As a retirement plan sponsor, can you encourage your employees to save and save more? A significant amount of research says that yes, you can improve both employee participation and their saving rates. Here are four 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.1 While auto-enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled.
- 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 theyâ€™re sacrificing employer matching funds along with saving less of their own pay.
- Adopt auto-escalation. Plans that use auto-escalation automatically increase their participantsâ€™ 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.
- Automate investment decisions with target-date investment products. Investing is complicated, and many employees donâ€™t want to take the time to learn how to manage their portfolios. Target-date strategies automatically adjust an employeeâ€™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.2
FiduciaryFirst can help retirement plan sponsors like you with strategies to improve your employeesâ€™ participation and savings rates. We rely on the principles of behavioral finance to help employees make better financial decisions and turn their weaknesses into strengths. For example, the suggestions above rely on inertia, the tendency of employees to resist change. By requiring them to opt out of your retirement plan, rather than opt in, you make it more likely they will accept participation in your plan. For more strategies to help improve your employeesâ€™ retirement savings, contact us at 866-226-0065.