Misunderstanding Retirement Plans Affects Participant Savings Behavior

Research reports find a large proportion of employees don’t understand their retirement benefits—with some not even realizing they are participating—and better communication is needed to help participants take the best savings actions.

Analyzing data from its 2019 Universe Benchmarks report and its 2019 Health and Financial Wellbeing Mindset Study together, Alight Solutions found employees in general don’t understand the broad-based benefits offering from employers.

In spite of finding better participation and savings rates by employees in retirement plans, employees said they trust their employers but want a better understanding of the retirement plan.

According to Virginia Maguire, vice president of wealth product strategy at Alight Solutions in Atlanta, with automatic enrollment and escalation, Alight found plans offering automatic enrollment have an average participation rate of 87%. And in 2018, the average plan participant’s contribution rate remained at 7.9%; however, among participants who were also contributing in 2017, the average rate increased from 8% to 8.4%, largely a result of the growing popularity of automatic escalation.

An unpublished survey from Fisher Investments found while most participants think they know enough about their 401(k), 71% of survey respondents failed a basic 401(k) quiz.

“We have all understood the value in automatic plan design in overcoming participant inertia, but if plan sponsors don’t communicate to participants about the features of the plan, participants aren’t engaged and not taking the behaviors plan sponsors want them to,” Maguire says, adding that it is also important to make sure default savings rates are adequate.

According to Maguire, there are also similar communication issues about plan investments. Not surprisingly, she says, target-date funds (TDFs) are used by three-quarters of participants. However, a finding she was surprised about is that, on average, participants hold about five asset classes—they use TDFs, but also put funds in other investments because they hear the diversification message. They do not understand that TDFs address the diversification issue.

Alight Solutions also found that only 8% of workers are contributing the maximum amount allowed to both their 401(k) plan and their health savings account (HSA), but the Health and Financial Wellbeing Mindset Study found that about one-quarter actually believe they are contributing the maximum. In addition, almost 10% of workers contribute to a 401(k) without realizing it, and 12% of workers receive employer matching contributions but are not aware.

These misperceptions and lack of knowledge cause problems for participant savings behaviors. For example, Maguire says, if participants think they are contributing the maximum amount allowed, they will not increase their savings. While she finds that 10% of participants not realizing they are contributing is not surprising, given the trend of automatic enrollment and participants not paying attention to pay stubs or reading retirement plan disclosures, it means these participants are not at all engaged in their retirement savings. As for those who don’t know they are getting a match, Maguire says what can help are communications telling them they are not saving enough to get the full match and tools to get them to choose auto escalation.

According to the Fisher Investments study, 81% of employers think their plans provide sufficient financial information, while only 57% of employees agree. And, Alight found employees don’t feel confident about their financial wellbeing in general, and not understanding retirement plans is a component of that.

Alight found one-third of employees struggle with where to go to find financial information, Maguire says. Seventy-eight percent of employees said decision tools would help with their retirement savings and financial wellbeing, and 70% said spending and saving assistance tools would help.

Getting more personal with benefit education

A survey from Colonial Life found employees who work at the smallest U.S. businesses understand their employee benefits the best. In a survey of 1,506 full-time U.S. employees, 47% of employees who work for companies with fewer than 100 employees report understanding their benefits “very well.” Only one-third of workers at larger businesses report understanding their benefits that well.

Colonial Life attributes this to a personalized focus in benefits education. Employers with more than 100 workers are more likely to depend on email (58%), websites (49%) and mailed packages (30%) to educate employees about benefits, according to the survey While 34% of businesses smaller than 100 employees also rely on email, they focus more attention on personalized individual and group meetings with HR professionals.

Nearly 25% of employees at the smallest businesses say individual meetings with benefits experts are available to them, compared to just 14% at employers with more than 100 workers. And 37% of the smallest employers have group meetings with HR professionals to discuss benefits, compared to just 29% of larger employers.

That is why Maguire says some of the most valuable things all employers can do is drive employees to their benefits website, hold seminars and webinars. More than half (56%) of employees surveyed by Alight Solutions said that would help.

“A seminar or webinar onsite is more personal. We’ve seen those be extremely useful,” Maguire says. “Also, it would get to those who are contributing to the plan but don’t realize it.”