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Employee benefits and retirement plan solutions Trends and Insights How to make saving in a 401(k) plan hard (to avoid)

How to make saving in a 401(k) plan hard (to avoid)

Retirement plans today tend to be designed with features so the average person can begin saving with little effort. Yet, it’s seemingly not working for many employees. Instead of easier, do we need to make it harder to avoid?
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Headshot of Marc Howell, FSA, EA
Marc Howell, FSA, EA
Managing Director, Enhanced Plan Design at 51ԹϺ Financial Group®
5 min read |

When 401(k) and other defined contribution (DC) plans came into existence, the industry focused on access. The thought was that if only employees had these plans available, everyone would immediately become retirement and investment experts on their own. That generally didn't happen. So, we spent the last 10-20 years focusing on making the process to save for retirement easier for employees. The use of automated features, including automatic (auto) enrollment, and Qualified Default Investment Alternatives (QDIAs) was used by plan sponsors to help take advantage of human inertia and get people enrolled in their plans. Target date funds (TDFs), which are built to help ensure asset allocation would adjust automatically over time, have typically become the standard QDIA for many plans. The problem now is that while this helps, it doesn't solve the issue for everyone. That same inertia that is counted on to get people into the plan can also be what keeps people out of the plan, particularly if they miss the auto enrollment period.

The “easy button” plan features haven’t been working

The reality is nearly half of U.S. workers don’t participate in a retirement plan.

Many employees don’t enroll in their employer’s retirement plan due to a lack of information and confidence in basic investment terminology. Only 30% say they’re comfortable investing money. Unsurprising, age and salary impact the decision to contribute to a retirement plan. Many also say they have too much debt and need to pay down some or all their debt before they can start to save for retirement.

I have not started to save for retirement

48%

Gen Z (ages 18-27)

38%

Salary < $50,000

Auto enrollment of newly eligible employees has helped increase participation but isn’t being utilized as the industry expected. It was assumed most plans would add it to their plan design, but less than half (47%) of employers offer auto enrollment. And unfortunately, many plans operate in such a way that if an employee says, “no” to the retirement plan once, they aren’t asked again.

It’s a similar story with a plan’s QDIAs, which are typically a TDF. Committees, investment advisors, and consultants, including plan designers, all spend hours determining the right TDF and applicable glide path for the plan’s participants. Yet, once it’s selected, there may be no follow-up to help ensure employees stay in the plan’s QDIA. It’s not unusual for participants to change their investment allocations from the TDF being used as the plan’s QDIA for distinct reasons (sometimes in a panic during a market downturn) and then forget to change back again.

The plan design challenge—make it hard not to save for retirement

It’s one thing to make the retirement plan easier to participate in, but I challenge all of us to make it hard for employees to avoid the retirement plan and save for their future.

Auto enroll and sweep in all eligible employees each year. Make it hard to not get into the plan. An annual re-enrollment would have them decide each year whether they want to save for their retirement as they would have to consciously decide to opt out of the plan each year. A new hire's choices may be quite different from the choices the same person makes after a few years.

An auto sweep may also catch those who stopped contributing for some reason but forgot to re-enroll or catch those who didn’t know they were eligible. For employers conducting the full sweep each year they tend to do this when annual reviews and raises occur to help keep any difference in take-home pay to a minimum.

Research shows that almost half of nonparticipants would be interested in learning more about their benefits during their performance management period and nearly 1 in 3 would continue to defer when auto enrolled.

Auto increase aggressively. Make it hard to not save enough. Consider designing the plan so everyone saving below 15% (not just those who were auto enrolled) is auto escalated by 1% each year until their deferral rate hits 15%. Most employees need to save more than they do.

Re-enrolling employees into the QDIA at least every 5 years. Make it hard to invest poorly. Monitor where your employees are positioned in their asset mix versus the glide path selected. This can be seen with a simple review of how many participants are in the QDIA compared to those who aren’t. By re-enrolling participants into the plan’s QDIA, their accounts would be back on the glide path. And like automatic enrollment, they would have the opportunity to opt out of the re-enrollment.

Hypothetical participant scatter plot analysis

Glide path ranges vs. Equity allocation pre and post retirement

A hypothetical participant scatter plot analysis showing the S&P target date index glide path.
the Glide path for the S&P Target Date Index
5% equity band range above the glide path
5% equity band range below the glide path

Shown for illustrative purposes only.

