Employees have taken positive steps in building their retirement nest eggs, according to data released recently from the Bank of America Merrill Lynch Plan Wellness Scorecard. And employers are steering them in the right direction through plan design, education, communication and guidance.
Employee engagement with workplace retirement plans surged with every metric the study measured. Total contributions increased by 14% and the number of employees with balances grew 16% in 2015. The number of employees who started contributing or increased their contributions to their savings grew 82% from 2012 to 2015, suggesting that employees are taking advantage of savings opportunities within their plans as they prepare for retirement.
“We know that employees want to save. [Employees] know they need to save and they are anxious to save more,” says Gary DeMaio, head of defined contribution product for Bank of America Merrill Lynch. "Plan sponsors, along with their providers, can employ plan design features that improve the financial lives of their employees and that lead them to positive action."
One plan design feature that fared better than even DeMaio could have predicted was raising automatic default rates.
Automatic enrollment plans with higher default contribution rates saw higher rates of participation, reaching as high as 88% for plans with a 10% default rate in 2015.
“Plans that have higher automatic default rates than we would typically find actually have higher participation rates than plans using lower default rates. We didn’t expect to see an increase in participation rates simply by using higher default rates," DeMaio explains.
DeMaio argues that based on the report’s findings, plan sponsors are setting their retirement default rates too low.
After all, 84% of employees who changed contribution rates increased them.
“We can be a lot more aggressive in setting default rates. While we all thought that default rates could be higher, I think they could be a lot higher, even in the double digits, depending on your demographic," he says.
Another surprising finding from the report was employees’ attraction to Roth accounts.
The number of contributors to Roth accounts increased 38% and total contributions increased 32%.
Once upon a time, retirement experts assumed older, more sophisticated investors would be the best, if only, fit for Roth, but DeMaio says he’s finding the opposite.
“We’re finding Roth features are most popular with the under-40 and millennial groups,” he says. Which actually makes sense since this younger demographic has the longest time to enjoy the account’s tax advantages and then retire in a lower tax bracket.
The takeaway: make every retirement feature available. DeMaio further insists that plan sponsors who don’t offer Roth accounts should add that feature to their plan.
“The idea that Roth doesn’t make sense for your demographic [is untrue],” he explains. “The reality is there will always be some demographic that will be well served by Roth."
The increased enrollment and contributions to Roth accounts is not coming at the expense of pre-tax savings options, such as 401(k) and health savings accounts. On the contrary, savings rates have increased for both types and employees are contributing to both sources.
Enrollment in HSAs continues to grow year over year, as it offers employees the opportunity to save for healthcare expenses. In 2015, the number of HSA accounts increased 47%, with total assets under management increasing 47% and average cash balances increasing 42%.
Overall, plan sponsors should remove any and all obstacles blocking employees’ ability to save for retirement so that their experience with enrollment and contribution increases is a fluid and hassle-free process.
"If you make it very easy to engage participants, you can take them where they need to be,” says DeMaio.
