At a TPSU program held at Queens University in Charlotte NC, the HR manager of a 70-person manufacturing company describes an innovative technique inspired by their CFO to boost employee deferral rates.
Every year, the company reviews employees who either get merit or cost of living increases. Before the increase even shows up within the employee’s paycheck, they receive an email from the company asking if they want a portion of the increase to go towards their 401k plan. That way, the employee does not even suffer the pain of loss which is proven to be twice as great as the joy of gain.
Not finished there, the company sends a note with the first paycheck to employees if they did not elect to already increase their 401k savings rate.
Professors Shlomo Benartzi from UCLA and Richard Thaler from the University of Chicago pioneered this technique using the theory of hyperbolic discounting where people are willing to sacrifice now for rewards in the future. But it’s even easier if they don’t have to sacrifice anything today which spawned the notion and the book, “Save More Tomorrow.” Workers at a California company not willing to give up a greater percentage of their payroll for their future retirement were asked to sign up for future increases in their 401k deferral rates, especially when they got a raise. Tens of billions of increased savings have been realized.
Today, auto-escalation up to 12% is an essential part of the Ideal Plan which includes auto-enrollment and the stretch match. Combining auto-escalation with salary increases is a brilliant move by the Charlotte manufacturer. Another idea not widely used is to ask new hires first, if they want to use their deferral rate was at their previous employer, and secondly, whether they want to take a percentage of their increased salary to go to their retirement plan.
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