Employer matches aren't as strong of an inducement to get employees into the 401(k) plan as one might think, says Brigitte Madrian, a behavioral economist and professor of public policy and corporate management at Harvard's Kennedy School of Government.
While matches are great for employees once they're in the plan, they're not necessarily the best tool to get people in the plan in the first place, Madrian said during a Web briefing sponsored by State Street Global Advisors, which recently launched its Defined Contribution Investor Survey report.
Madrian made it clear she's not advocating employers get rid of their employer match, only that they should be aware of its impact.
A better enrollment tool is a planning aid, such as a simple, one-page sheet with step-by-step instructions - including a time frame for how long each step will take. This type of tool can increase enrollment by as much as 45%, according to a study cited by Madrian.
"It gives people a roadmap," says Kristi Mitchem, senior managing director and head of global defined contribution for SSgA. "It makes it easier and more digestible because people have a plan for how they're going to get from the beginning to the end, and they know how long it's going to take them."
Another effective enrollment tool for those employers that don't opt to auto-enroll employees is to force employees to make a yes-or-no choice at the time of employment. "We've worked with one large plan sponsor that's started making employees make a definitive choice to either participate in the plan or not participate in the plan at the time they fill out all that other paperwork they need to fill out at the time they start as an employee," says Mitchem. "And that took their participation rates up from about 50% to 70%."
Simple enrollment cards with boxes that employees can check off can also be effective, says Mitchem, particularly in the public plan space where there has traditionally been less use of auto-enrollment features. "Those cards are effective if they are given at a decision point," she says. "If employees attend a financial planning session, for example, they can go ahead and sign up right then. You can also send it out in the mail and it can go back to the record keeper."
When educating employees about the 401(k) plan, consider doing so in peer groups, Mitchem says. She recalls working with a plan sponsor that used this approach and found when the sessions were "more discussion-based, as opposed to a lecture format, more people signed up and their deferral rates were higher."
Furthermore, "if you talk about it in small discussion groups where employees share their own experiences with 401(k) plans and investing it heightens the engagement rate and makes it more accessible," she says.
Knowing vs. taking action
Once in the plan, the employer match threshold is a far stronger lever in getting employees to save more, says Madrian, citing the examples of two matches: 30 cents on the dollar up to 10% of pay and 50 cents on the dollar up to 6% of pay. Both matches amount to the same, but employees will tend to focus on saving up to the threshold in order to get the match.
State Street's survey of more than 1,000 retirement and profit sharing plan participants reveals a gap between understanding what's important and knowing how to take action. Seventy-eight percent of respondents, for example, think it's important to determine how much they'll need to save to have a secure retirement, yet only 33% feel knowledgeable about it.
"We are encouraged that employees who participate in DC plans know what is important, but they simply don't know what to do. Employers want their employees to be financially successful, not necessarily financial experts," says Mitchem. "We need to turn confusing tasks into clear steps, not with investment lingo, but with simple, clear descriptions and explanations. We also need to take advantage of tools that simplify, like automatic savings and professionally managed target-date funds."
Ways to engage employees
There are ways employers can help engage employees in their own retirement saving and planning, Mitchem says. Those include:
1. No jargon or investment speak. "We use jargon we don't even know is jargon," she says, noting that SSgA's survey of plan participants revealed a large number of people don't understand words that are so common in our investing nomenclature. For example, words like "bond" and even "fund" were not well understood.
"Think about how to talk in plain, simple English without a lot of terms that confuse participants," she says. "We encourage plan sponsors to do a jargon audit on their communications and watch for terms that might be off-putting." And if you do use jargon, include a glossary.
2. Keep it simple. "One of the things we hear consistently from participants is that they want [enrollment and participation] to be easy," says Mitchem. "Break it down into simple, easy steps. Where you can, take processes that might seem complex and make it easy."
3. Understand the frame and devise easy-to-use translation tools. Participants have a way they think about certain facets of retirement planning.
"The way participants think about retirement savings is in terms of deferral of their current salary - what they're putting away today," says Mitchem. "They don't think about it in terms of 'what's the balance I need to achieve when I'm 65?' or 'income replacement ratios.'"
Focus on talking to plan participants within the frame they're using. "Let's talk to them about percentage of salary saved," she continues. "A good benchmark is 10% to 15%."
If you want to get people into the practice of thinking about income replacement ratios, start with what they know and are comfortable with, which is percentage of salary deferred. Then, give them an easy tool to convert that into an income replacement ratio.
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