Although retirement planning is a top priority for many Americans, significant barriers persist. Nearly one in four workers with access to employer-sponsored retirement plans don’t participate, with even lower participation rates among lower-wage earners. As Heidi Johnson highlighted in a recent BenefitsPro article, employers have both an opportunity and responsibility to address these challenges. (Ms. Johnson is Senior Director, Behavioral Economics at Financial Health Network.)
Research shows that offering a quality retirement plan is crucial for recruitment and retention, with 76% of workers considering employer-sponsored retirement plans “extremely” or “very” important. Interestingly, costly incentives like generous match rates alone often fail to drive desired enrollment and saving behaviors.
Behavioral science offers proven strategies to overcome these challenges:
- Encourage Enrollment – Complexity and uncertainty often cause employees to put off participating in workplace retirement plans. Automatic enrollment eliminates these friction points, with auto-enrollment plans achieving participation rates as high as 94%. For employers hesitant to implement auto-enrollment, “active choice” presents an alternative that has the potential to double participation rates by prompting employees to make deliberate enrollment decisions during onboarding.
- Build Savings Balances – Default contribution rates significantly influence savings behavior. Setting higher default rates (6-7%) nudges employees to save more without deterring participation. Strategic matching contributions can further encourage higher savings rates, while auto-escalation features automatically increase contribution percentages annually, helping employees painlessly build larger retirement balances over time.
- Simplify Asset Allocation – Too many investment options can lead to decision paralysis. A curated selection of fewer than 10 funds reduces complexity, while target date funds simplify decision-making by automatically adjusting asset allocation as retirement approaches. Research shows these funds can increase retirement wealth by up to 50% over 30 years compared to self-managed portfolios.
- Protect Balances – With an estimated 2% of net retirement contributions lost annually to “leakage,” automatic portability helps preserve savings by seamlessly transferring retirement balances during job changes. Offering repayment options for hardship withdrawals provides flexibility while maintaining long-term savings momentum.
In light of these observations, Ms. Johnson offered the following takeaways for retirement plan sponsors:
- Review your plan design through a behavioral science lens—small adjustments can yield significant improvements in participation and savings rates.
- Consider the real barriers employees face rather than assuming financial incentives alone will drive desired behaviors.
- Implement auto-features strategically to help employees overcome inertia.
- Revisit investment options to ensure they simplify rather than complicate decision-making.
- Remember that 60% of workers report that robust retirement benefits increase their likelihood of staying with their current employer.
The annual open enrollment period presents an ideal opportunity to reassess retirement benefits. By adopting these behavioral science-backed strategies, you can enhance your organization’s recruiting and retention efforts while supporting employees’ long-term financial security.
