Benefits April 2, 2013

Income Projections Encourage Saving

April 2, 2013 (PLANSPONSOR.com) – New research shows providing employees with retirement income projections may lead them to save more.
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However, the findings suggest it was not the income projections alone, but the combined effect of providing retirement planning information along with the balance and income projections that encouraged an increase in saving.  

Researchers at the Center for Retirement Research at Boston College divided a sample population into four groups—a control group and three treatment groups, with each treatment group receiving one of three brochures. The “planning treatment” brochure provided general information about saving for retirement and a step-by-step guide for signing up or changing contributions to a voluntary retirement plan. The “balance treatment” brochure added age-specific projections of how hypothetical additional contributions would translate into additional balances at retirement. The “income treatment” brochure added age-specific projections of how the additional contributions would increase retirement income. 

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Compared to the control group, individuals in the income group were 1.2 percentage points more likely to change their contributions during the six-month period following receipt of the brochures—5.3% vs. 4.1%. The income group as a whole (including both those who changed contributions and those who did not) increased its retirement saving, on average, by $85 more than the control group; however, considering only the individuals who made a change, those in the “income group” increased their saving by $1,150 more per year than those in the control group.

Relative to the control group, individuals in the other two treatment groups—the “planning group” and “balance group”—were also more likely to change their VRP contributions, but did not show a statistically significant increase in the amount of saving.  

According to a brief about the research findings, the responses show the income projections had a beneficial, and statistically significant, effect on knowledge and confidence. Compared to the control group, the income group reported less difficulty finding information about how much to save for retirement and being better informed about retirement planning than they were six months prior. They also reported being more certain about their expected retirement income and more satisfied with their financial condition. 

However, the report notes, the results show the effect of the income projections on retirement saving was significantly reduced by a difficulty in paying bills, a strong preference for living “pretty much for today,” and a tendency to procrastinate, but was significantly enhanced if the respondent was good at following through. Cognitive ability and financial literacy generally had little effect, and in no case a statistically significant effect.  

The brief can be downloaded from http://crr.bc.edu/briefs/do-income-projections-affect-retirement-saving/.
Benefits April 2, 2013

29% Chose Deferral Higher than Default

April 2, 2013 (PLANSPONSOR.com) - Five percent of Section 401(k) plans include an automatic contribution arrangement (ACA), according to the Internal Revenue Service (IRS) 401(k) Compliance Questionnaire.
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Very large and large plans are more likely than medium or small plans to have an automatic contribution arrangement.    

According to the IRS’s final report of responses from its Questionnaire, 43% of participants subject to an ACA deferred at the default rate, while 29% elected a rate higher than the default rate.Twenty-one percent elected not to make elective deferrals, and 7% elected a rate less than the default rate.  

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The Internal Revenue Service’s (IRS) final report of responses from its 401(k) Compliance Check Questionnaire includes results reported in the Interim Report (see “IRS Issues Interim Report About 401(k) Compliance Questionnaire”). The Interim Report projected 401(k) Questionnaire findings to the Section 401(k) plan sponsor population that files Form 5500.  

The final report also includes: 

  • Additional analysis of the 401(k) Questionnaire not included in the Interim Report; 
  • A new section about Automatic Contribution Arrangements;  
  • Stratified data highlighting differences in the results based on plan size; and 
  • Updates to the data included in the Interim Report to address questions from the retirement plan community. 

 

The final report is at http://www.irs.gov/pub/irs-tege/401k_final_report.pdf.

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