State of Michigan

All of the State of Michigan’s defined benefit (DB) plans for public employees have been closed over the past 11 years, and new hires now go into a defined contribution (DC) or hybrid plan. That changes how newer public employees need to approach saving enough for their retirement.

“Engagement in retirement planning is important for employees who primarily have a DC plan. But some are actively engaged in their retirement planning, while others may not have the interest or financial acumen to be engaged,” says Kerrie Vanden Bosch, director, Office of Retirement Services for the state, in Lansing, Michigan. “Knowing this, we work to establish our plan defaults in a way that sets employees up for a better probability of financial security in retirement.”

The state’s Small Steps automatic escalation program, now in its third year, typifies this approach and has quickly influenced participants’ retirement readiness. “Over a three-year period, we’ve seen an increase—from 21% to 41%—of participants achieving a ‘green stoplight’ as measured by Financial Engines,” Vanden Bosch says. The green stoplight is defined as meeting two criteria: 50% or more chance of replacing at least 70% of income, and 90% or more chance of replacing at least 50% of income. “We attribute this increase primarily to the Small Steps program,” she says. “Our participants want to do the right thing, and they are looking for guidance on how much to contribute.”

Michigan started doing automatic enrollment for public employees in defined contribution plans in 2012. “We didn’t pursue auto-escalation right away, because we were taking a deliberate approach, and auto-enrollment was the first big step,” recalls Anthony Estell, Office of Retirement Service director, plan development and compliance.

But the office’s 2015 targeted “Meet Your Match” campaign, aimed at participants contributing too little to receive the full employer match, turned out successfully. “So we started thinking about expanding it, to help increase savings rates for all of our participants,” Estell says.

The office had some concerns about participants rejecting auto-escalation, but only about 5% have opted out. Michigan worked with its recordkeeper, Voya Financial, on the communications campaign, launching it about a year in advance to give employees an early heads-up about Small Steps. Then, as the launch date neared, participants who would be auto-escalated if they failed to opt out started receiving targeted communications.

Estell has an idea about why the auto-escalation program got such widespread acceptance by Michigan public employees. “I think the fact that we talked about some of the ‘rule of thumb’ savings recommendations—that people need to save 15% to 20% of their pay every year—helped,” he says. “Most people know they need to save more, and this program helps overcome their inertia.”

The Office of Retirement Services reaches out every year to participants who have previously opted out of Small Steps. “The opt-out is just for one year,” Vanden Bosch says. “We know that participants’ financial situations change over time, and we want to give them every opportunity to increase their contributions, to help improve the probability of their financial security in retirement.”

—Judy Ward