7 ideas to improve retirement plan design
Famed behavioral economist Shlomo Benartzi offers some outcome-focused changes.
Lawmakers have scrambled over the past year to minimize the financial impact that early withdrawals might have on retirement savers forced to dip into their accounts due to the pandemic. In a white paper for Voya Financial, Shlomo Benartzi, professor emeritus at UCLA Anderson School of Management and senior academic advisor at Voya, asks the question, “if we make it easy to draw down savings, how can we make it even easier to accumulate savings once the hardship is over?”
Related: New work dynamics call for employers to re-imagine retirement benefits for younger adults
Charlie Nelson, CEO of retirement and employee benefits for Voya Financial, acknowledged the strain that COVID-19 has had on workers and employers. “While many individuals have had no choice but to withdraw funds from their retirement savings, there are many opportunities for employers to implement solutions that can help individuals get back on track, starting with small changes to the design of their retirement plan program,” he said in a statement.
Benartzi offered plan design changes that sponsors can adopt to help improve workers’ outcomes.
- Expand auto-enrollment. Automatic enrollment has been shown to effectively increase participation rates, particularly for women and people of color who have historically had lower enrollments in company plans.
- Increase re-enrollment adoption. Benartzi suggested implementing aggressive re-enrollment campaigns. He pointed to the U.K., where plan providers are required to automatically re-enroll workers every three years, even if they’ve previously opted out.
“While workers can quickly opt-out again if they so desire, it’s important to offer people repeated opportunities to make saving as easy as possible,” he wrote.
- Increase default deferral rates to 7%. Benartzi cited research that shows automatic deferral rates between 7% and 10% did not increase opt-outs. He suggested 7% as a default deferral because the increase between 6% and 7% resulted in the biggest increase in savings.
- Improve website design. Three design elements in particular (simplified, standardized language throughout the website, “traffic light’ color schemes to influence decision making, and displaying plan information closer to where the enrollment decision is made) increased in engagement from 60% to 69%, including higher contribution rates.
- Increase auto-escalation to 2% with a 15% cap. The SECURE Act encourages raising the cap on auto-escalation programs to 15%, Benartzi said.
“Financial security is the work of a lifetime. It won’t happen all at once, especially when the economy has been held back by a pandemic, which is why gradually raising rates in the future can be so important.”
- Adopt the stretch match. The pandemic has pressured some employers to cut or pause their 401(k) contribution matches, but Benartzi suggests that employers who are considering such a move adopt a stretch match instead. Plan sponsors can reduce the amount they match but increase the cap on contributions that will earn the match. This strategy “enables employers to shift a portion of their matching costs into the future, after the economy recovers,” and can encourage workers to increase their own contributions, he said.
- Consider matching a fixed amount. Matching a percentage of workers’ pay can be an abstract concept, Benartzi noted. It’s hard to envision what 2% of your pay looks like coming out of your check, or what it means for your savings. Offering a match in hard dollars shows employees exactly how much money they’re leaving on the proverbial table.
“Psychologically, it’s easy to give up a 6% match, but it’s hard to let go of a $1,200 lump sum,” he wrote.
Related: