Employer matches aren't as strong of an inducement to get employees into the 401(k) plan as you might think, says Brigitte Madrian, a behavioral economist and professor of public policy and corporate management at Harvard's Kennedy School of Government.
While matches are great for employees once they're in the plan, they're not necessarily the best tool to get people in the plan in the first place, Madrian said during a Web briefing sponsored by State Street Global Advisors, which recently launched its Defined Contribution Investor Survey report.
Madrian made it clear she's not advocating employers get rid of their employer match, only that they should be aware of its impact.
A better enrollment tool is a planning aid, such as a simple, one-page sheet with step-by-step instructions including a time frame for how long each step will take. This type of tool can increase enrollment by as much as 45%, according to a study cited by Madrian.
"It gives people a road map," says Kristi Mitchem, senior managing director and head of global defined contribution for SSgA. "It makes it easier and more digestible because people have a plan for how they're going to get from the beginning to the end, and they know how long it's going to take them."
Another effective enrollment tool for those employers that don't opt to auto-enroll employees is to force employees to make a yes-or-no choice at the time of employment. "We've worked with one large plan sponsor that's started making employees make a definitive choice to either participate in the plan or not participate in the plan at the time they fill out all that other paperwork they need to fill out at the time they start as an employee," says Mitchem. "And that took their participation rates up from about 50% to 70%."
Simple enrollment cards with boxes that employees can check off can also be effective, says Mitchem, particularly in the public plan space, where there has traditionally been less use of auto-enrollment features. "Those cards are effective if they are given at a decision point," she says. "If employees attend a financial planning session, for example, they can go ahead and sign up right then. You can also send it out in the mail and it can go back to the recordkeeper."
When educating employees about the 401(k) plan, consider doing so in peer groups, Mitchem says. She recalls working with a plan sponsor that used this approach and found that when the sessions were "more discussion-based, as opposed to a lecture format, more people signed up and their deferral rates were higher."
Furthermore, "if you talk about it in small discussion groups where employees share their own experiences with 401(k) plans and investing, it heightens the engagement rate and makes it more accessible,"she says.
Once in the plan, the employer match threshold is a far stronger lever in getting employees to save more, said Madrian, citing the examples of two matches: 30 cents on the dollar up to 10% of pay, and 50 cents on the dollar up to 6% of pay. Both matches amount to the same, but employees will tend to focus on saving up to the threshold in order to get the match.
State Street's survey of more than 1,000 retirement and profit-sharing plan participants reveals a gap between understanding what's important and knowing how to take action. Seventy-eight percent of respondents, for example, think it's important to determine how much they'll need to save to have a secure retirement, yet only 33% feel knowledgeable about it.
"We are encouraged that employees who participate in DC plans know what is important, but they simply don't know what to do. Employers want their employees to be financially successful, not necessarily financial experts," says Mitchem. "We need to turn confusing tasks into clear steps, not with investment lingo, but with simple, clear descriptions and explanations. We also need to take advantage of tools that simplify, like automatic savings and professionally managed target-date funds."
Other survey findings include:
* About 40% of respondents expressed uncertainty about the risk and return characteristics of common investments in 401(k) plans, including international stock funds, stock index funds and stable value funds.
* About 70% know adjusting their investments over time is important, but only 30% say they know how to do this.
* More than 80% think it's important to know how to make retirement savings last a lifetime, but just 28% say they know how to achieve this.
* More than half of survey respondents admitted they don't know what target-date funds are, or are not familiar with how they work.
