The paper points out that, despite the decline in defined benefit plans and the uncertainty of social security, employees exhibit troubling behavior in retirement saving and planning. Not enough eligible employees enroll in retirement plans and those who do are saving at inadequate levels or sufficiently diversifying their investments.
Behavioral research shows that employees suffer from inertia (See Participant Inertia Key to Understanding Behaviorand 401(k) Participants Afflicted with Account Inertia ) and make investment decisions based on emotions and impulses (See Emotions Negatively Affect Investment Decisionsand Emotions and Impulses Contribute to Bad Retirement Planning Decisions ).
The paper also mentions that recent Employee Benefit Research Institute (EBRI) research shows that individuals’ confidence levels about their retirement do not match their actions. According to the EBRI study, 24% of workers surveyed are very confident about their financial security in retirement and more than four in 10 (44%) are somewhat confident. However, of those who are very confident, 22% are not currently saving for retirement, 39% have less than $50,000 in savings, and 37% have not done a retirement needs calculation (See EBRI Reports Workers are Too Confident About Retirement ).
Auto Plan Feature Solutions
While auto enrollment has helped in engaging more employees in their retirement saving, it is not the total solution, the paper points out. Auto enrollment increases participation levels, but does not address the issue of inadequate savings or diversification (See Auto Enrollment Improves Quantity, not Quality, of Participation ). The paper suggests that employers use auto enrollment, but consider a higher default contribution rate than the common 3% and consider using a lifestyle fund as the default investment option.
Other suggestions the paper gives include automatic deferral increases and auto rebalancing of investments.
Communication is Key
The key, though, to improving participant saving and investment behavior is through targeted personally relevant communications, the paper says. The auto features aid employers in targeted and personal communications. For example, the paper says, if an employee were automatically enrolled in the company’s defined contribution plan, but had not changed the default savings rate in two years, the employer could respond with a communication that pointed out the lack of change in the rate and projected savings if the rate were increased.
“Plans offering communications with retirement income projections have been found to increase participation rates, in small but statistically significant increments. Additional research suggests that workshops focused on issues each participant brings with them results in over twice as many gains in deferrals per program than traditional lecture-based workshops,” the paper says.
Pointing out that research also suggests that information overload can paralyze an individual, the report says that targeted communications reduce decision-making complexity for participants. In addition, offering a recommended course of action draws the participant to accept that solution because it requires no additional data gathering or decision-making effort, according to the report. Personalized communication also plays on the emotional component to changing participant behavior. Participants feel like someone is paying attention to their specific situation and that someone cares.
Finally, the report notes that not all individuals respond the same to certain communication styles. Some internalize written communications better, while others respond better when information is spoken to them. Additionally, not all individuals are comfortable navigating through content that is presented online. “Using multiple media, then, to reach employees ensures that participants with different behavioral styles will find a way to receive information that is most comfortable to them,” the report says.
Registered users of MassMutual’s plan sponsor and advisor Web sites may view or download a copy of “A Behavioral Approach to Retirement Planning: Automation, Personalization and Engagement” at http://www.massmutual.com/retire . To request a free printed copy, individuals can call (800) 767-1000, ext. 47820.
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