Focus on salary deferrals

According to our analysis, encouraging employees to increase their salary deferral rates could have the biggest impact. We looked at the impact of three variables—investment performance, asset allocation and rate of salary deferral—on a participant's account balance. Deferral rates still had a much bigger impact on the account balance over time.

Here's why. When the salary deferral rate is increased,

• The participant contributes more to the account
• The participant's employer contributes more to the account (assuming a matching contribution)
• The participant benefits even more by the power of compounding

Of course, talking about the importance of salary deferral rates is a lot easier than actually getting participants to boost their contributions. Our experience shows that one of the best ways to help increase salary deferrals can be by using automatic saving features: automatic enrollment, automatic salary deferral increases and even use of qualified default investment alternatives.

Automation can help drive better participation and savings rate

These plan features can help improve retirement plan success:

• Automatic enrollment. Employees are defaulted into the plan at a set contribution rate and must take action to opt out.
• Automatic deferral rate escalation. Deferral rates are automatically increased over time unless the participant takes action to opt out.
• Defaulting to a Qualified Default Investment Alternative (QDIA). Participants who don't indicate their investment preferences are defaulted into the plan's Qualified Default Investment Alternative.  

Studies show that, once enrolled using these plan features, participants tend to stick with them. For example, 95 percent of employees remain in the plan once auto-enrolled, fewer than 10 percent of participants opt out of their automatic deferral rate escalator (no matter how high their contribution percentage rises) and 50 percent of participants defaulted into an investment option never revisit that decision, according to Hewitt[2].

Another important part of helping employees prepare for a more financially secure retirement is encouraging them to maintain their contributions—even during tough times. Nearly 93 percent of employees who stayed invested in their employer's 401(k) plans and continued to contribute now have higher account balances than they had before the market collapsed three years ago (as of 5/1/2011), according to the Employee Benefit Research Institute.

The time is now

According to our analysis, the salary deferral rate has the greatest impact on a participant's retirement plan account balance and has the potential to better prepare them for retirement—and they may be more likely to appreciate the benefit. For more tips on increasing deferral rates, download the free white paper, "Pursuing 'Retirement Plan Success' During Participants' Accumulation Years," at www.principal.com/financialpros/research.