Imagine a business owner offers a 401(k) plan with a solid employer match. A year later, participation rates are underwhelming, a significant portion of employees haven’t enrolled, and many who have are contributing only enough to capture the match.
While you’d think one would lead to the other, offering a retirement plan and having employees actually use it is not guaranteed. According to Vanguard’s 2026 How America Saves report, overall 401(k) participation among eligible employees has reached a record 86%, up from 65% two decades ago. That improvement has essentially no correlation to economic conditions or market performance. Instead, it typically comes down to plan design.
The behavioral design features built into a 401(k) plan are, in many cases, the difference between a plan employees participate in and one they ignore (or, more likely, overlook).
Why Participation Rates Are Important
Low participation is not only an inherent problem for employees and their general financial well-being but also a compliance problem for plan sponsors.
401(k) plans must pass annual nondiscrimination tests, which gauge whether the plan disproportionately benefits highly compensated employees (HCEs) relative to non-highly compensated employees (NHCEs). If NHCE participation and deferral rates are low relative to HCEs, the plan could fail testing, forcing refunds of contributions to HCEs (including business owners) and limiting how much they can contribute. As you can imagine, this is a particularly relevant and consequential risk in owner-heavy businesses and professional firms.
Safe harbor 401(k) plans, which I’ll cover below, offer an alternative structure.
Feature #1: Automatic Enrollment
Under an opt-in structure (the traditional default), employees must take affirmative action to join the plan. Most don’t, simply because they forgot or didn’t realize they had to. Under automatic enrollment, employees are enrolled at a default contribution rate unless they actively opt out.
Vanguard found that, among defined contribution plans with at least 1,000 participants, 79% now use automatic enrollment. The opt-out rate is generally low, demonstrating that most employees simply need the enrollment barrier removed from the process.
Implementation Considerations
The SECURE 2.0 Act requires automatic enrollment for most 401(k) plans established after December 29, 2022, effective for plan years beginning on or after January 1, 2025. The minimum default contribution rate is 3%, though 62% of Vanguard plans with automatic enrollment already default employees at 4% or higher. Higher defaults lead to higher initial savings rates, although the appropriate default should cater to plan demographics and employer objectives.
Exemptions apply for plans established before December 29, 2022 (grandfathered), employers with 10 or fewer employees, and businesses in existence for fewer than three years.
If your plan is older and not covered by the mandate, the data still makes the case for adoption.
Feature #2: Automatic Escalation
Automatic enrollment gets employees in the door. Automatic escalation keeps their savings rate moving in the right direction.
Employees enrolled at 3% who never increase their contribution rate may not accumulate enough retirement savings for their needs. Automatic escalation addresses this by incrementally increasing contribution rates, such as 1% annually, up to a specified cap. Employees can opt out of escalation, but most don’t.
Vanguard’s 2026 data shows that 71% of plans with automatic enrollment now include an automatic escalation feature. The average total contribution rate, combining employee and employer contributions, reached an all-time high of 12.1% in 2025. Among all participants, 45% increased their deferral rate in 2025, either voluntarily or through automatic escalation.
Implementation Considerations
SECURE 2.0 requires automatic escalation for plans subject to the mandatory automatic enrollment provisions. Contribution rates must increase by 1% annually until reaching at least 10% (but no more than 15%). A plan that initially defaults employees at 10% already satisfies the statutory minimum escalation endpoint, so additional increases are not required solely to meet SECURE 2.0’s minimum.
Setting it higher (12–15%) better aligns with Vanguard’s research though, which suggests this level helps achieve adequate retirement savings.
Feature #3: Qualified Default Investment Alternatives (QDIAs)
So, where do auto-enrollment contributions go?
Without a deliberately chosen default investment, employees passively enrolled may find their contributions sitting in a money market fund or stable value option. While technically invested, it’s unlikely that their portfolios would generate high enough returns to support long-term financial goals. The Department of Labor established QDIA safe harbor rules to address this, providing plan sponsors with fiduciary protection when defaulting employees into qualifying investment options.
