Americans aren’t saving enough for retirement. This is not a news flash. In fact, almost every day I see a new headline pointing out the problem. While their angles vary (I remain unsold on the fact that avocado toast is the culprit), the message remains—ALERT, ALERT . . . we are in trouble, my friends.
For an employer, I know this problem can be especially frustrating. You work hard to offer robust retirement benefits and spend hours crafting communication messages to encourage your participants to enroll.
What more can a plan sponsor do? Well, a relatively new area of study called behavioral decision making can help you look at your retirement plans and communication efforts with fresh eyes.
Behavioral decision making recognizes that we, as humans, share a knack for making irrational decisions. That’s why even though you have the best intentions (“I’m definitely going to the gym after work today!”) you often choose the more immediately gratifying one (“Oh wait . . . the whole department is headed to happy hour? I’ll hit the gym next week”).
As a plan sponsor, applying the theories of behavioral economics can help nudge your employees into savings. Consider the practice of automatic enrollment in defined contribution (DC) plans. Auto-enrolling employees capitalizes on many theories of behavioral economics, including:
- Inertia—People prefer the status quo and can be reluctant to change. With auto-enrollment, employees’ status quo is now participation in the plan. They will need to take action, and overcome inertia, if they wish to stop contributions.
- Anchoring Effect—The default contribution rate an employer sets for auto-enrollment serves as an anchor of what would be an appropriate contribution rate. Employers who set an auto-enrollment at 6% are likely to see employees contribute more than an employer who sets an auto-enrollment rate at 3%.
- Endorsement Effect—People tend to follow others, assuming that other people’s decisions are the right decisions. If an employer has an auto-enrollment plan and advises new hires that 95% of staff participates, the new employees are likely to follow the recommendation of their employer and the example of their peers.
[Related: Free Webcast on April 2, 2018: Small Tweaks, Big Impact: The Power of Behavioral Decision Making for the Plan Sponsor]
Automatic enrollment in DC plans has grown in popularity in recent years. An International Foundation report found that 59% of DC plans use automatic enrollment. Among corporations, the most common deferral rate is 3% of earnings, followed by 6% and then 5%.
However, an essential part of an auto-enrollment program can be auto-escalation—without it, that pesky inertia starts to appear, and participants do not increase their contribution rates. The Foundation report found that only one-third of corporate plan sponsors report using auto-escalation. Among those employers, the typical rate of increase is 1%, with a typical cap of the deferral rate at 10%. Employers may want to give serious consideration to the default rate set for auto-enrollment. An amount too low may encourage participation but serve as an unrealistic anchor of the rate of savings needed for a secure retirement.
Behavioral decision making theories can also be applied to other areas of your retirement benefits and communication efforts. For example, consider loss aversion, which says that losing feels worse than winning feels good. So instead of pointing out the “free money” gained by participating, point out the “free money” lost by not participating.
This National Employee Benefits Day [April 2, 2018] we’re encouraging all plan sponsors to take a look at how behavioral decision making can positively influence their participants’ decisions. Learn more at www.ifebp.org/benefitsday.
Also—don’t forget to register for our FREE webcast to be held on Employee Benefits Day: Small Tweaks, Big Impact: The Power of Behavioral Decision Making for the Plan Sponsor.
Communications Manager at the International Foundation