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Employers get creative to get workers to participate in 401(k)s

For years, companies have preached to employees about the need to save in a 401(k) plan. They've cajoled. They've nagged. They've issued dire warnings, laden with grim statistics.

The results? Mixed at best. Up to a third of eligible workers still don't take part in a 401(k), even though it's the only retirement plan many of them have. Even among those who do, up to half leave free money on the table: They save too little to get their company's full match. By any gauge, low 401(k) participation and savings threaten to derail the retirement plans of tens of millions of Americans.

Now, many employers have dropped the gloves, turning to creative, even off-the-wall, gimmicks to shake the lapels of their time-starved, information-overloaded workers and boost enrollment.

"We've got beach balls, we've got T-shirts — you name it, we've got it," Fanny Sheumaker of Dean Foods says of the freebies the food-and-beverage company has handed out to get its nearly 30,000 workers interested in the 401(k) plan.

Universal Orlando Resort, with 13,000 employees, has created a mascot, the "401(k) Kid," along with a lottery-style scratch-off ticket and a form that lets workers enroll with the check of a few boxes.

More companies have decided to automatically enroll workers. (That trend is likely to gain momentum under a pension act passed last week.) Others kick money into 401(k) accounts even if employees save nothing. Employers are also using simplified enrollment cards that let workers sign up in about a minute. Some sweeten the deal by handing out iPods and piggy banks.

The new strategies come as the number of employees covered by 401(k) plans has ballooned. Increasingly, Corporate America has been phasing out traditional pensions, which pay workers a lifetime stream of income in retirement based on length of service, and shifting investment responsibility to workers through 401(k)s. In 2005, 61% of large employers offered traditional pensions, down from 91% two decades earlier, Hewitt Associates says.

As employers shift to 401(k) plans, they're "trying to find ways to replicate some of the features" of traditional pensions, says Ann Combs of the Labor Department's Employee Benefits Security Administration. The goal is to "jump-start employee savings and make sure people will have adequate savings in retirement."

Companies are seeking innovative ways to boost participation in 401(k)s, because "in their current form, they're not going to be successful as the primary retirement" plans for workers, says Sheldon Gamzon of PricewaterhouseCoopers' human-resources group.

The new strategies are hardly cure-alls for the fundamental woes of workers whose 401(k) savings will, in large part, determine the quality of their retirement years. Even many who do take part aren't saving enough to maintain their standard of living in retirement. Retirees need 60% to 80% of their pre-retirement income — and possibly up to 100% — to maintain the same standard of living, financial planners say.

William Montgomery, 56, says he'll probably have to stop working in five years because of failing health. But with a $300,000 nest egg, he feels far from ready financially, although he's kicked in 5% of his pay, what he can afford, to a 401(k) for more than two decades.

His father and grandfather both enjoyed traditional pensions, says Montgomery, a customer-service rep in Maple Valley, Wash., and were "set for life. With a 401(k), I'm just worried about having the money last a few years."

Companies have a vested interest in getting workers to save in 401(k) plans. Attractive retirement benefits help employers hire and retain top workers. Also, under IRS rules, the amount that executives can put in their own 401(k)s is tied to what rank-and-file workers put away. When a company's overall participation is too low, highly paid employees can't contribute the maximum to their tax-deferred retirement plans.

Additionally, companies that help employees save enough for retirement are less likely to face lawsuits from disgruntled workers over the plan's options or performance, says Christopher Jones of Financial Engines, which offers retirement-plan investment advice.

Why the reluctance of so many workers to exploit the potential of 401(k)s? Some feel they can't afford it. Others don't have the time or patience to wade through dense enrollment packets. But more often, employers say, workers are intimidated by the idea of managing their own money, so they procrastinate.

"People are just drowning in information about how much to save, when to increase their contributions," says Luke Vandermillen of Principal Financial. "People are just paralyzed with the choices."

Companies are combating employee procrastination and paralysis through:

•Automatic enrollment. In 2005, one out of four large employers automatically enrolled workers in the 401(k) plan, and half of those who didn't said they were likely to in 2006, according to Hewitt Associates. Employees can opt out of the plan but most don't.

That figure is expected to rise. That's because the pension act resolves a major concern of employers: It clarifies that automatic enrollment won't violate state laws that prohibit withholding employees' wages without their explicit consent. The Labor Department says it also intends to ease employers' confusion about which investment options are appropriate for automatically enrolled employees.

Many companies are already taking this approach. Earlier this year, IBM said it would automatically enroll non-participants in its 401(k) plan starting in 2008; after that, employees' traditional pension benefits will no longer accrue. Costco Wholesale adopted automatic enrollment last year for new employees — nearly 30,000 of them.

"We found that with the 401(k), it's based on inertia," says John Matthews of Costco. "We figured that if we could use inertia to our advantage, then most likely they'd stay."

