Lots of people point to self-indulgent millennials or debt-beleaguered GenXers or negligent boomers as the reason for the retirement crisis and the cause of their own hardships.
A blog post from the Center for Retirement Research at Boston College highlights the study and points out that employers could improve retirement outcomes for their workers—if they were sufficiently interested in doing so—based on research already in hand.
Employers who offer 401(k)s to their workers made some progress, mostly, along the path of automatic enrollment, the blog post notes, during the early 2000s, with notable success: “Today,” it says, “nearly 90 percent of automatically enrolled employees stay where they are put, while only about half of workers sign up to save when 401(k) enrollment is strictly voluntary.”
But progress along those lines has ground to a halt, it points out, and because of the huge variations among 401(k) plans there are plenty of cracks in the private system through which employees are all too ready to fall—and employers apparently too ready to let them.
The Morningstar report points out that even when companies do use auto-enrollment, plans aren’t designed well enough to encourage an adequate level of savings—or, in fact, actually discourage it.
The report, titled “Save More Today: Improving Retirement Savings Rates with Carrots, Sticks, and Nudges,” highlights a number of ways in which plan features actually work against employees saving enough to actually retire on—but the flip side of that is that those features can be tweaked so that they work for the employee’s benefit, and turned into those carrots, sticks and nudges.
And it doesn’t even have to be expensive, since many employers are concerned about the outlay for a retirement plan and are often reluctant, at best, to add to it.
Here are 6 ways employers can encourage their employees to save more for retirement—and at limited, or no, additional cost.
If a company’s plan doesn’t have automatic enrollment, it should, since the results are so outstanding.
Lots of people fail to sign up, if “voluntary” enrollment is required, due to procrastination, preoccupation or other human failings—but if it’s an automatic feature, they get swept up and are saving for retirement almost before they know it.
Says the report: “[P]articipation rates are significantly higher in plans with automatic enrollment (compared to voluntary enrollment schemes).” It adds, “[E]arly research by Madrian and Shea (2001) noted a 48-percentage-point increase in 401(k) participation among new employees after the adoption of automatic enrollment.”
That’s a small action to have such a large effect.
5. Automatic reenrollment.
The marked effect of auto-enrollment on participation has a corollary: existing eligible employees aren’t usually included when the feature is added to a plan.
And this is not unusual.
In fact, the study cites two others that find the inclusion of “reenrollment”—adding existing employees to a plan—is “relatively uncommon,” with the studies finding only 15 percent or 12 percent of plans offering that opportunity.
However, adding “reenrollment” when an auto-enrollment feature is added can significantly boost the participation of existing employees.
4. Higher default savings rate.
An aggressive default savings rate will get employees saving more from the very beginning—and although employers say that workers will be reluctant to accept a rate of anywhere from 6–8–10 percent rather than the more common 3 percent, that’s contrary to study findings.
In fact, says the study, “Roughly half of investors tend to accept the initial default savings rate regardless of level, up to 6 percent using empirical data and up to 12 percent based on the online survey.”
And that’s not all: it adds that “Participants who reject the default rate tend to select higher savings rates, on average, as default rates rise,” which means they are saving even more.
This can be particularly important since, the report says, many employers are more concerned with the participation rate than the savings rate—but the savings rate is what will save employees come retirement.
3. Mandatory auto-escalation.
Automatic escalation, the study reports, “is commonly offered in conjunction with automatic enrollment (e.g., 62 percent of plans offering automatic enrollment also offered automatic escalation according to Aon.”
But only a third to a half of plans actually offer it, despite its benefits—and 62 percent of those who do provide it on an opt-in, rather than an opt-out, basis.
That design is poor on two counts: not only does it not “sweep” everyone into an automatic increase in savings, people who have to opt in don’t always keep doing so.
Just 11 percent, the report says, stay in the plan when it is opt-in, compared with 68 percent who do so when it is opt-out.”
And then there’s the issue of whether the auto-escalation rate is set high enough. Since workers will often accept whatever the default is, setting the rate higher rather than lower would push them to save more and better prepare them for retirement.
2. Matching contributions.
Matching contributions are a thorny issue, since driving up the participation rate will require more in contributions.
As a result, employers might not only be reluctant to boost the participation rate too much, they’re not all that anxious to increase their matching contributions either.
But again, a tweak can change employee behavior without a large increase in cost.
One option is to stretch the match out further; for instance, matching 25 percent of the first 8 percent of employee deferrals instead of matching 50 percent of the first 4 percent employee deferrals. Another option is moving to a discretionary match approach.
1. In-plan advice.
Plans that provide employees with advice can also have a marked effect on savings behavior, with higher recommended savings levels from in-plan financial advisors.
In fact, 90 percent of participants who engaged an in-plan advice solution increasing their savings rates—by about 2 percentage points on average.
“Additionally,” the report says, “higher savings recommendations result in higher implemented savings levels (i.e., more is better).”
This is one area in which it’s not clear whether opting in or having to opt out is more effective.
Perhaps it’s that those who are willing to save more seek out guidance on how much to save.