The IRS announced Thursday that the annual contribution limit for 401(k)s will remain unchanged at $17,500 for 2014, but it’s not likely to affect participants’ contributing behavior. The soon-to-be-released Mercer Workplace Survey found that the average participant believes the deferral limit is $8,532, almost half the actual limit. That gives them the dangerous perception that they’re close to the maximum contribution when they’re actually far from it.
Mercer found that respondents expect to contribute just under $7,500 to their 401(k) plan in 2014.
“Plan sponsors need to do a better job of communicating the total opportunity employees have when contributing to their 401(k) plan,” Dave Tolve, U.S. leader of Mercer’s defined contribution administration business, told ThinkAdvisor on Monday. “When you start to dig into it further and start to think about the different demographics, it’s important for plan sponsors to communicate specific to their different employee demographics.”
Tolve blamed automatic features for at least some of the problem. “Automatic enrollment is pretty pervasive in 401(k) plans today. It’s great for getting employees to start contributing, but it often leads to inertia where many employees say, ‘This is great. I’m enrolled in my 401(k) and I don’t need to do any more.’”
Tolve referred to past Mercer research that shows people who contribute at the default level tend to contribute less than people who actively make a decision to contribute.
“Automatic enrollment has its place,” he said, “but it’s important to communicate to employees that there’s a lot more room to contribute beyond the default.”
Automatic escalation isn’t a perfect solution, either. “It’s a great feature, but it alone is not enough,” he said. “A lot of plans will start someone at 3% and increase by 1% per year. That’s better than that employee not enrolling at all, but there’s an additional step that a lot of plan sponsors ignore, and that’s letting them know that there’s a much greater opportunity in 401(k) plans and they should be saving more.”