Report: Employers Need to Give Employees a Hand in Retirement Saving

June 13, 2006 ( - A report from the TIAA-CREF Institute says employers should abandon the traditional "hands-off" approach with defined contribution plans and implement automated plan features to help employees save for retirement.

The report notes previous studies that have shown that 401(k) participants suffer from emotional behaviors and inertia that hurt their retirement savings decisions (See Report: Behavioral Communication Aids Employees in Retirement Saving ). Since this has left many employees without enough savings for retirement, the report says, plan sponsors need to be more “paternal” and consider plan design as a way to help their employees.

The author notes that researchers have tried to find out what plan features attract more participants, and while providing a company match contribution helps, it does not increase participation levels enough (See Report: Don’t Look to Match for Earth Shattering Participation Boosts ). Automatic enrollment has proven to be the most effective plan feature for getting employees to save.

However, although participation levels increase through automatic enrollment, the same inertia that caused participants not to enroll on their own causes them to not change the default deferral percent and default investment dictated by auto enrollment (See Auto Enrollment Improves Quantity, not Quality, of Participation ). The report says automatic deferral increases, and that a lifestyle fund as the default fund for automatic enrollment will help employees save more.

“In sum, the trend toward defaults in DC plans is turning employees’ former behavioral liabilities-namely procrastination and inertia-into assets,” the report concluded.

The report is here .