How to Mitigate Participants’ Savings Biases

Experts discuss how plan sponsors can get participants out of retirement savings "ruts" and get them to engage more with their retirement plans.

If a retirement plan automatically enrolls participants at a 3% deferral rate and does not pair that with automatic escalation, the vast majority of participants stay at that rate, says Nathan Voris, managing director of business strategy at Schwab Retirement Plan Services.

That’s why it is so important for plan sponsors to “rethink the 3% deferral rate and pair that with automatic escalation,” Voris says.

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Amy Ouellette, director of retirement services at Betterment for Business, agrees: “A lot of plans use a 3% deferral rate. That provides a mental anchor for people, essentially telling them that this is a good amount to save. For a lot of people, that rate is simply not going to be enough to get them to the retirement they want. Sponsors’ fears about participants’ resistance to higher savings rates are unfounded. A study by Shlomo Bernatzi found that plans with deferral rates as high as 11% have similar opt-out rates as plans with deferral rates of 6%.”

If a sponsor is still uncomfortable starting people off with a 6% deferral rate, “it is important to pair that with yearly automatic escalation until they reach a much higher rate,” Ouellette says.

Yet another retirement plan participant savings bias is status quo bias, whereby participants who are automatically enrolled take no interest in their retirement savings. This can be countered with “group and one-on-one meetings, which yield some of the best results, timely emails, texts and other communications,” says Patrick Delaney, DCIO retirement insights leader at T. Rowe Price.

It is also important to periodically prompt people to or automatically rebalance their portfolios and consider other options, such as managed accounts, says Mark Riepe, senior vice president at the Schwab Center for Financial Research.

Providing people with retirement calculators that show them their projected monthly income in retirement are also powerful tools that can motivate participants to save more, Ouellette says.

Finally, it is critical to offer people holistic financial wellness programs, Voris says. “People have many competing financial priorities,” he notes. “The average 26-year-old is focused on buying a car or paying down student debt, while a 50-year-old may be trying to save for a child’s college education. Saving for retirement cannot be done in a vacuum.”

Travelers to Help Employees Save for Retirement While Paying Down Student Debt

Employee student loan repayments will qualify for 401(k) employer match contributions.

The Travelers Companies has created The Travelers Paying It Forward Savings Program for its employees, which will allow payments that U.S. employees make toward their student loans to be eligible for the company’s 401(k) matching program.

Alan Schnitzer, chairman and CEO of Travelers, says many of the firm’s younger employees struggle to save for retirement because student loans weigh so heavily on their finances.

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“Investing in their education shouldn’t stop our employees from investing in their future,” Schnitzer says. “We are promoting a standard of employee care that enables them to do both.”

Pointing to data from the Federal Reserve, Travelers notes that student loan debt in the U.S. topped $1.5 trillion at the end of 2018 and that 41% of those between the ages of 18 and 29 have no retirement savings. In addition, 42% of those who attend college have incurred at least some debt for their education.

The Travelers Paying It Forward Savings Program will go into effect in January 2020.

In a recent private letter ruling, the Internal Revenue Service (IRS) says that under a 401(k) plan, if an eligible employee makes an elective contribution during a payroll period equal to at least 2% of his or her eligible compensation during the pay period, the plan sponsor makes a matching contribution on behalf of the employee equal to 5% of the employee’s eligible compensation during the pay period. The regular matching contributions are made each payroll period.

In addition, Senators Ron Wyden, D-Oregon, and Ben Cardin, D-Maryland, have introduced legislation that would allow 401(k), 403(b) and SIMPLE retirement plan sponsors to use their plans to provide student loan repayment benefits to employees.

According to a summary of the bill, The Retirement Parity for Student Loans Act would permit these plan sponsors to make matching contributions to workers as if their student loan payments were salary reduction contributions.

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