Source: 51ԹϺ Asset Management. The above data represents a sampling of participant data for a hypothetical 401(k) retirement plan. It does not represent returns of any individual portfolio or product. Exclusive reliance on the above is not advised. Asset allocation and diversification do not ensure a profit or protect against a loss.

Build a retirement savings culture. Make it hard to not know the retirement plan. Don’t assume all employees have the same financial literacy. Adding the automated features can help get people into the plan, but let’s help them understand why they should take an active role in their retirement savings. Encourage the use of the financial wellness programs made available by plan service providers. Now that they’re saving for retirement, how do they also pay down their debt? Are they saving enough for retirement? Help them in using online tools and resources available to them via the retirement provider website.

Employee choice remains

Some employers feel it’s too controlling and paternalistic to implement automated features into the plan design. I argue the opposite. Being paternalistic to me means helping and educating employees to make the best decisions for themselves and their future. Nothing suggested above disallows employee choice. Those employees who are actively engaged in their plan, choosing their investments and savings rate can continue to do so. Those who decide time and again to avoid the plan can continue to do so, but it’ll become much harder to make that choice. Time counts in a defined contribution plan. Every year someone fails to save in the employer-sponsored retirement plan in their 20’s could decrease their future income by thousands of dollars. Let’s do the right thing and make retirement savings hard to avoid.

Discover more

Dive deeper into why employees don’t take advantage of their employer’s retirement plan with our new research, 51ԹϺ® Retirement Security Survey—Nonparticipants.

It’s important to work with a retirement service provider who understands and has the expertise to consult on options to help deliver the desired results. If you’re looking for options that could work in building a more robust retirement plan—reach out to your 51ԹϺ® representative.

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Footnotes

U.S. Bureau of Labor Statistics (BLS), March 2023. 51ԹϺ® Retirement Security Survey – Eligible but not participating, December 2023. PLANSPONSOR 2022 Defined Contribution Survey, December 2022. 87% of plans offer target date funds as their default investment. 51ԹϺ data as of December 31, 2023. 51ԹϺ® Retirement Security Survey – Eligible but not participating, December 2023. Based on analysis conducted by the 51ԹϺ Financial Group®, November 2022. The estimate assumes a 40-year span of accumulating savings and the following facts: retirement at age 65; 10-15% individual plus employer contributions; Social Security providing 40 percent replacement of income: 4.5% withdrawal of retirement savings; 6 percent annual market returns; 2 percent annual inflation; and 3 percent annual wage growth over 40 years in the workforce. This estimate is based on a goal of replacing about 80 percent of salary. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs as savings depends on many factors, including lifestyle, social security replacement, and retirement age.

Replacement factor of 80% is based on our industry experience and GAO Retirement Security Report to Congressional requestors. The estimated average total spending for post-retirement households was about 77 percent of the spending levels for pre-retirement households. GAO, 2013 CE Data; 16-242, Retirement Replacement Rates. Investopedia, , Richmond, Steven. December 20, 2023.

About Target Date investment options:

Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation and diversification do not ensure a profit or protect against a loss. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation.

Important Information

Defined benefit measurements, if applicable, are for the sole purpose of providing the plan sponsor information with respect to their plan or plans evaluated. Related analysis presented is/will be completed based on the plan’s participant data, provisions, and actuarial assumptions and methods incorporated into the DB plans most recent funding and/or accounting measurements. Analysis using different information and at future measurement dates may differ significantly from the current analysis.

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets. The performance and risks of a fund of funds directly correspond to the performance and risks of the underlying funds in which the fund invests.

There is no guarantee that a target date investment will provide adequate income at or through retirement. A target date fund’s (TDF) glide path is typically set to align with a retirement age of 65, which may be your plan’s normal retirement date (NRD). If your plan’s NRD/age is different, the plan may default you to a TDF based on the plan’s NRD/Age. Participants may choose a TDF that does not match the plan’s intended retirement date but instead aligns more to their investment risk. Compare the different TDF’s to see how the mix of investments shift based on the TDF glide path.

The subject matter in this communication is educational only and provided with the understanding that 51ԹϺ® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through 51ԹϺ Life Insurance Company®. Securities offered through 51ԹϺ Securities, Inc., member SIPC and/or independent broker-dealers. Referenced companies are members of the 51ԹϺ Financial Group®, Des Moines, IA 50392. Certain investment options and contract riders may not be available in all states or U.S. commonwealths.

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