If you are one of those people don't save in the 401(k)
or other employer-sponsored retirement plan, your lack of retirement
readiness is not only hurting you, it may also be affecting the owner and
executives of your company. But how can
an employer help encourage workers to put away retirement savings? A 2012
working paper, Matching Contributions and Savings Outcomes: A Behavioral
Economics Perspective, by Brigitte C. Madrain at the National Bureau of
Economic Research, had some ideas about what works and what does not when it
comes to encouraging employee retirement plan participation.
Make more of a
match: Matching is often the go-to move among plan providers, the
thing that should encourage employees. Free money! But it doesn't do the job
you might think. What did work was increasing the match threshold, for
example instead of offering a 50 percent match on up to 6 percent of
contributions, offering a 25 percent match on up to 12 percent of
contributions. It gets savers to shift their savings goals, but it doesn't
change the amount the employer lays out.
Keep saving simple: No
more than ever, employers need to make saving for retirement easy and fun.
Education plays an important role in helping people recognize the stakes of
saving for retirement. But educational materials should also be fun. Even
including a real 401(k) contribution calculator to show the impact that
your 6 percent or 10 percent contribution each pay period doesn't feel like a 6
percent or 10 percent cut in your pay.
Some plan providers recommend offering a gift card
to everyone who signs up for the plan, or registering new plan participants in
a drawing for a tempting prize. Free gifts can create excitement, but your
goal should be to find something fun and sustainable to get people to
focus on their savings over the long term.
Automate
participation: You can also go on the theory that people will take the
path of least resistance. Make savings part of their routine and they will go
with it. About 56 percent of plans now offer automatic enrollment programs,
according to T. Rowe Price's Getting Beyond Ordinary: Advances in
Automatic Savings Program Design. You can stop participating whenever you
want, but it will require action on your part. Studies find that when
people are asked to opt in with something like a savings percentage increase,
for example, just over 8 percent does so. If they are asked instead to opt
out of a change, more than 64 percent of participants just keep it.
Automatic participation is a welcome advancement in 401(k)
participation, but some investment professionals believe we can go further. T.
Rowe Price would like to see automatic participation extend beyond new
hires, to people who are long-term employees. The investment giant would also
like to see an increased default rate.
Pick the initial
investment: Among employers who do auto-enroll new employees, 77
percent in the T. Rowe Price survey say they use a target-date retirement
fund or lifecycle fund. These funds have asset allocation built in,
and balances over time according to your age and time until retirement. Another
easy win is to offer a single, broad market index fund or exchange
traded fund. It's kind of like an investment in the entire market, it's cheap,
and it will give new investors a first-hand lesson in the S&P, market
swings, fees and other money topics.
Be a nag: Even
after you've hooked the employees into the plan, the work does not stop.
Employees who participate in 401(k) and other defined contribution plans
typically complain that they want more help. Make being good at retirement
saving a company value. Remind your staff often to increase contribution rates
(or do it for them and remind them they can opt-out if they choose). Conduct
annual portfolio rebalancing clinics or retirement readiness seminars
over lunch. Teach, assist and inspire your staff to make retirement a part of
their own personal goals. Small reminders can spur big change.
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