Action steps for greater savings balances

Jan 25, 2017
By BlackRock

How plan sponsors can help boost participant savings.

In For Better or For Worse, Default Effects and 401(k) Savings Behavior, James J. Choi, David Laibson et al., warned that a “low default savings rate and a conservative default investment undercut accumulation.” Part of the reason, they speculate, is that participants may take plan defaults as savings advice and remain at a potentially less-than-adequate rate.

Now that we face reduced return expectations, plan sponsors and providers cannot rely on the old way of thinking: that returns will take care of themselves. The time has come to rethink our approach to helping participants build and manage their retirement readiness.

The good news is that setting more aggressive automatic savings rates will send a powerful message that participants need to save more. Here are three steps that plan sponsors may want to consider to help boost participant savings:

1. Let auto-features do some of the heavy lifting

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Establish auto-enrollment,
and then raise the bar

While close to a third1 of plans have yet to include this auto-enrollment feature, the Employee Benefit Research Institute estimates that more than half of potential participants would accept auto-enrollment deferral being doubled from 3% to 6%.

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Make auto-escalation opt-out
instead of opt-in

Auto-escalation can be a powerful tool for increasing savings. Unfortunately, many plans either do not offer it or offer it as an opt-in. Consider making auto-escalation opt-out and set timing so increases coincide with annual raises.

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Automate catch-up contributions

Automatically enroll eligible participants for catch-up contributions to take advantage of the higher ceiling the IRS permits after they turn 50.

2. Optimize plan design

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Reconfigure company match

Plans can stretch the match to encourage participants to contribute more, to get the full amount (e.g., match 50% of the first 6% of savings rather than 100% of the first 3%). Also, plans may want to consider increasing the match or making other contributions to help build retirement balances.

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Review savings leakage

Consider steps to limit loans or early withdrawals that may undermine retirement savings balances.

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Address both savings rates and risk exposure through reenrollment

Bring employees into the plan, including those who have previously opted out, while also resetting the default savings rate at a new higher minimum, and moving participants into a diversified investment option.

3. Review retirement policies and goals

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Keep retired participants enrolled

This may benefit the plan by maintaining economies of scale, and benefit retirees through continued access to institutional pricing and fiduciary oversight.

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Reevaluate any savings guidance

As returns expectations change, historical guidance — whether rules of thumb, calculators or other tools — may need to be revisited and recommunicated accordingly.

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Offer strategic participant communications

Strategic communications can help participants engage with and take a greater role in building their retirement savings — and help keep them focused on the long-term goal rather than short-term market movements.

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Reengage participants with their
retirement plan

Include retirement plan details in the annual benefits reenrollment to keep retirement savings top of mind.

The bottom line

As defined contribution (DC) plans have evolved, participants increasingly depend on the decisions made by plan sponsors and providers to help them create the retirement outcomes they want. In these times of reduced market expectations, we believe there is an even greater need for action and guidance from plan sponsors on behalf of their participants.