Encouraging Savings Without a Match

Auto features are the likeliest ways to boost savings rates, according to Robyn Credico, defined contribution practice leader for North America at Towers Watson. “Even companies that do offer a match aren’t always successful in getting people to save,” Credico tells PLANSPONSOR. And when companies suspended the match because of economic stresses, she says, they saw almost no change in savings rates. Even without a match people do stay auto enrolled.

Even without a match, it’s a good idea to give people the option of a 401(k) plan so they can save on their own. She suggests using a default savings rate of 6% followed by annual 1% auto increases. “Smaller employers could give a profit-sharing contribution,” Credico also suggests.

Derrin Watson, an attorney with the Relius Education division of SunGard, agrees that auto features can boost participation. Even for participants who have filed a deferral election, plans that incorporate auto increase provisions will raise savings amounts. Watson says some participants might not like this, but many people accept the auto increase and, as a result, slowly build to an adequate level of retirement savings.

It is important to note that automatic enrollment is not an option for all defined contribution plans. Non-ERISA (Employee Retirement Income Security Act) 403(b) plans, for example, often are governed by state laws that do not allow employers to take money from participants paycheck without their consent.

About 10% of defined contribution (DC) plans do not offer a match contribution, according to the 2013 PLANSPONSOR DC Survey. With a typical adoption rate of 95%, auto enrollment is likely an excellent choice for plans without a match. And even higher default rates, Credico says, such as 6%, do not have an impact on the opt-out rate. It works because of passive behavior and because people are not paying attention, she feels.

The importance of saving for retirement is a vital piece of participant communication, Credico says. And the amount participants need to save cannot be overstated. “Even with plans with a match; people should be saving a lot more than whatever the match is. The most common match is 50% on the dollar on the first 6% of pay.

“The actual amount of savings this will generate is not enough,” Credico says, since many people will save only up to the percentage of salary that is matched. “You need to save a lot more than the match,” she says, and plan sponsors should communicate that.

Participant education is key to helping increase savings without an employer match, says Watson. “Teach people the importance of deferring and the time value of starting those retirement savings as early as possible,” Watson tells PLANSPONSOR. Participants should understand that the miracle of compound interest needs a long time frame to work, he points out.

Employers and vendors are both increasingly interested in trying to educate employees about retirement readiness, and modeling tools can be very useful. Credico points out that most vendors have tools that project what participants will have at retirement; it depends on what the employer is willing to pay (for tools). Almost every single recordkeeper has tools to help project out retirement needs and what participant need to save. Some tools are too complicated; it is better to use simpler ones. If you have to put a lot of information into the tool people won’t do it, she contends.

Putnam Investments recently brought out a tool that uses peer comparisons to help participants see how much other participants with similar age and salary are saving. Social comparison lets people in a 401(k) plan see how well they are doing compared with their peers and can perhaps prod them to change their financial behaviors.

ING U.S. offers My Savings Score, a benchmarking tool that helps users calculate their personal “state of savings.” Personal retirement preparedness is scored by comparing the user’s current savings to a prescriptive target, based on age and annual income.

Good modeling tools take into account health care costs in retirement as well as savings and compensation. Most important, Credico says, are that tools be usable in real time. “If you make a decision to do something such as save more, it goes straight into the recordkeeping system and makes that change,” she says. “It’s better than having someone get written material and then have to go somewhere to make that change—people get distracted by other things.” At employee meetings that discuss savings and retirement planning, Credico advises, the most success will come from having electronic forms or another way for people to make plan changes right there.

"All employers struggle with getting people to participate. The most successful way is auto enrollment,” Credico concludes.