Thinking outside the box to increase low-income employee participation in 401(k) plans

Jerry Kalish
July 28, 2009 — 2,180 views  
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Suppose you're a plan sponsor that wants to increase 401(k) participation among your low income employees, what do you do?

You know, of course, that employee financial education programs by themselves are not enough to influence a change in employee behavior. You might consider automatic enrollment about which I've written about before.

Automatic enrollment has been shown to raise 401(k) participation rates dramatically when it is applied to new hires, particularly new hires who are low earners. In one important study, automatic enrollment increased 401(k) participation rates of those making under $20,000 annually from 13 percent to 80 percent.

Research from the Retirement Security Project (a member of the Retirement Made Simpler coalition) indicates that low-income individuals can, and will, save given the right circumstances.

So what exactly are the right circumstances? If you are thinking outside the box like Staples, you partner up with Progress Through Business, a nonprofit organization focusing on poverty alleviation issues, and H&R Block to offer discounted tax preparation to low-income employees of Staples, Inc. thorough a pilot program called Tax Break first rolled out in January 2007 and run again in January 2008.

What follows are the highlights of a study of this unique program prepared by John Hoffmire, PhD Director of the Center on Business and Poverty University of Wisconsin-Madison, Wisconsin School of Business and Thomas Harms, Treasurer, Progress Through Business, for the filene Research Institute.

What made Tax Break unique was the inclusion of opportunities for low income employees to enroll in both employer and government benefit programs in the tax preparation process. The result was a significant increase in employee participation in such employer-sponsored plans as 401(k) retirement plans, employee stock purchase plans, and tuition reimbursement programs. Enrollment in government benefits also increased, with higher incidences of the Earned Income Tax Credit, child care credits, renters credits, education credits, and various advantages that are available to but sometimes not accessed by eligible low-income taxpayers.

The employees screened for benefits in 2007 showed a 29% increase in 401(k) plan enrollment, a 16% increase in Employee Stock Purchase Plan enrollment, and a 42% increase in scholarship program enrollment. In terms of just the 401(k) plan, employees benefited by accumulating retirement saving and receiving a 50% match by Staples on the first 6% an employee contributed.

The program worked out well for Staples. After one full year of tracking, those who participated in the program during the 2007 tax season showed a 32% improvement in retention over those who did not participate. This improvement in retention more than covered the costs incurred
by Staples.

In fact, according to Hoffmire, "For each dollar that Staples invested in the program, they got back more than $6 in retention benefits related to having to hire others and train others who they did not want to lose. This calculation was based on the cost that McDonalds faces when they lose a worker they did not want to see leave the company. In fact, the savings were even greater for Staples, because their costs related to unwanted turnover are even higher than McDonald's."

So why the excellent results? Because someone thought outside the box and recognized tax filing is the single largest financial event of the year for that for low income employees. And it presented a unique "teachable moment". That is, a time at which an individual is most receptive to learning something.

In addition, the researchers found other advantages that accrued to Staples and its employees. Hoffmire said, "On certain days, when the tax program was being promoted in Staples' large distribution centers, you could notice an improvement in the error rates as employees seemed to show more care for their work as they felt they were being offered a benefit that was worth the equivalent of a 2% raise just through the tax preparation component of the program."

Here is a link to the complete study, The Economics of Serving Low-Income Employees at Tax Time: Implications for Credit Unions (PDF, 63 page).

Jerry Kalish


Jerry Kalish is President of National Benefit Services, Inc., is a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. Jerry has over 30 years of experience with a wide variety of employee benefit plans including retirement programs, welfare benefit plans, executive benefits, and employee ownership programs. He provides continuing education programs for CPAs and financial services and human resource professionals. Jerry has authored and edited two books on employee benefits and he is currently at work on his third book, the subject of which is retirement plans for the 21st Century.He writes a regular monthly column for Employee Benefit News and a weekly column for Slate's BizBox blog for small businesses. He can also be followed on Twitter.