As a society, we are inundated with more information than ever before through computers and mobile devices. Behavioral scientists say this wealth of data is creating a scarcity of attention, and the speed at which we process information online may not lead us to make the right decisions, particularly with our retirement plans. This only adds to the greater retirement-security challenge that Americans face.
New research from Voya Financial’s Behavioral Finance Institute for Innovation found that 90% of workplace savings plans are not “on track,” meaning the average projected retirement income of participants in those plans is below 70% of their working income. This is because most people are not making thoughtful investment decisions. We can tell this by looking at their online retirement plan activity — the time they spend on their plan’s website, the information they gather and the trade-offs they make.
There is good news. The same technology that overwhelms us with information can also help us. By applying the principles of modern behavioral science to retirement, we are researching ways to break through the traditional barriers to saving and improve individual outcomes. The scale, speed and efficiency that the digital world offers can lead us more quickly to solutions and allow us to “nudge” investors in the right direction.
As the research unfolds, advisers and employers have a solid foundation to build upon. In fact, a blueprint for designing a more successful workplace plan already exists and affords sponsors with important legal and fiduciary protections. This approach includes five strategies that advisers should be discussing today with their plan clients:
1. Automatic enrollment. The easiest way to help employers advance their employees’ retirement goals is to first get them on the path to saving. Industry research has found this simple step can increase enrollment by roughly 10%. Advisers should encourage their clients to adopt auto-enrollment policies to reduce the number of employees who get overlooked or sidetracked before signing up for their plan.
2. Successful default options. Taking a thoughtful approach to selecting an effective savings default option is also important. Advisers should spend time educating a sponsor on the right options for their plan’s specific needs. Today, advisers can use behavioral data to help inform their plan sponsor clients on qualified default investment (QDIA) options, which could prove helpful in the new Department of Labor fiduciary landscape.
3. Employer matching. Advisers should also take time to assess whether an employer can offer a matching program, which has the potential to increase savings rates among employees. Strategies like a “stretch match” can help engage participants without adding significant costs to the plan.
4. Automatic escalation. Advisers can work with sponsors to develop a program that automatically adds a gradual savings increase each year. Employees have the option to opt out of the increase, but data shows they typically do not. This can lead to greater plan engagement and better long-term outcomes. Behavioral science is helping us understand how high these levels can be set to retain participation.
5. Re-enrollment. Most participants are making quick, non-researched-based decisions with their plan investments. Additionally, many long-term participants who have not acted in years may benefit from a “course correction” on their investment strategies and asset allocation choices. Advisers should discuss how plan re-enrollment using a sponsor’s QDIA can be an effective way to advance retirement readiness.
The convergence of science and digital delivery channels has the power to overhaul the retirement experience and successfully bring long-term goals to life for hardworking Americans. The above strategies offer tested, proven ways to nudge participants onto the right track as we continue to explore the new ways that behavioral science will shape the future.
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