertia will keep most people in without any pain.

Clearly, the most significant part of the answer is a generous match.   But salary, job security, and the cost of living, including health care costs, are obviously part of the picture.

We also need to recognize that American demographics has just reached an important watershed.    For the first time, the share of workers in our "savings" cohort -- ages 35 to 55 -- has begun to decline.

For younger employees, who typically have greater acquisition needs, a generous match is needed to offset the disadvantages of salary reduction.

Some of the opportunity costs incurred by 401 (k) salary reductions are specific to individual employees; especially younger employees who wish to invest in themselves, their spouses, or children by way of ongoing education, or by way of starting, or putting aside a nest egg for, a small family business. Current monies are often of value just to improve a current standard of living, including child care, health care, transportation, or even more expensive housing in order to save commuting time necessary for a quality family life.

For some, the opportunity cost is also combined with the adverse impact of investing in equity through a 401 (k), and the near exclusive focus on business organizations producing less than half of American GDP   created by the limited investment options in a typical 401 (k).

Without a match, or for salary reduction above the match, it is probably a poor decision for most employees -- especially younger employees -- to contribute to a 401 (k) plan.   Why?   The opportunity cost of salary reduction for each employee must be weighed against these factors:

• Deferral today will be at a historically low tax rate for all participants. Withdrawal is likely to be at a higher tax rate.
• Deferral today will be at a low tax rate for many younger employees at the beginning of their career. Withdrawal is likely to be at a higher tax rate.
• If the deferred salary is needed before retirement, say because of lost employment, the money withdrawn will be subject to additional penalties on withdrawal.
• Meeting a younger employee's long term retirement savings needs typically suggests the acquisition of at least some tax advantaged investments; e.g., equity.   However, the cost of those investments reflects the value of those tax advantages to tax paying investors.   As none of the tax advantages (e.g., LTCG or lower dividend tax) benefit the typical 401(k) mutual fund investor, employees lose these advantages within a 401 (k).
• On top of all this, especially those 401 (k) plans with "free" bundled recordkeeping, may shift investment and administration fees to employees.   These fees and expenses may tip the balance against participation for younger and lower paid employees.

Here is the overall picture: A low paid, low tax rate, employee -- perhaps an employee who is not confident of his ongoing employments -- is asked to decide whether to forego other important uses for the salary in order to risk higher taxes on withdrawal; penalties for early withdrawal; loss of the tax advantages to equity investments; and, on top of all that, to pay a disproportionate amount of the cost (relative to his share of the plan's tax deferral benefits) of an insurance company's variable group annuity wrapper (these wrappers are typically justified outside of the 401 (k) world at least in part on their tax benefits) that is wrapping equity and other mutual investment options, each with their own fees and expenses.

Accordingly, if the match is high enough, or if the company is in a high paying industry, or if an individual's current tax rate is high enough, or if the employee has other resources for his or her other current needs, then the scale will tip toward higher salary reduction elections. One partial solution that goes beyond the options you presented is that Congress could remove the penalty for early withdrawal for non-highly compensated employees.   It could also eliminate the administrative restrictions and the expense of managing those restrictions.