Checking Participation Rates and Deferral Levels: Are Employees Using the Plan?

One of the most valuable benefits an employer can offer is a workplace retirement plan. Yet merely offering a 401(k) plan doesn't necessarily mean employees are taking full advantage of it. Mid-year is an excellent time for business owners and plan sponsors to step back and evaluate two important indicators of their plan's effectiveness: participation rates and employee deferral levels.

These metrics can deliver valuable insight into employee engagement, retirement readiness, and whether the plan is achieving its intended purpose. They may also help identify opportunities to improve plan design and participant education.

Why Participation Rates Matter

Participation rate refers to the percentage of eligible employees who are actively participating in the retirement plan.

A high participation rate generally suggests that employees recognize the value of the benefit and are taking steps to prepare for retirement. Lower participation rates, however, may indicate barriers that deserve attention, such as lack of awareness, enrollment complexity, financial stress, or insufficient education.

While every workforce is unique, routinely monitoring participation trends helps employers understand whether employees are utilizing one of the organization's most valuable benefits.

Don't Stop at Participation

Enrollment is only the first step.

An employee contributing 1% of pay is technically participating, but that contribution level may not be sufficient to help meet long-term retirement goals.

That's why employers should also review employee deferral rates—the percentage of compensation employees choose to contribute to the plan.

Looking at both participation and contribution levels provides a more complete picture of overall retirement readiness.

Questions Every Employer Should Ask

When reviewing plan data, consider questions such as:

• What percentage of eligible employees are participating?
• Are participation rates improving year over year?
• Are new hires enrolling quickly?
• What is the average employee deferral rate?
• How many participants contribute enough to receive the full employer match?
• Are employees increasing contributions over time?

The answers can help determine whether additional communication or plan enhancements may be beneficial.

Are Employees Missing the Full Employer Match?

One of the most common missed opportunities occurs when employees contribute less than the amount required to receive the full employer matching contribution.

For example, if an employer matches contributions up to 5% of pay but many employees contribute only 2% or 3%, those employees are effectively leaving part of their compensation unclaimed.

Periodic reviews can identify this issue and create opportunities for targeted employee education explaining how employer matching contributions work.

Understanding Deferral Levels Across Your Workforce

Average contribution rates often vary by:

• Age
• Income level
• Length of employment
• Department
• Job classification

For example:

• Younger employees may contribute less because they are balancing student loans or starting families.
• Mid-career employees may increase contributions as earnings grow.
• Employees approaching retirement often seek to maximize retirement savings through higher contribution rates and catch-up contributions if eligible.

Reviewing these trends can help employers customize educational efforts to different employee groups.

The Role of Auto-Enrollment and Auto-Escalation

Many employers have adopted automatic enrollment features to encourage greater participation.

Automatic enrollment places eligible employees into the retirement plan unless they choose to opt out. Research has shown that automatic enrollment can significantly increase participation rates, notably among younger workers and first-time savers.

Automatic escalation goes one step further by gradually increasing employee contribution percentages over time, helping participants build retirement savings without requiring annual action.

Employers considering plan enhancements may wish to evaluate whether these features match their workforce and overall retirement plan objectives.

Education Can Make a Difference

Many employees don't understand:

• How much they should save
• The impact of compound growth over time
• How employer matching contributions work
• The tax advantages of salary deferrals
• The long-term consequences of delaying retirement savings

Providing ongoing financial education can help employees make better decisions and increase confidence in their retirement planning.

Educational meetings, webinars, newsletters, and one-on-one guidance may all contribute to stronger engagement.

Watch for Participation Gaps

Participation reports can also reveal whether certain employee groups are participating at significantly lower rates than others.

For example:

• Recently hired employees
• Younger workers
• Lower-income employees
• Certain departments or locations

Knowing these trends allows employers to focus educational resources where they can have the greatest impact.

Mid-Year Is the Perfect Time to Review

Waiting until year-end to evaluate participation frequently leaves little opportunity to bring meaningful improvements before another plan year begins.

A mid-year review provides time to:

• Assess current participation levels.
• Evaluate average employee contribution rates.
• Identify employees not receiving the full employer match.
• Review enrollment trends for new hires.
• Consider whether communication efforts are effective.
• Evaluate whether plan design changes could improve participation.

These preventive steps can help improve employee engagement while aiding long-term retirement readiness.

How DWAM Can Help

At Duncan Williams Asset Management (DWAM), we believe a successful retirement plan goes beyond simply offering investment options. It involves helping employees understand the value of participating and authorizing them to make well-informed financial choices.

Our retirement plan consulting services can help employers:

• Review participation and deferral trends.
• Analyze employee contribution patterns.
• Identify opportunities to improve retirement readiness.
• Support participant education and financial wellness initiatives.
• Evaluate plan design features such as automatic enrollment and automatic escalation.
• Coordinate with recordkeepers and other plan service providers to assist ongoing plan oversight.

By helping employers understand how employees use their retirement plan, DWAM can help build a highly engaged workforce and a stronger retirement program.

Disclosure

This article is provided for informational and educational purposes only and should not be considered legal, tax, accounting, ERISA, or investment advice. Every retirement plan and workforce is unique, and employers should consult accredited legal, tax, and retirement plan professionals regarding their specific fiduciary responsibilities and plan design decisions. Investment products involve risk, including the possible loss of principal. Duncan Williams Asset Management (DWAM) is a registered investment adviser. Registration does not imply a certain level of skill or training.

Source URLs

• Internal Revenue Service – Operating a 401(k) Plan
  https://www.irs.gov/retirement-plans/operating-a-401k-plan
• Internal Revenue Service – 401(k) Plan Overview
  https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview
• U.S. Department of Labor – Retirement Plans and ERISA Information
  https://www.dol.gov/general/topic/retirement
• U.S. Department of Labor – Employee Retirement Income Security Act (ERISA) Overview
  https://www.dol.gov/general/topic/retirement/erisa
• U.S. Department of Labor – Meeting Your Fiduciary Responsibilities
  https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities
• U.S. Securities and Exchange Commission – Saving for Retirement
  https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/saving-retirement
• U.S. Government Accountability Office – Retirement Savings Research and Reports
  https://www.gao.gov/topics/retirement-security

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