Offering automatic features in your plan isn’t enough to incentivize employees to save for retirement, but adopting higher default options might be.
New findings from the Voya Behavioral Finance Institute for Innovation show that employers who focus on finding optimal retirement plan design settings are likelier to see higher savings rates from employees. While employees who enrolled at a default of 1% remained at this level without considering an increase, roughly half of employees who were shown a 2% default escalator stuck with that percentage.
The research shows that when given the option, most employees will choose to stick with the higher percentage, and even if they don’t, consider escalation each year. Even as those who were enrolled at 2% switched back to 1%, Voya findings show that these participants still chose to escalate in the future.
“Over the past several years, automatic enrollment and escalation features in defined contribution plans have made it easier and simpler for individuals to start saving early and more,” said Tom Armstrong, head of Voya’s Behavioral Finance Institute for Innovation, in a statement. “These powerful tools have improved retirement outcomes and helped close longstanding gaps in retirement plan participation; importantly, these gaps have been closed across gender, race, ethnicity and income. Therefore, understanding how to make incremental changes in the use of these features to further drive positive outcomes remains especially important in helping participants truly maximize their retirement savings potential.”
According to Voya, among employees who decided to enroll in automatic escalation, a significant number of employees were also willing to escalate before 12 months had elapsed. When prompted by the default, 54% of employees appeared willing to escalate in 90 days, and with 67% in 180 days. However, the more aggressive default delays, which led to escalation beginning sooner, did modestly reduce escalation enrollment (from 23% to 18%).
“Ultimately, our findings also highlight the need for additional research to help determine the optimal escalation default for different types of employees,” added Armstrong. “By creating more personalized defaults and in striving to optimize the design of retirement savings products, employers should not overlook the importance of appropriately setting and personalizing auto-escalation defaults.”
SEE ALSO:
- Higher Auto-Defaults Dominate in Many DC Plans
- Defaults Matter: T. Rowe Price Analysis Shows Just How Much
- Next Retirement Reforms Need to Be ‘Smart’ Defaults: Shlomo Benartzi
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
