Plan Design Strategies to Boost Retirement Outcomes for Low-Income Participants

Plan sponsors’ best available plan design and benefits strategies to boost retirement outcomes for low- and moderate-income (LMI) participants are instituting automatic features, offering emergency savings options and implementing financial wellness programs, according to industry sources.

Adding auto-enrollment features to employer-sponsored defined contribution (DC) retirement plans borrows an idea from behavioral economics to take advantage of active choice by removing a barrier for workers to enroll, says Rich Johnson, senior fellow and director of the Program on Retirement Policy at the Urban Institute, a Washington, D.C.-based think-tank for economic and social policy research.

“Research has shown overwhelmingly that the best way to get lower- and moderate-income workers to participate in a plan is to just automatically put them in the plan,” he says.

“The most important thing that 401(k) plan sponsors can do to boost retirement savings by moderate- and low-income workers is to institute automatic enrollment,” he adds. “We know that a lot of low- and moderate-income workers fail to sign up for [retirement plans], because they just don’t get around to it, and by automatically enrolling workers—giving them the option to decline enrollment—that breaks down that barrier.”

An Employee Benefit Research Institute (EBRI) webinar held last month compared several generations’ access to retirement plans, net worth, student loan incidence and debt at the same ages to provide a clear total retirement picture. EBRI research found there are differences in retirement plan access across generations and attendant retirement savings gaps among demographics.

Indeed, Hispanic workers have lagged other groups in retirement savings, research has shown. Legislative efforts have attempted to boost retirement plan participation overall, including the 2019 Setting Every Community Up for Retirement Security Enhancement (SECURE) Act, but gaps still remain, especially among LMI workers. 

Auto-enrollment must be paired with additional features and plan sponsors’ ongoing examination of participation in the employer-sponsored retirement plan, Johnsons says, because once an employee is auto-enrolled, it’s critical that person saves at a deferral rate that will accumulate sufficient savings.

On the other hand, setting the auto-deferral rate too high can hurt participation, Johnson notes.

“A better strategy might be to start at relatively low rate and then have automatic escalation so that every year the contribution rate would increase by a percentage point, until it reaches a certain level,” he explains.

Employers can also examine their match rate to encourage higher deferral rates, as research shows that many participants contribute to the retirement plan up to the level at which the maximum contribution match is reached. “The higher the level at which the match ends, the more that can get more people to participate,” Johnson says.

For example, instead of employers matching worker contributions 100% to a lower max, employers could contribute half of what the employee does up to a higher max, Johnson adds. In other words, instead of matching 100% of a 3% contribution, employers could use the same amount of money to match 50% of a 6% contribution.

“That doesn’t necessarily cost the pan sponsor more, but having the level at which the match ends higher could induce workers to participate more,” he says.

Additionally, plan sponsors can assist LMI participants by considering using auto-escalation tactics, because getting participants into the plan is just the first step—ensuring participants are enrolled and contributing to accumulate a “reasonable amount of retirement savings,” is the long-term goal, Johnson adds.

Another tactic employers can use is to defer portions of an employee’s pay raise automatically into the retirement plan, rather than straight into a paycheck.

“Workers wouldn’t necessarily feel like they’re losing out on something because they’re still getting a slight bump up in their salary at the same time and getting a bump up in their retirement savings,” Johnson explains.

Warren Cormier, executive director of the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center (RRC), says instituting a financial wellness program with an emergency savings program—that continually reaffirms the critical importance of having sufficient savings to cover emergencies—is the most powerful tool available for participants earning roughly between $20,000 and $75,000.

“The first thing they need to do before they can really focus on long-term savings or retirement is to make sure that they are getting a sense of feeling in control and security about their day-to-day experience,” he says. “Once that’s taken care of, then you can move to a higher order of experience, that is, saving for what might happen 20, 30, 40 years from now.”

LIMRA research shows that almost 30% of workers have no emergency savings fund, which can lead participants to withdraw money from retirement accounts.

Plan sponsors can turn to their retirement plan advisers for help with plan design and benefit strategies and to start financial wellness campaigns for employees that explain the information and resources in plain terms, says Greg Adams, consultant at Fiducient Advisors.

“Providing information to the plan sponsors about the auto-features, the statistics behind why they work, how they work—that information really helps plan sponsors start to make decisions and helps to alleviate some of the concerns from plan sponsors that it’s too controlling or too paternalistic,” he adds.