From Starbucks to cash cards, small perks can boost 401(k) enrollment

Advisers and other retirement-plan professionals can guide employers through offering newly available perks for 401(k) and 403(b) participation using recent guidance from the IRS.

Among many provisions of the SECURE 2.0 Act aimed at the persistent issues involved with boosting the availability of and enrollment in retirement plans, one gave employers the green light to offer "a de minimis financial incentive" for signing up, according to a notice issued last month by the IRS on frequently asked questions about the 2022 legislation. The agency provided further clarification on the definition of "de minimis" — a legal term meaning "lacking significance or importance" — because the legislation included no specifications for the size or manner of the legalized inducements to join the plans, the IRS said in the notice.

In the guidance, the IRS set the maximum value of the incentives at $250 per employee. The retirement plan sponsor could pay that amount or the equivalent in, for example, gift cards in a series of installments, such as offering $100 to enroll and another $150 after a year in the company's 401(k). The law prohibits employers from using plan assets to pay for the incentives or count them toward matching contributions, but the gifts will count toward the employee's income and wages and be subject to withholding and reporting requirements.

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"This might be that small thing that gets people to participate," said Anthony Williams, the senior vice president of investment services with Houston-based Galene Financial. "It's hard to get people motivated to participate in these plans, especially if they're shaky on what they are anyway."

Those additional participants bring benefits to the employers as well, Williams pointed out in an interview. "If they have matching, the more people that contribute, they can match more and use that to increase their deduction and reduce their taxes at the end of the day," he said.

Employers usually offer gifts or prizes rather than cash, and the IRS guidance also clarified that they're only able to offer the incentives to employees who haven't elected to defer their retirement-plan benefits, according to Kate Clark, the managing partner of Tallahassee, Florida-based Cypress Capital. Any interested employers should first discuss the idea with their adviser, third-party administrator or Employee Retirement Income Security Act counsel "well ahead of any rollout to your employees," Clark said in an email.

"My initial response would be to look at the plan and complete a cost-benefit analysis of the incentives to see if there are other more meaningful ways to enhance benefits overall and garner engagement in a more beneficial and productive manner," she said. "Understanding the true wants and wishes of the employee base is a core factor in determining the probability of success of any corporate benefit. I would caution employers to not jump on the idea of the new incentives program and instead spend time understanding what is meaningful to their employees. You may find that there are areas to enhance benefits without additional costs to the employer."

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Other potential boons to greater participation include automatic enrollment and accelerated contributions into the plan for all employees as well as matching contributions, according to Elizabeth Camara, the head of retirement plan services with Wakefield, Massachusetts-based Sentinel Group.

"Financial advisers can collaborate with their clients to design a program suitable for their organization, taking into account the workforce demographics and the affordable monetary allocation for employee gifts," Camara said in an email. "This might involve providing gift cards for popular locations such as coffee shops, retail stores or local grocery stores. Generating enthusiasm for the program and the retirement plan can be achieved through engaging and educational presentations. Helping employees see beyond their working years into retirement is key to them understanding the importance of saving now."

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Since "most people are like a deer in the headlights when it comes to a 401(k)," Williams favors automatic enrollment as another strategy as well, he said. Items as small as a cloth to clean glasses, a phone charger or $15 Starbucks cards might even spark an employee's interest.

"A simple gift is good enough," Williams said. "I don't think it has to be too fancy, because I think people just like to see effort."