Part 2: motivate participants to save
Turning retirement resolutions into reality
2018 DC PLAN PARTICIPANT SURVEY FINDINGS
Our latest survey reveals that, although participants are making progress and gaining confidence overall, more work is needed. In a series of three articles, we discuss our findings and the steps plan sponsors can take to further strengthen their plans.
Participants expect employers to encourage them to save
The first article in our three-part series, 2018 Defined Contribution (DC) Plan Participant Survey Findings, reports that, despite continued improvement, too many participants still lack confidence in their ability to save, invest and achieve their retirement goals.1
In response, this article explores participants’ views of the tools plan sponsors are using to help motivate employees to save and save enough—from traditional strategies to innovative automatic plan features.
The good news is, participants generally expect employers to encourage them to save through their defined contribution (DC) plans and to provide a viewpoint on how much to save. Few want their employer to decide their savings rate for them, though that number has increased (EXHIBIT 1).
Our survey indicates that automatic enrollment and automatic contribution escalation—which allow participants to opt out or change their contribution rates—appear to strike the right balance between the encouragement and direction participants need and the autonomy they want.
Motivating participants to save requires a balance between employer encouragement and participant choice
EXHIBIT 1: TO WHAT EXTENT DO YOU AGREE/DISAGREE WITH THE FOLLOWING STATEMENTS? (% RESPONDING “SOMEWHAT AGREE” OR “STRONGLY AGREE”)
Rewarding saving, quantifying goals
Encouraging employees to save can take many forms and traditionally has included education on retirement planning, financial incentives like matching contributions and tools to help quantify savings requirements. Each has a role to play and can motivate different participants to varying degrees. Our survey sheds light on two of these approaches.
The employer match
The employer match is a widely used strategy for motivating plan participants to save; 79% of plan participants say their employer offers a match. These programs work by providing an incentive for participants to contribute more in order to take full advantage of the match. As an example, an employer might match participants’ 401(k) contributions dollar for dollar, up to 6% of their salary annually.
But these programs can have unintended consequences if not thoughtfully structured and communicated. The problem arises when participants see the percentage of salary matched (e.g., 6%) as all they need to save—even if the rate is too low to get them to their retirement goals.
Our findings suggest the potential for misinterpretation:
- 30% view the percentage of salary matched as a contribution recommendation
- 19% interpret the percentage specifically as what their employer “thinks they should be saving”
- 4% think it is the amount their employer feels they should be able to save
- 21% say they set their 2017 contribution rate to “what my employer will match”
Stretching the match
One way to help prevent such unintended consequences— without increasing the employer’s cost—is to stretch the match.
As seen in EXHIBIT 2, when participants were asked what an employer should do if their match program appears to be having an unintended, undesirable impact on savings rates, 40% supported stretching the match, providing an incentive for participants to double their contribution rates. Others felt a general (27%) or targeted (20%) communication encouraging an increase in saving would be most effective.
Participants see stretching the match as an effective way to motivate higher savings rates
EXHIBIT 2: IF AN EMPLOYER MATCHED CONTRIBUTIONS DOLLAR FOR DOLLAR, UP TO THE FIRST 6% OF EMPLOYEES’ SALARIES AND FOUND THAT MANY EMPLOYEES WERE ONLY SAVING 6% OF THEIR SALARIES, WHICH ONE OF THE FOLLOWING DO YOU THINK WOULD BE MOST EFFECTIVE FOR THE EMPLOYER TO DO TO ENCOURAGE THE EMPLOYEES TO SAVE MORE MONEY FOR RETIREMENT?
Quantifying savings requirements
Since many participants still lack confidence in their ability to quantify their savings goals2, they find personalized estimates of how much they need to save to be very motivating. Our findings suggest that the more specific and immediately actionable the savings projections are, the more effective they will be. Asked to select the best way for an employer to motivate them to contribute more to their retirement plan and reach their retirement goals:
- A plurality (36%) chose knowing the amount they should be contributing now from each paycheck—and how much more they need to save.
- Only 19% chose knowing how far their current savings balances are from the sometimes daunting amount they “should” have in their retirement accounts.
- Just 11% chose receiving frequent reminders that they are falling short of their savings goals.
The remaining and sizable 34% said the best way to motivate them to contribute more was to have their contributions automatically increase by 1% a year, with the option of canceling the increase at any time. These participants appear to recognize the power of inertia: knowing does not always lead to doing. In fact, among participants who had received a notification that they were not on track to reach an appropriate level of retirement savings, 40% either meant to make a change but didn’t get around to it (12%) or did not even consider doing anything (28%). As we will see, automatic plan features are designed to put the forces of inertia to work for participants.
