The majority of employers want to prepare their employees for a financially secure retirement, but have found educational campaigns unlikely to result in substantial changes in behavior. Instead, Steve Utkus, director of Vanguard’s Center for Retirement Research, recommended that employers use “participant inertia to their benefit and do it exclusively with plan design.”
According to a 2010 Deloitte and IFEBP survey, approximately three-fourths of plan sponsors either care about or take great interest in their employees’ retirement readiness. For this population, there are tools and strategies available to help their workers take full advantage of their competitive retirement offerings.
“You can signal through plan design what is the right thing to do by creating a savings culture through the plan,” Utkus said at the Boston Mid-Sized Retirement & Pension Plan Management Conference on Monday.
When coupled together, auto-enrollment and auto-escalation can drive higher participation rates. They are not a panacea, however, if applied ineffectively, Utkus warned.
For example, if a company has a 2% or 3% entry level at auto-enrollment, but does not increase that contribution level automatically, this does not create enough in retirement savings because participants tend to stay anchored at these defaulted rates, he explained.
Profit-sharing is an additional tactic that employers can use, but it is variable and fluctuates. In the best-case scenario during financially successful years, contributions grow, but in poor circumstances, the employee contribution and employer match remains at the base level.
Often, employees won’t rebalance their plan elections and risk an insufficiently diversified portfolio. Utkus advised employers to revisit employees who are already enrolled, but who may have under-diversified holdings, with a reenrollment strategy.
Default everyone to a target date fund or something else that will help balance their portfolio in 60 days and give them the chance to opt-out, he said. This can be independent of the plan event and done on a one-time basis or annually.
This approach can radically transform plan behavior. In one case mentioned by Utkus, only 26% of participants made the active choice to opt-out. Originally, only four in 10 participants had well-diversified portfolios, but after the reenrollment process, eight in 10 had well-rounded plans.
Utkus stressed that if a plan sponsor wants to change retirement planning behavior in a fundamental way, then it shouldn’t simply offer retirement education seminars. Seminars can target participants who already are engaged with their investment portfolios, but rarely reach employees who are not investing or lack comprehensive investment strategies.
“We can’t directly ensure retirement readiness, but we can create an environment that nudges or encourages participants to move in that a direction,” Utkus told the conference attendees, pointing to auto-enrollment, auto-escalation, profit-sharing and reenrollment as possible solutions.
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