Retirement plans today tend to be designed with features so the average person can begin saving with little effort. Yet, it’s seemingly not working for many employees. Instead of easier, do we need to make it harder to avoid?
When 401(k) and other defined contribution (DC) plans came into existence, the industry focused on access. The thought was that if only employees had these plans available, everyone would immediately become retirement and investment experts on their own. That generally didn’t happen. So, we spent the last 10-20 years focusing on making the process to save for retirement easier for employees. The use of automated features, including automatic (auto) enrollment and auto-increase became a way for plan sponsors to help take advantage of human inertia and get people enrolled in their plans. This included the use of target date funds (TDFs), which help ensure the asset allocation adjusts automatically over time, as the Qualified Default Investment Alternative (QDIA) for many plans. The problem now is that while these features help, they don’t solve the issue for everyone. That same inertia that is counted on to get people into the plan can also be what keeps people out of the plan, particularly if they miss the auto enrollment period.
The reality is nearly half of U.S. workers don’t participate in a retirement plan.
Many employees don’t enroll in their employer’s retirement plan due to a lack of information and confidence in basic investment terminology. Only 30% say they’re comfortable investing money. Unsurprisingly, age and salary impact the decision to contribute to a retirement plan. Many also say they have too much debt and need to pay down some or all their debt before they can start to save for retirement.
I have not started to save for retirement
48%
Gen Z (ages 18-27)
38%
Salary < $50,000
It’s one thing to make the retirement plan easier to participate in, but I challenge all of us to make it hard for employees to avoid the retirement plan and save for their future.
Auto enroll and re-enroll all eligible employees each year. Make it hard to not get into the plan. An automatic annual re-enrollment would have them decide each year whether they want to save for their retirement as they would have to consciously decide to opt out of the plan each year. A new hire’s choices may be quite different from the choices the same person makes after a few years.
95% of employees remain in the plan when auto-enrolled.
An automatic annual re-enrollment may also catch those who stopped contributing for some reason but forgot to re-enroll or catch those who didn’t know they were eligible. For employers conducting a re-enrollment each year they tend to do this when performance reviews and raises occur or during the benefits election period. This helps keep any difference in take-home pay to a minimum.
Research shows that almost half of nonparticipants would be interested in learning more about their benefits during their performance management period and nearly 3 in 4 would continue to defer when auto-enrolled.
- Remain at default
- Increase deferral
- Decrease deferral
- Opt out to zero
*Based on actions taken within 90 days following auto-enrollment.
Figures may not sum to 100% due to rounding.
Auto-increase aggressively. Make it hard to not save enough. Consider designing the plan so everyone saving below 15% (not just those who were auto-enrolled) is auto-increased by 1% each year until their contribution rate hits 15%. Most employees need to save more than they do.
Re-enroll employees into the QDIA at least every 5 years. Make it hard to invest poorly. Monitor where your employees are positioned in their asset mix versus the glide path selected.
This can be seen with a simple review of how many participants are in the QDIA compared to those who aren’t. By re-enrolling participants into the plan’s QDIA, their accounts would be back on the glide path. And like auto-enrollment, they would have the opportunity to opt out of the re-enrollment.
Glide path ranges vs. Equity allocation pre and post retirement
Some employers feel it’s too controlling and paternalistic to implement automated features into the plan design. I argue the opposite. Being paternalistic to me means helping and educating employees to make the best decisions for themselves and their future. Nothing suggested above disallows employee choice. Those employees who are actively engaged in their plan, choosing their investments and savings rate can continue to do so. Those who decide time and again to avoid the plan can continue to do so, but it’ll become much harder to make that choice. Time counts in a defined contribution plan. Every year someone fails to save in the employer-sponsored retirement plan in their 20s could decrease their future income by thousands of dollars.
Get more data-driven insights: The power of automated 401(k) plan features
It’s important to work with a retirement service provider who understands and has the expertise to consult on options to help deliver the desired results. If you’re looking for options that could work in building a more robust retirement plan—reach out to your 51ԹϺ® representative.