Target date funds have emerged as the dominant QDIA. They automatically adjust asset allocation from growth-oriented to increasingly conservative as the participant approaches the target retirement date. This involves no investment decision-making from an employee who may not be thinking about their 401(k) at all. According to Vanguard’s 2026 data, 69% of participants were invested in professionally managed allocations, including target date funds, as of year-end 2025.
Implementation Considerations
Selecting an appropriate QDIA is a fiduciary decision. Plan sponsors bear responsibility for the investment choice and are expected to evaluate target date fund series on expense ratios, glide path design, underlying fund quality, and whether the fund’s assumptions align with the plan’s participant demographics.
For example, a plan defaulting employees into a high-cost target date fund with an overly aggressive glide path is not serving those employees well, even if it’s technically QDIA-compliant.
Regular review of QDIA appropriateness is part of the sponsor’s ongoing fiduciary responsibility.
Feature #4: Employer Match Design
Match formulas vary widely, such as 50% of the first 6%, 100% of the first 3%, dollar-for-dollar up to 4%, and so on.
Two formulas can cost the employer the same amount while encouraging very different employee behavior. For example, a 50% match on the first 6% of pay and a 100% match on the first 3% both cap the employer contribution at 3% of compensation. But the first formula requires an employee to contribute 6% to receive the full match, while the second requires only 3%.
That’s the idea behind a stretch match: structure the formula so employees have to save more of their own money to capture the full employer contribution, without necessarily increasing the employer’s maximum cost.
The match formula should still be evaluated in context. A more aggressive stretch may encourage higher deferral rates, but it can also be less intuitive for employees who don’t understand how the formula works.
The Safe Harbor Connection
If you’re concerned about annual nondiscrimination testing, a safe harbor is another design option.
A properly operated safe harbor plan generally avoids the ADP and ACP testing that can otherwise limit highly compensated employees if 401(k) contribution rates among non-highly compensated employees are too low.
In exchange, the employer must satisfy specific contribution and plan-design requirements. Traditional safe harbor matching contributions are immediately vested, while a Qualified Automatic Contribution Arrangement (QACA) can permit up to a two-year vesting schedule.
The required contribution formula is also a funding commitment, so the decision should be evaluated alongside payroll costs, employee demographics, recruiting goals, and the owner’s objectives for the plan. That trade-off is greater predictability around testing, stronger incentives for employee participation, and fewer surprises for owners trying to maximize their own retirement contributions.
Feature #5: Financial Education as a Plan Feature
Intuitively, employees who understand what they have and what it’s worth are more likely to participate and increase their contribution rates. The retention impact of retirement benefits is only as strong as employees’ awareness of what they’d be giving up by leaving.
It’s imperative not to view education as merely a compliance box to check. It should include accessible guidance for employees facing specific decisions (e.g., new hire enrollment process, contribution rate increases, investment reallocation).
What a High-Participation Plan Typically Includes
- Automatic enrollment at a meaningful default rate, such as 6%
- Automatic escalation that helps participants move toward Vanguard’s recommended combined savings rate of 12%–15%
- A thoughtfully selected QDIA — typically a target date fund series evaluated for cost, glide path, and underlying fund quality
- A match formula designed to incentivize higher employee contribution rates
- Financial education that makes the plan’s value visible in concrete, projected terms
- A safe harbor design where appropriate, simplifying compliance and protecting ownership’s ability to maximize their own contributions
Each of these features is available to any plan sponsor. Plan design can make a substantial difference in participation and savings behavior, particularly if automatic enrollment, escalation, thoughtful defaults, and employer incentives work together.
At BEW, we help plan sponsors evaluate their current plan design against best practices, identify participation gaps, and implement the features that produce better outcomes for employees and better compliance results for the business.
Schedule a conversation to discuss how you may be able to increase 401(k) participation.
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