The majority of employers want to prepare employees for a financially secure retirement, but have found educational campaigns unlikely to result in substantial changes in behavior. Employers walk a fine line when they implement automatic features; some argue that they enable lax saving habits and investment ignorance by funneling participants into plans automatically. On the other hand, Steve Utkus, director of Vanguard's Center for Retirement Research, recommends that employers use "participant inertia to their benefit and do it exclusively with plan design."
According to a 2010 survey by Deloitte and the International Foundation of Employee Benefit Plans, approximately three-quarters of plan sponsors either care about or take great interest in their employees' retirement readiness. For those employers, "you can signal through plan design what is the right thing to do by creating a savings culture through the plan," Utkus said this spring at the Boston Mid-Sized Retirement & Pension Plan Management Conference.
To boost plan contribution rates, employers have several tools available to them. Auto-enrollment is a step in the right direction, said Utkus, but low deferral rates remain a problem, such as stopping at 3% of pay. Thus, it's important to combine this with an auto-escalation, increasing participants' investment rates automatically by 1% or 2% each year until they reach an ideal 12% to 15%, according to Utkus, adding that auto-escalation should have a lower endpoint for low-income workers and a higher threshold for more amply paid employees.
Employers as enablers?
Ron Cohen, managing director and head of retirement services at DWS Investments Deutsche Bank Group, dismisses the claim that these tactics merely give employees fish without teaching them how to catch their own, so to speak. "Plan sponsors worry they're becoming too paternalistic, but unfortunately for something as complicated as this, I think we do need to spoon feed participants," he explains.
Adds Christopher Jones, chief investment officer of Financial Engines: "Setting up a plan so it works for the average participant and results in good outcomes for them - even if they're not willing to take that level of responsibility - is not only prudent from the perspective of the plan sponsor, but required from a societal perspective if we expect 401(k) plans to actually deliver on retirement security. It's not going to if we force everyone to make their own decisions."
Jim Green, executive director of HR for Lacks Enterprises, Inc., explains that his company implemented an auto-enrollment strategy two years ago, which starts at 3% and goes up 1% every year for three years until it reaches 6%. As a result, participation increased from 69% to 90%.
"We just want to make sure that we're getting them the right tools and most education as early as possible so they have enough time to prepare for and manage their retirement," he explains.
Don't set it and forget it
When coupled together, auto-enrollment and auto-escalation can drive higher participation rates. They are not a panacea, however, if applied ineffectively, Utkus warned. For example, if a company has a 2% or 3% entry level at auto-enrollment, but does not increase that contribution level automatically, this does not create enough in retirement savings because participants tend to stay anchored at these defaulted rates, he explained.
Profit-sharing is an additional tactic that employers can use, but it is variable and fluctuates. In the best-case scenario during financially successful years, contributions grow, but in poor circumstances, the employee contribution and employer match remains at the base level.
Often, employees won't rebalance their plan elections and risk an insufficiently diversified portfolio. Utkus advised employers to revisit employees who are already enrolled, but who may have under-diversified holdings, with a re-enrollment strategy.
Default participants into a target-date fund or another vehicle that will help balance their portfolio in 60 days and give them the chance to opt-out, Utkus said. This can be independent of the plan event and done on a one-time basis or annually. Often, it is used when a plan sponsor changes recordkeepers or changes the whole menu of investment options.
"Employers will object because it's seen as un-American - people should make choices on their own, but I think this view fails to account for the fact that many people feel they lack the skills to make informed choices, [or] don't pay attention and let their choices drift," Utkus explained.
Whatever enrollment strategy plan sponsors use, Utkus stressed that to change retirement planning behavior in a fundamental way simply offering retirement education seminars is insufficient.
"We can't directly ensure retirement readiness, but we can create an environment that nudges or encourages participants to move in that a direction," Utkus told the conference attendees, pointing to auto-enrollment, auto-escalation, profit-sharing and reenrollment as possible solutions.
