Strategies for Increasing Employees’ Retirement Savings

Automatic enrollment has been shown to increase the number of employees who save in their employer-sponsored defined contribution plan.

However, relatively few employers use auto-enrollment, and employers tend to automatically enroll employees at small deferral rates, noted Natalie Wyatt, senior sales representative with Innovest. In addition, even fewer employers automatically escalate participants’ deferral rates once they have been opted into the plan.

In a Conversations That Matter session at the 2014 American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference, led by Wyatt and Jen Gibbs Swets, senior manager at Dixon Hughes Goodman LLP, conference attendees discussed strategies for increasing participants’ savings.

There are plan design-based strategies, which include auto-enrollment, auto-escalation and company match contributions—discretionary, fixed or safe harbor. The majority of attendees agreed that the default deferral rate for automatic contribution should be the rate at which participants get the full match contribution, if there is one. If plan sponsors start at a lower rate than this, they should use auto-escalation to get employees at least up to the maximum rate that will be matched.

An attendee suggested using re-enrollment of all employees instead of just automatically enrolling only new employees, and doing so annually or periodically to show how important it is to invest in the retirement plan. Each re-enrollment should drive more participants into the plan.

Another attendee noted that auto-escalation is usually tied to auto-enrollment, but employees that were not auto-enrolled may want to auto-escalate and should be encouraged to opt-in to auto-escalation.

“Stretching” the match formula is another way to spur increased employee savings, according to Wyatt and Gibbs Swets. For example, instead of offering a 50% match of up to 6% of deferrals, offer a 25% match of up to 12% of deferrals. The participant will have to kick in more savings to get the match, but the employer will not have to increase the amount it contributes.

An attendee suggested that plan sponsors implementing a stretch match include communications to employees that show their projected account balance at different ages. The messaging should compare the current plan design along with their projected account balance at different ages with the new plan design to show how this is a positive change. “This can convince them to save more or sign up for auto escalate,” he said.

There are several reasons plan sponsors are hesitant to use automatic plan features for increasing employees’ savings. With auto-enrollment and auto-escalation, plan administration fees may go up as the number of participants or the assets in the plan increase. Also, plan sponsors may have to kick in more matching contributions as more employees enroll in the plan. These reasons are particularly bothersome to plan sponsors in industries in which there is high employee turnover and a plan can end up with many small terminated participant balances, an attendee mentioned. Wyatt stressed that auto-enrollment is not for every plan; plan sponsors have to consider what is best for their plan.

Many plan sponsors are concerned with what happens if an error occurs in the administration of auto-enrollment—if a participant is missed, the employer will have to contribute the amount of deferral, match and earnings the participant would have made and accrued. Attendees of the conference session agreed that immediate eligibility is the simplest way to avoid missing an eligible employee, and if using set entry dates—first of the month or first of the quarter following eligibility—there must be a person responsible for monitoring who is eligible.

The issue of who takes responsibility for getting employees into the plan when using auto-enrollment is also a concern for plan sponsors. It could be the responsibility of the payroll administrator, a third-party administrator or recordkeeper. One attendee who works for a recordkeeper says it provides a report of employees eligible for auto enrollment or auto escalation to the plan sponsor and the plan sponsor implements it through payroll.

Aside from plan design-based strategies for increasing participants’ savings, there are service-based strategies.

One attendee suggested that participant communications should focus on retirement income. Plan participants should be provided with retirement income projections, and a best practice is to provide a projection that takes into account a participant’s income and place of residence. Conference attendees discussed how retirement readiness means different things depending on an employee’s state of residence, standard of living and planned activities for retirement.

A gap analysis is another way to get plan participants focused on retirement income. One attendee suggested this should be followed up with a one-on-one discussion with an adviser. And, the adviser should be on-site at the place of business of the plan sponsor because “if you just provide a number for participants to call for a follow up, they won’t respond.”  A discussion is needed to let participants know why focusing on retirement income is important, and according to one attendee, participants should be informed about how health care costs will affect their retirement.

One attendee mentioned the importance of general financial education. “If an employee can’t manage his finances and pay his bills, then he can’t afford to save,” she said. Education that will help them budget and manage debt will help them “find” money to save.

Wyatt noted that targeted education can be effective. Plan sponsors should hold meetings for different generations and genders to discuss issues they are dealing with currently. An attendee noted that getting them to take some kind of action at the meeting—joining the plan or increasing their deferral rate—is important because “the impact of the meeting will be gone later.”

An attendee asked how to avoid violating employees' confidentiality, for example, if the plan sponsor wants to target all employees who are not saving. Another attendee suggested providing employees with a video to view on their own. Wyatt said a webcast or a postcard with a tear off for enrolling or increasing savings would honor confidentiality with a targeted message.