Helping Participants Overcome Savings Biases

Starting people off with a deferral rate of 3% is actually a disservice, experts agree.

If a retirement plan automatically enrolls participants at a 3% deferral rate and does not pair that with automatic escalation, the vast majority of participants stay at that rate, says Nathan Voris, managing director of business strategy at Schwab Retirement Plan Services.

That’s why it is so important for retirement plan advisers to convince their plan sponsor clients to “rethink the 3% deferral rate and pair that with automatic escalation,” Voris says.

Amy Ouellette, director of retirement services at Betterment for Business, agrees: “A lot of plans use a 3% deferral rate. That provides a mental anchor for people, essentially telling them that this is a good amount to save. For a lot of people, that rate is simply not going to be enough to get them to the retirement they want. Sponsors’ fears about participants’ resistance to higher savings rates are unfounded. A study by Shlomo Bernatzi found that plans with deferral rates as high as 11% have similar opt-out rates as plans with deferral rates of 6%.”

If a sponsor is still uncomfortable starting people off with a 6% deferral rate, “it is important to pair that with yearly automatic escalation until they reach a much higher rate,” Ouellette says.

Yet another 401(k) savings bias is status quo bias, whereby participants who are automatically enrolled take no interest in their retirement savings. This can be countered with “group and one-on-one meetings, which yield some of the best results, timely emails, texts and other communications,” says Patrick Delaney, DCIO retirement insights leader at T. Rowe Price.

It is also important to periodically prompt people to or automatically rebalance their portfolios and consider other options, such as managed accounts, says Mark Riepe, senior vice president at the Schwab Center for Financial Research.

Providing people with retirement calculators that show them their projected monthly income in retirement are also powerful tools that can motivate participants to save more, Ouellette says.

Finally, it is critical to offer people holistic financial wellness programs, Voris says. “People have many competing financial priorities,” he notes. “The average 26-year-old is focused on buying a car or paying down student debt, while a 50-year-old may be trying to save for a child’s college education. Saving for retirement cannot be done in a vacuum.”