As a retirement plan sponsor how can you encourage your employees to save – and save more?
Improving both employee participation and their saving rates is easy when you’re prepared. Here are four simple ways you can help your employees start building a confident retirement.
Boost Employee Participation with Automatic Enrollment
Choosing to automatically enroll all new employees in your retirement plan can dramatically improve your participation rates. According to the Center for Retirement Research (CRR) at Boston College, in one study of automatic enrollment, participation increased by 50 percent, with the largest gains among younger and lower-paid employees.
While auto-enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled because it taps into the basic psychological trait, inertia. People tend to resist change and don’t take action even when the action is clearly beneficial – like saving for retirement. However, when Plan Sponsors utilize automatic enrollment, human inertia becomes beneficial as most employees stay enrolled in the plan.
Set the Initial Default Contribution Rate Higher
Many companies who use auto-enrollment set their default contribution rate relatively low at three percent, according to the CRR, which is lower than the typical employer match rate of six percent. Workers who might have contributed more to their savings passively accept the lower default rate, which means they’re sacrificing employer matching funds along with saving less of their own pay.
Plans that use auto-escalation automatically increase their participants’ contribution rate every year, typically by one percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers that the majority of workers who experienced automatic increases simply accepted them, and savings rates dramatically increased. (Thanks Inertia!)
Automate Investment Decisions with Target-Date Investment Products
Investing is complicated, and many employees don’t want to take the time to learn how to manage their portfolios. Target-date strategies automatically adjust an employee’s investment allocations over time, shifting them to a more conservative asset mix as the target date (typically retirement) approaches. The ease of use of target-date funds means their popularity is increasing. The CRR notes that in 2014, nearly 20 percent of all 401(k) assets were in target-date funds, and about half of plan participants used target-date funds.