Plan design changes are worth talking about if you feel participant outcomes matter. Plan design changes are making a difference for plan participants and plan sponsors. Retirement plan withdrawals increased due to the Covid-19 pandemic. Unfortunately, this may result in long-term negative impacts on outcomes. This is described in a recent white paper written by Shlomo Benartzi, Professor Emeritus, UCLA Anderson School of Management. Mr. Benartzi is also Senior Academic Advisor at Voya Financial.
According to Professor Benartzi, it made sense to implement regulations that provided workers the flexibility to access to their savings during a time of crisis. Now, as attention turns to what happens when our economy recovers, we ponder, what could be? A question for plan sponsors becomes: “if we make it easy to draw down savings, how can we make it even easier to accumulate savings once the hardship is over?” As Professor Benartzi describes, participants may need access to their savings now, but withdrawing the money means they will have to accumulate even more to retire successfully and on time.
What is a plan sponsor to do to combat the effects of early withdrawals due to the latest financial crisis? Professor Benartzi suggests improving retirement plan designs to help increase savings once the economy recovers. If changes cannot be implemented now, they should be re-evaluated as soon as possible, he noted.
Professor Benartzi offers seven recommendations for implementing plan design changes:
- Boost auto-enrollment deferral rates to 7%: According to Professor Benartzi, “To help employees save more, researchers at Harvard, UCLA, the Wharton School and City, University of London, in collaboration with The Voya Behavioral Finance Institute for Innovation, have studied the impact of suggested savings rates on employee decision. The biggest increase in savings came from raising suggested rates from 6 to 7%, which is why 7% is our recommended display rate.”
- Increase annual auto-escalation to 2%
- Boost the escalator cap to 15%: “To help employees reach a savings level required for a successful retirement, plan sponsors should consider putting employees on a path to gradually save more over time. These [escalators] have proven to be extremely successful. And have already helped more than 15 million Americans increase their savings.” The SECURE Act also encourages raising the cap on auto-escalated savings rates from 10% to 15%.
- Enrolling and re-enrolling all employees holistically: The SECURE Act encourages employers to make widespread use of auto-enrollment. This, includes a provision to incorporate plan design changes to make workplace retirement plans available to part-time employees. However, “Given the effectiveness of auto-enrollment, we should apply the nudge to all employees using re-enrollment, and not just new hires.”
- Rethinking the online enrollment architecture: A few simple digital design changes to the online enrollment interface, can make a dramatic difference on outcomes. Simplifying language or changing a button color can enhance retirement outcomes by significantly impacting participants’ choices. This also includes encouraging higher savings rates.
- Consider the stretch match: The way a stretch match typically works is, employers reduce their match rate while increasing their match cap. Instead of matching 50 cents on the dollar up to 6% of pay, incorporate an employer could opt to offer 25 cents up to 10% or 15% of pay. The stretch match is not a new idea. However, the stretch match encourages higher savings rates so workers can accumulate additional funds for retirement. It can also save companies money in the short-term, as not all employees are likely to raise their savings to the new cap.
- Consider the fixed dollar match: This type of match offers employees a lump sum, such as $1200 for the year, if they keep saving. As Professor Benartzi pointed out, “This is equivalent to a 50 cents on the dollar match up to six percent of pay for a $40,000 income. This is less than the typical match cost, thus helping companies reduce matching costs during the recession.” It may also be more effective in helping employees wrap their heads around the match, which may entice them to save more.
Taken together, these plan design changes may help improve financial security for American workers. According to Professor Benartzi, “Plan sponsors should apply these design changes holistically, and include both full and part-time, and new and existing employees. They should also utilize periodic re-enrollment to ensure that no workers are left behind.”
