When we were children, none of us wanted to eat our vegetables. We were told the benefits of eating them, but the constant begging from our parents produced little results. As we fast forward to adulthood, we’ve found that not only do we eat our vegetables, we actually like them. We know the health benefits – reduction in blood pressure, less risk of cancer, stroke and diabetes – and now we also enjoy eating a salad. Imagine something we hated as a child that we now love eating every day for lunch (as long as there’s plenty of dressing).
We thought of vegetables when American Century Investments released their Third Annual Defined Contribution Plan Participant Study last month. According to the survey, “nearly all retirement plan participants – nine in 10 – said they have at least some regret about when they started saving for retirement.” It’s astonishing how much they regret it, as it was found that not saving for retirement was mentioned more frequently as one of the biggest mistakes of their lives than “not doing better with personal relationships or careers.”
Despite all of this regret, the survey found that we still aren’t saving enough. Over half of those surveyed admit they should be saving more and that they want help. They know they should be eating their vegetables, but they can’t do it without a little nudge.
Automatic Help
The survey showed that almost 70% of participants support automatic enrollment at a 6% contribution rate (more than the previous year), and nearly 80% would be interested in automatic contribution rate increases. Research has long shown that automatic enrollment can increase participation due to employee inertia, but the most recent surveys from American Century and others show that participants want employers to automatically enroll them.
The past perception was that employees don’t know what’s good for them and more than likely won’t do anything about it, so an employer can automatically enroll them and help them get started on saving for retirement. Now we have come to realize that participants do know what is good for them, but hesitate to sign up for the plan for a myriad of reasons – lack of understanding about the plan, a perceived need of the money now, and focusing on paying down debt have historically been the most recited reasons from our own experience with clients and previous surveys.
The Employer’s Role
It was found that most in the survey want help from their employer when it comes to saving, while employers think the opposite. 25% of employers believe that their participants want to be left alone, while another 25% think they want just a “slight nudge.” Employees want more. This can be changed if the focus is place more on engaging the employee throughout the lifetime of employment – from the interview until retirement. Some of the most successful ways to engage have been through consistent communication and automatic features, like auto enrollment and automatic increases.
A common argument against automatic enrollment is the fear of employee backlash amongst those in the lower income thresholds. However, In Vanguard’s How American Saves 2015 report, it was found that no matter the age or income, automatic enrollment increases participation. It is most evident for the youngest participants as well as those with lower incomes, with participation more than doubling in both instances. The charts below detail the information by income and age:
Another argument is that automatically enrolling at a 6% deferral rate will result in more participants opting out. The research, however, shows the opt-out rates are not meaningfully different at a default deferral amount of 6% versus 3%. Fidelity’s research of their own plans found that the opt-out rate at 6% was less than the opt-out rate at 3%, and neither was higher than 15%.
The biggest objection many times is money, as past research found plan sponsors were reluctant to implement automatic enrollment due to perceived cost increases. It makes sense that if a company has a matching contribution, then higher participation will increase costs. Another objection is the fear of increased administration for what may already be an overworked human resources department.
While these concerns may be true, employers have an opportunity to make a lasting impact on the employees, just like our parents did when we were children. They could have taken us through the fast food lane at a much cheaper cost instead of buying and preparing a well-balanced meal, but the long-term benefits of a healthier lifestyle outweighed the costs of spending more money.
The most interesting result from the study was the pre-retirees were five times more likely to choose a company with a retirement plan over a company that offered a higher salary but no retirement plan. Participants under the age of 55 were four times more likely to do the same. Participants want to save for retirement. They just need a nudge.
The Unexpected Benefits of Engagement
American Century’s survey found that 80% believed they would have more in savings if their employer would have done more to nudge them along. While one may debate whether or not a company is responsible for their employee’s financial future, it is apparent that participants look to them for help and see those companies that do help in a more positive light. Almost 65% of those surveyed said they feel positive about a company that offers auto enrollment and automatic increases.
This echoes earlier research done in 2012 by BlackRock and the Boston Research Group. Among their results was that the retirement plan helped build greater alignment between employee and employer. If the employer can “market” the retirement plan effectively to the employees, the participants’ positive perception of the plan creates engagement and alignment. Furthermore, research from Towers Watson has shown that alignment and higher engagement between employee and employer leads to higher profit margins. Companies that spent the time and money engaging with their employees in a variety of ways saw higher profitability. (Note: you can find the interview we did with the author of the research here.)
So when it’s all said and done, it becomes even easier to understand why automation of the enrollment and savings process is a great way to improve employees’ futures and the well-being of the company. It is clearly well worth the effort to provide a well-designed retirement plan.
