Default retirement options can be a good thing; they give employees a chance to gain benefits without having to stress over choices. But, they can also be a bad thing; not all default options fit individual employees’ long-term goals or plans.
A new report presented Friday at the 13th Annual Joint Conference of the Retirement Research Consortium outlined the “The Downside of Defaults” and the reasons people default.
“For a long time early on there, people viewed it as an ideological win-win: the employer could provide people with good guidance and preserve their choice if they wanted to do something a little different,” says Jeffrey R. Brown, professor of finance at the University of Illinois Urbana-Champaign and co-author of the report. “In the last few years, that win-win approach has come under question…people who design the defaults bring their own bias to decision making and soft paternalism can lead to harder paternalism.”
Researchers studied the State Universities Retirement System, where 26,000 people were surveyed and 5,000 responded, with 93% of respondents aware of their choice of one of three pension plans offered. The defined benefit plan acts as the default option and participants contribute 8% of their salary. The second option, the “Portable Plan,” is similar to the first, but has a higher refund and 100% employer matching if the participant leaves SURS. The third option, the “Self-managed Plan,” is a participant-directed defined contribution plan that invests a total of 8% from the employee and 6.6% from the employer.
One of the key findings was that one third of those who passively chose the default plan regretted the choice later. One out of five people say that because SURS chose the defined benefit plan as the default, it led them to believe it was the best choice for them. In fact, 16% were deliberate defaulters and two out of five people never got around to making an active decision. Employees had six months from their date of hire to choose a plan, though Brown says this might not be enough time.
“You don’t have a long time, you’re probably new to the area and you have to understand complex differences and how they map up your own preferences. It’s a complicated and overwhelming setting,” he says.
Joseph Piacentini, chief economist and director of Policy and Research at the Employee Benefit Securities Administration, says that the findings are important to policy decisions, which impact HR leaders every day.
“The power of defaults has transformed the retirement system in the U.S.,” he says. He highlighted two policies his agency had released that impact the way information is conveyed, one of which mandates comparative charts to clearly evaluate information. “Programs are using these processes to shape defaults. Information problems are important. If you give people good information, they’ll have lower rates of defaults.”
Marital status, type of position, health and age were not correlated with default. Some evidence that higher-net worth individuals, those who were more comfortable with financial risk and women were less likely to default. There were a high number of people who weren’t even aware that they would be defaulted at the end of six months. Education was also correlated, with higher levels leading to less passive defaults.
“We’d like to dig deeper into what leads people into regretting a default choice; is it that their circumstances changed? Or is it that they learned new information that made them realize that a different plan would have been better?” Brown says. “These both have different welfare implications; if it’s the fact that learning more information would lead to better choices, that’s something that is within the realm of control of plan design.”
Piacentini also questioned another practical stand point: If researchers in the future can pin-point people who are more likely to passively default, could policy makers target them with more information? Thirty-five percent of those who defaulted said they would choose a different plan today, whereas 15% of those who made an active choice or deliberately defaulted would do so.
“Is there a possibility that you could predict who will default so you could identify them and intervene?” Piacentini asked. “If so, are there rules and changes in policies that would make it possible?” To be sure, the implications of one out of six defaulters actively making that choice means HR guidance is crucial in the orientation process and future policies could ease or hinder HR management in the future.
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