Pushing the Employee-Savings Envelope
A recent survey suggests that employees may be more receptive to automatic defined-contribution increases than some employers think.
By Tom Starner
While the concept of automatically escalating 401(k) paycheck deductions annually may sound unappetizing to some HR leaders because of the added costs they can incur, the results of a recent survey indicate employees may be ready to dig in.
The survey, from the American United Life Insurance Co., a subsidiary of Indianapolis-based OneAmerica, a national financial-services-provider network, reports that 55 percent of 7,545 retirement plan participants surveyed said they would favor automatic annual increases to their defined-contribution retirement plans.
According to Marsha Whitehead, vice president of marketing for retirement services for OneAmerica, in Indianapolis, plan sponsors are increasingly focused on helping their participants become "retirement ready." As a result, she says, automatic plan design features combined with a hands-on, multi-media communication/education program are a must for employer sponsors to meet this goal for their employees -- especially with traditional defined-benefits plans practically extinct today.
"With non-stop family, health and life events and changing financial obligations over the course of one's life, saving for retirement can easily fall to the bottom of the priority list," Whitehead says. "Automatic features can help plan participants easily increase their retirement contributions and not get distracted by other financial matters."
Whitehead added that automatically increasing the contribution amount each year helps address inflation and cost-of-living increases -- a feature, she explains, that can really help participants stay focused and disciplined in planning and saving for retirement.
Basically, there are two ways to offer such a program: "opt-in," which means employees must actively sign up, or "opt-out," which automatically launches escalating deductions until an employee decides to quit. As might be expected, the opt-out feature has a high participation rate when compared to opt-in. For example, a 2013 T. Rowe Price client survey found that, when an automatic increase was offered on an opt-in basis, only 8.3 percent of participants chose to opt-in, versus 64.7 percent staying in when a plan included an opt-out provision.
Rob Austin, director of retirement research at Aon Hewitt in Charlotte, N.C., says it's clear that the opt-out feature is preferable for ensuring high enrollment, but among plans that already have automatic enrollment, only about 57 percent have it paired with auto escalation.
"It's not as common as you think, but unless an employer has a really robust auto-enrollment-default rate, they should use the escalation program," he says.
Austin believes a strong selling point for auto escalation is that an employee can gradually increase their retirement-savings rate, which many experts today say should be between 10 percent and 15 percent of salary to ensure enough for retirement.
"The ability to slowly boost savings is powerful," he says. "They may not want to do it all now, so they can do it incrementally. It's easier on the participants, not nearly as painful."
Robyn Credico, national director of defined contribution consulting at Towers Watson in Arlington, Va., says the advantage of automatic escalation is that employees save more, and it certainly encourages them to save well beyond the company match, if one exists.
"The reason you make it automatic instead of offering opt-in is most studies show that people don't opt out," she says. "You especially can encourage lower- and middle-[income] workers to participate. If you don't get them to auto increase, they won't save enough."
Credico notes that people typically learn to live with net incomes, so if employers can time the escalations with annual raises, that makes it even more attractive.
Jamie McInnes, a Woodbridge, N.J.-based senior vice president and COO for total-retirement solutions at Prudential Retirement, is not surprised by the OneAmerica survey findings, noting that Prudential sees similar results in its research.
"Participants recognize that they have personal biases against doing it themselves," McInnes says, though he adds that today's economy might make the concept of someone taking more out of their pay as somewhat scary for low-to-medium-wage workers.
In fact, McInnes says he does see HR executives balk more often at auto-escalation because they believe lower-paid individuals will become problematic when they are enrolled in an auto-escalation plan and don't necessarily want to be. Another opposition expressed by HR professionals is that the cost of the match will rise dramatically with auto-enrollment, so it can go even higher with auto-escalation.
Even with those objections, McInnes says HR and benefits leaders can work with their retirement-plan provider to overcome the issues and ensure their employees are preparing properly for retirement, regardless of income level or age.
For example, Prudential offers an "achievement meter" that each participating employee sees regularly. The idea is that, once implemented, it's still critical to engage employees by showing them they are on track to someday retire.
"Even when they have a 1-percent uptick in their savings rate, we send a congratulatory note [or] email with details about how much they will have at retirement," he says. "It really helps them understand how it helps ensure a more secure future."
OneAmerica's Whitehead offers a few reasons why HR professionals should add and/or promote an auto-escalation feature in their defined-contribution plans:
* Cost reduction -- When participants delay retirement, the extra costs add up. Employers spend more money on healthcare for older employees, and healthcare costs are also higher for plan sponsors whose participants cite high levels of financial stress. According to 2011 research from Financial Finesse, the additional cost to employers is between $10,000 and $50,000 annually per employee, for every year a participant delays retirement beyond normal retirement age. Enabling employees to retire at an earlier age can save employers money in the long run.
* Productivity and talent attraction/retention -- Employees overwhelmed by financial stress often carry that worry to work, resulting in less productivity and lower performance. Also, employers may see turnover spikes when younger employees perceive limited career paths because older employees are staying longer, limiting opportunities for promotion. Older and more tenured employees generally earn higher salaries, which costs the company more than younger employees.
* Match-related costs need not increase -- As noted, one concern employers have about implementing auto-escalation is costs related to the employer match. Some providers offer tools to assist the plan sponsor in calculating the best matching formula to accommodate the influx of new participants. This calculator can allow the plan sponsor to input plan participation rate and current matching formula, which means adjustments to determine options for managing costs and/or keeping them stable.
Whitehead notes that even with the 55 percent employee approval rating, 29 percent of respondents in the OneAmerica survey were "unsure" of how they feel about auto-increase, and 19 percent said they would opt out of the feature. Clearly, organizations have roadblocks to overcome.
"There is still work to do to educate both HR and employees about the importance of calculating how much retirement income they need and [to ensure employees] are contributing enough to their retirement accounts to meet those needs," Whitehead says.
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