Thirty years after the birth of the 401(k) plan, the retirement planning landscape continues to evolve. Employees now have more say in how they manage their retirement savings than ever before. Individuals are directly responsible for securing a comfortable retirement—or not. However, various studies show employee participation in company-defined contribution plans remains low despite employer attempts to change this behavior.
Part of the problem is plan participants are not always armed with the tools or education they need to succeed. Insight from behavioral finance research shows there are three main roadblocks preventing individuals from making critical decisions about retirement plans during the time of enrollment:
2) Educate employees about saving and investment options
Choosing investment options is another roadblock for employees. Presenting a menu of investment options is daunting, especially during enrollment. It requires further education because there are too many options to choose from (equity funds, money market funds, bond funds, etc.). The way these funds are presented can cause confusion, complicate investment decisions and could delay or prevent enrollment altogether.
Participants require further education on all of the investment options available to them to make a sound decision—particularly the options that will meet specific saving goals and objectives best. Offering employees regular educational sessions on retirement-related topics via face-to-face meetings, such as brown bag lunches and presentations, or supplying participants with flyers and tailored emails, will help build employees’ retirement knowledge and get them on the right track to making the best investment choices. Consider some basic and in-depth topic choices:
4) Try automatic enrollment
Studies show increasing the number of options in a retirement plan can actually be detrimental and discourage any action. Offering too many options often does more harm than good; it can lead to choice avoidance and prevent employees from enrolling.
Automatic enrollment, on the other hand, helps reduce the number of active decisions an employee has to make, including percentage of salary to contribute and investment options to select. It changes the enrollment default from opt-in to opt-out—so employees are enrolled in a plan unless they choose not to participate. It helps participants overcome any hesitation as well as decision avoidance caused by complexity and procrastination.