Sitting down with PLANSPONSOR to offer an inside take on the results of the firm’s “Driving Plan Health” report, Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust, made some important points about “inertia,” and how this theme impacts the retirement plan industry in pervasive and pernicious ways.
As Hooker explained, retirement industry practitioners will almost certainly be familiar with the topic of inertia as it pertains to participants—used as short-hand to reference the simple fact that most workers in the U.S. just do not spend a lot of time or mental energy in their daily lives thinking about retirement. And even if they do know they should take action, this knowledge seldom suffices to inspire concerted, unilateral action from a would-be retirement saver.
Hooker said inertia is one of the biggest reasons why traditional defined contribution (DC) retirement plans, which put much of the burden of signing up and managing investment accounts over time directly on the plate of individual workers, often fail to generate the same type of retirement readiness that participants in defined benefit (DB) pensions can enjoy.
According to Hooker, the conversation around inertia has been immensely helpful for improving the “choice architecture” that surrounds DC plans, leading to an understanding of the importance of automatic enrollment and deferral escalation features, and to the widespread use of pre-diversified investment options in the qualified default investment alternative (QDIA) slot.
“Where the conversation has not been as advanced is when we are talking about the ways plan sponsors also have their own amount of inertia to grapple with,” Hooker said. “We have built this new report to help plan sponsors understand the many opportunities they have to be much more proactive in the design and management of their DC retirement plans. We identified the set of specific features of a well-designed 401(k) plan that are most effective in helping employees amass the savings they need to replace 80% of their income in retirement.”
In the Driving Plan Health report, researchers point to 16 distinct features and strategies that can be highly effective in improving retirement plan outcomes. Interestingly, Hooker said, the research shows “high influence plans” do not by any means look all the same. Nor are they all just the most generous plans to be analyzed in terms of the matching formula.
“Instead, they use their own thoughtful combinations of the different features to launch employees on the path to replace 80% of their pre-retirement income once they retire,” Hooker said. “For the top performing plan sponsors, this is not just about generosity or doing the right thing. These plans are targeting high income replacement rates because that is what it takes to effectively manage a workforce and ensure people can retire on time.”
Hooker said that, of the 16 features that exert influence, four generate the most positive outcomes. First is automatic enrollment with a default deferral rate of 6% and tied to automatic annual re-enrollments; second is the use of re-enrollments (with opt-outs, of course) to increase employee deferrals to a rate of 10% or higher; third is the offering of diversified investment choices, such as a target-date funds; and fourth is an “above-average company match of at least 5%, or profit sharing.”
“When used together, these features address the psychological barriers, or inertia, that tend to get in the way of a person’s path to a well-funded retirement,” Hooker said. “Our research shows that effective plan design helps render better outcomes for employees. When plans are built with the right features, employees have a much better shot at building the savings they need for retirement.”
Among the thousands of plans analyzed by Wells Fargo Institutional Retirement and Trust, just 10% are deemed to be high influence—i.e., their plan sponsors have addressed their own inertia and made progressive, goals-based plan design a priority.
“High influence plans are not concentrated in any one industry. Our research shows many U.S. businesses can and do institute plans that have positively influenced employee behavior,” Hooker said. “I would add that even the companies with the highest influence scores can all still make small changes that have a big impact.”
Other findings show participation in 401(k) plans overall has increased 19% over the last five years, with Millennials continuing to make the biggest gains. Also positive, savers contributing at a rate of 10% or higher have increased 10%. Baby boomers (45%) are significantly more likely to contribute at that rate, followed by Generation X (36%) and Millennials (29%).
The figure for Millennials, Hooker said, shows that DC plan sponsors cannot afford to be complacent. If they want their DC plans to truly prepare their workers for retirement, they simply must consider implementing the four key influence factors aforementioned. Indeed, among high influence plans, the Wells Fargo Plan Health Index has improved by 62% over the past five years, and average balances have increased 30%.
“Although plan design is the foundation and the most influential component for engaging participants, businesses also should incorporate effective communications and forward-thinking digital tools to help employees overcome psychological barriers to saving,” Hooker said. “Targeted participant communications and digital tools is likely to encourage positive participant behavior. For example, having a peer comparison tool with a simple ‘click here to change your deferral rate’ option is an easy way to encourage participant action.”