So far, the strategy is working: Nine out of 10 of those automatically enrolled have stayed in the plan, Costco says. This fall, the company plans to enroll existing employees who are not already in the plan.

"Obviously, you don't want to offend people" if they don't want to save, but for those who haven't gotten around to signing up, it's a good way to get them participating, Matthews says.

Not all employers are wild about automatic enrollment. "We're not a big fan," says Annette Grabow of M.A. Mortenson, a construction company in Minneapolis. "We don't want to be that paternal and have people sit back and do nothing."

•Automatic company contributions. A growing trend is for companies to boost employee participation by automatically contributing 1% to 10% of each employee's pay into a 401(k) account, regardless of whether the employee contributes.

But workers usually don't get something for nothing. Often, employers pay non-matching contributions to offset a shrunken traditional pension plan. For example, West Bend Mutual Insurance in West Bend, Wis., began kicking in 5% to 9% of employees' pay into a 401(k) plan after it dropped its pension plan last year.

"People can see and feel this and understand what (this contribution) means," says Debra Cahoon of West Bend Mutual.

IBM, in phasing out its traditional pension, said it will deposit 1% to 4% of pay automatically into workers' 401(k) plans. That's on top of a dollar-for-dollar match on employee contributions up to 6% of pay.

Costco for years has paid out 3% to 9% of an employee's salary each year, in addition to matching 50% of the first $1,000 the employee contributes.

Automatic company contributions help workers boost often-low 401(k) balances. Yet the risk of this approach is that it'll give them "a false sense of security" because they may feel they don't need to invest their own money because they're getting the company contribution, says Lori Lucas of Hewitt Associates.

•Quick enrollment cards. An alternative to automatic enrollment is a quick enrollment card. It lets employees sign up for 401(k) plans within a minute or so. Workers can check a box to choose a contribution rate and often, another box to direct their money into one of a choice of investments. The options range from conservative bond funds to aggressive stock funds.

Principal Financial, on its "Easy Enrollment" form, also lets employees check a third box to automatically increase their 401(k) contribution rate each year. About 38% of the 401(k) plans that Principal manages use this form, with the average employee contributing 5% of pay initially and then stepping up this rate 1.4 percentage points each year afterward.

"If you can check three boxes and be on your way, then you've boiled it down" to a quick-and-easy process for workers, Vandermillen says.

Companies' efforts to simplify 401(k) enrollment represent a recognition that "more choice is not necessarily better," says Vanguard CEO Jack Brennan. "Well-structured programs are better."

•Eye-catching campaigns. Sue Steck, of Universal Orlando Resort, says scratch-off game cards, and prizes such as iPods, backpacks, T-shirts and water bottles, worked because "the thrill of winning something gets people very excited and gives us the opportunity to market the plan." Since the campaign began in July 2005, the theme-park operator raised 401(k) participation by 6 percentage points, to 47% of eligible workers.

M.A. Mortenson increased participation last year more than 20 percentage points among its eligible construction workers by using quick-enrollment forms and holding meetings in English and Spanish. The company also sent out a jigsaw puzzle that, when pieced together, encouraged employees to "learn more about the different pieces of a successful retirement plan."

Enrolling workers in 401(k) plans is a feat unto itself. But keeping them interested — and involved — is a continuing chore. So is persuading them to invest in a diversified portfolio that's appropriate for them. A Vanguard report showed that, in 2004, 13% of 401(k) participants had their entire account in fixed-income securities, 21% had all-stock portfolios and one-fifth had more than 20% in company stock.

Brandon Kaid, 23, a software developer in Rochester Hills, Mich., enjoys managing his 401(k) plan and says it's "not rocket science." Even so, his portfolio isn't what retirement experts consider ideal. Kaid invests in target-retirement funds, which begin with aggressive mixes of stocks and bonds and gradually shift to more conservative allocations as you near retirement.

But instead of putting the entire portfolio in this option, as it's intended to be used, Kaid allocates 40% of his money to international funds and 20% to mid- and small-cap funds. He explains that he's "not big on having all of your money in one fund, even if that fund does give you diversification inside of it."

Workers typically lack the know-how of the professional managers who oversee traditional pensions, making it harder for them to accumulate enough money for retirement, says Damon Silvers of the AFL-CIO.

Busy schedules also work against 401(k) participants making smart, informed investment decisions. "As I've become more experienced, I've realized that I can't always make the best (investment) decisions," says Alan Bull, 27, a field engineer in Seattle. "I'd rather have a professional make the decisions for me."

For many companies, though, finding the right balance between employee responsibility and company oversight isn't always easy.

"The days of a parental and parochial way of handling employees is gone," says Randy MacDonald, a senior vice president at IBM.

At the same time, "it's our responsibility to help educate and have appropriate oversight (over the plan). In this day and age, there are a lot of challenges."

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