Sponsors: Your Misconceptions Could Be Hindering Retirement Readiness. Sometimes, the truth hurts. Or, as the inimitable Gloria Steinem once said: “the truth will set you free, but first it will piss you off.”
Here’s a truth bomb that might evoke a combination of all three: if you’re a plan sponsor, your misconceptions about how your employees view your retirement plan could be hindering your ability to help them achieve the best possible outcomes in their post-career years. In other words, what you believe your employees are thinking about your retirement plan may be getting in the way of you making good decisions that can help improve their financial well being in retirement. And in fact, what you think they think may not be what they’re thinking at all.
We meet a lot of plan sponsors through The Plan Sponsor University (TPSU), and we’ve heard a bevy of misconceptions, including “my plan participants won’t like it if I do a re-enrollment” and “I’m worried enrollment will plummet if I increase my plan’s default deferral rate.” Several recent studies corroborate what we’re hearing from plan sponsors — they fear the unknown consequences of being too hands-on when it comes to changing up traditional plan designs or taking proactive steps to help boost retirement readiness.
We believe this fear of being paternalistic is, at best, outdated, and at worst, an excuse not to do anything. It probably goes without saying — both approaches are not ideal.
In reality, participants are more flexible, tolerant and committed to reaching their retirement goals than you think. Here’s one example: a recent study sponsored by Voya Financial and co-authored by UCLA professor Shlomo Benartzi found that higher default deferral rates in defined contribution (DC) retirement plans don’t actually deter enrollment. However, many plan sponsors seem to believe that enrollment rates will decline if they push default contribution rates beyond the typical 3%-4% that the industry has been using for years.
Those fears are largely unfounded. In fact, the study found that default deferral rates in the range of 7%-10% were highly tolerated and did not result in a drop in enrollment. Even at an 11% default rate, enrollment declined only slightly.
It’s obvious, but it bears mentioning that higher deferrals lead to increased savings rates, which lead to improved retirement outcomes. As such, sponsors should proactively raise default deferral rates (even if only for new hires), or gradually over time for existing employees. The benefits to the majority of participants clearly outweigh the “risks” of a select few opting out because they believe the deferral rate is too high. And again, as the Voya study shows, the likelihood of opt-outs is actually quite low, even when participants are pushed outside of their comfort zone on deferrals.
Plan sponsors also have misconceptions around re-enrollment, a process where participants’ retirement plan assets and future contributions are defaulted into the plan’s default investment option, like a target date fund (TDF). Typically, most sponsors opt to do a re-enrollment when they make changes to the plan’s investment menu, bring a new recordkeeper on board, or want to help improve participants’ asset allocation, according to Callan.
Interestingly, though, a recent J.P. Morgan Asset Management study found that most plan sponsors are apprehensive about re-enrollments because they fear pushback from participants. However, 82% of participants actually support re-enrollment — in their minds, the easier their investment decisions, the better. Misconception busted.
Moreover, plan sponsors who participated in the J.P. Morgan study claimed that re-enrollments posed too much of a fiduciary risk. Thirty-nine percent of sponsors were unaware that they could receive fiduciary protection by defaulting assets into a qualified default investment alternative (QDIA) during a re-enrollment. Another misconception busted.
These are just two examples where common misconceptions can get in the way of making critical decisions that can help improve retirement readiness and outcomes. We think plan sponsors can be more open-minded when it comes to pushing the envelope so they can help participants be as retirement-ready as they can be. We’re seeing a lot the “older,” paternalistic and more commonly accepted ideas about retirement plans being turned on their ears as the industry conducts more deep-dive research. The latest findings show that participants’ tolerance level for more outcome-oriented default options is a lot higher than we originally predicted, and their behaviors aren’t necessarily as predictable — or contrary to what we want them to do — as we thought.
As such, it’s time for sponsors to let go of popular misconceptions about what participants will and won’t do and make way for new paradigms. Simply put, many of the old ways of thinking aren’t relevant anymore. The industry and regulations continue to evolve, and employers’ thinking about how they treat retirement plan participants must change along with them.
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