Retirement vs. Regret
While most employees are well-intentioned when it comes to saving for retirement, not all of them make the decision to do so. However, there are ways that HR leaders can help workers in this area.
By William Atkinson
According to the third annual Defined Contribution Plan Participant Study, published earlier this month by American Century Investments, retirement-plan participants have a great deal of regret about their past savings behavior.
"Plan participants aren't expecting to be rich," says Diane Gallagher, vice president of American Century Investments's defined-contribution-investment-only practice in Kansas City, who oversaw the study. "They are really aspiring for independence, rather than affluence, in retirement." And, according to Gallagher, employees realize it is important to save through their defined contribution plans. "However, they look to their employers to help them establish positive savings and investing patterns."
The problems are real. "In our surveys over the past several years, participants have answered consistently about why they aren't saving," says Gallagher. They report not earning enough to afford to contribute, having to pay off debt, and/or having to pay off unexpected expenses. "As always, today gets in the way of tomorrow," she says. "Covering daily expenses and debt take precedence over saving."
Rob Austin, director of retirement research for Aon Hewitt in Charlotte, N.C., agrees.
"[We] recently surveyed over 2,000 workers about different financial topics, and specifically asked for reasons individuals do not participate in their employer-sponsored plans," he says. Among individuals who were eligible to participate, nearly half (48 percent) cited the inability to afford to make contributions. "This was by far the most popular reason," he says. Other commonly provided answers included lack of knowledge of the plan (19 percent) and a fear of losing money (16 percent).
But there can be other reasons, too. One is "inertia," according to Lynn Dudley, senior vice president for global retirement and compensation policy, at the American Benefits Council in Washington.
"People have busy lives and think it will take too much time," she says. Another is uncertainty or timidity. "People lack familiarity and don't have someone they can readily ask," she says. "For example, they don't know how much is the right amount to contribute, or they are not clear on the tax implications."
And sometimes, according to Dudley, people are afraid to give up the money on the front end, and this can be for any number of reasons. For example, they genuinely may not have enough money. "Sometimes, they are just not sure how much they need to live on or have other debts and are not sure which is more important, such as paying off school loans faster or putting money into a 401(k)," she says.
Finally, for some employees, says Dudley, the whole set of financial-related decisions is not clear to them-disability insurance, life insurance, retirement savings, credit management, educational savings, buying a house or a car, etc. In other words, they feel as though they have no "expert" to whom they can turn to provide them with appropriate information and guidance.
So, what can HR do?
"Automatic savings programs, specifically automatic enrollment and automatic increase, are the most effective and proven strategies to increase defined contribution plan participation," says Gallagher. "Employees are actually very amenable to these programs." In the company's latest participant survey titled Who's in the Driver's Seat? Participants Just Want to Ride Along-2015 National Survey of Defined Contribution Plan Participants, 68 percent of participants between 25 and 54, and 69 percent of participants between 55 and 65, felt that employers should automatically enroll participants at 6 percent. (The national average is between 3 and 4 percent.) "Majorities of both age groups also felt this should be done retroactively, with all employees being 'swept' into the plan, rather than just the new hires, which is the more common practice," says Gallagher.
"Taking a page from behavioral economic studies, many companies have adopted 'automatic enrollment,' which requires that individuals participate in the plan unless they opt out," Austin says. "Our research shows that these plans have much higher participation rates. Among plans with automatic enrollment, the average participation rate is 85 percent. Plans without automatic enrollment have an average participation rate of 61 percent."
There are some other solutions, too, according to Dudley. "These can include campaigns, with a lot of fanfare and education in an intensive short-term effort," she says. Another option is using an open enrollment for the plan. In addition, the use of financial well-being programs, including educational materials, forms to learn, on-line tools, presentations by experts, etc., can also be effective. "On-site small group meetings are another common tool," she says.
Finally, according to Gallagher, it might be worth the effort to consider plan investment re-enrollment, in which a participant's current account balance and future contributions are automatically invested in the plan's qualified default investment alternative, unless the participant opts out.
"In our survey, 71 percent of participants between 25 and 54, and 68 percent between 55 and 65, think employers should do this," she says.
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