Motivating saving with automatic plan features
Automating the saving process while providing participants with the ability to opt out are the critical elements in two plan features gaining popularity among plan sponsors and participants alike:
- Automatic enrollment is a process through which, after proper notification, employees are enrolled by default into the employer’s DC plan at a predetermined contribution rate, with assets invested in the plan’s qualified default investment alternative (QDIA), such as a target date fund (TDF). A participant can, at his or her discretion, opt out of the plan, change the contribution rate or elect a different investment option.
- Automatic contribution escalation raises contribution rates annually by a specified percentage until a target contribution rate is reached. Whether they default into or explicitly elect this automatic feature, participants can opt out or choose to alter their contribution rate.
Used in combination and appropriately implemented, these automatic features allow plan sponsors to proactively place employees on a solid path to a secure retirement. They are designed to improve saving behavior, in part by tapping into the forces of inertia: If participants do nothing, they will remain enrolled in the plan, with a savings rate that will gradually increase to a target level over time. Of course, as with matching contribution programs, the savings rates must be thoughtfully communicated and set at levels designed to help participants achieve retirement security.
According to our 2017 Plan Sponsor Research, 64% of all plans (and 85% of large plans) have implemented automatic enrollment and half have implemented automatic contribution escalation (77% of large plans).3 The most frequently cited reason for not implementing these features was a fear that employees might see them as limiting their freedom of choice. As we have emphasized, the choice to opt out or change contribution rates is still in the hands of participants.
Participants are supportive
Despite some plan sponsors’ reluctance to implement automatic features, most participants find automatic enrollment and automatic contribution escalation attractive (82% and 80%, respectively), with 78% supportive of the combination (EXHIBIT 3). In fact, both “do it for me” and “do it yourself” investors appreciate these features, with 81% and 75%, respectively, supportive of the combination.4
What some plan sponsors fear, most participants favor
EXHIBIT 3: % PLAN SPONSORS NOT IMPLEMENTING DUE TO FEAR OF PARTICIPANT PUSHBACK VS. % PARTICIPANTS IN FAVOR OF OR AT LEAST NEUTRAL TOWARD AUTOMATIC FEATURES
Experienced participants are satisfied
What’s more, among those who have been automatically enrolled, the vast majority (95%) are satisfied, including 96% of “do it for me” investors and 94% of “do it yourselfers.” Overall, few opted out (1%) and an encouraging number (33%) admit that had they not been automatically enrolled, it is unlikely that they would have participated in the plan. “Do it for me” investors, in particular, clearly benefit from the added nudge of automatic enrollment, with 41% saying they probably would not have otherwise enrolled (vs. 16% of “do it yourselfers”).
Similarly, among those whose contributions were automatically escalated, almost all are satisfied: 97% of total participants, 99% of “do it for me” investors and 93% of “do it yourselfers.” Less than 1% of the total stopped contributing while only 6% decreased their contribution after their contribution rate was increased.
A powerful combination
Finally, results suggest that the combination of automatic enrollment and automatic contribution escalation may be especially powerful. Comparing the retirement outlooks of those who were automatically enrolled and also had their contribution rates automatically raised with those who were only automatically enrolled:
- 62% of participants with both automatic features expect to be able to retire when they want vs. 46% of those who were only automatically enrolled.
- 80% of participants with both automatic features expect their savings to last throughout their lifetime vs. 47% of those who were only automatically enrolled.
With automatic features, together can be better
EXHIBIT 4A: PERCENTAGE OF PARTICIPANTS WHO EXPECT TO BE FINANCIALLY ABLE TO RETIRE AT THEIR IDEAL RETIREMENT AGE
EXHIBIT 4B: PERCENTAGE WHO “SOMEWHAT” OR “STRONGLY” AGREE THEIR SAVINGS WILL LAST THROUGHOUT THEIR LIFETIME
Implications for plan sponsors
Traditional approaches alone are not sufficient to motivate employees to save and to save at sufficient levels. Automatic plan features can help plan sponsors improve saving behavior and put inertia to work for, not against, participants. Our research provides evidence to help dispel the fears of participant pushback that are preventing some plan sponsors from implementing these features and proactively helping participants to turn their retirement resolutions into reality.
About the survey methodology
To stay in tune with the knowledge, behavior and attitudes of 401(k) plan participants with respect to saving and investing for retirement, we undertook our fifth participant research study on this topic. From January 5 through January 15, 2018, we partnered with Mathew Greenwald & Associates, a market research firm based in Washington, D.C., to conduct an online survey of 1,295 defined contribution plan participants. In order to qualify for the study, each respondent had to be employed full-time at a for-profit organization with at least 50 employees, be at least 18 years old and have contributed to a 401(k) plan in the past 12 months.
Survey results have been weighted by age, gender and education to reflect the overall makeup of the general population of 401(k) plan participants. In a similarly sized, random sample survey of general population respondents, the margin of error (at the 95% confidence level) for the total population in this study would be plus or minus approximately 2.8 percentage points.