For Healthy Retirement Plans, Give Participants a Little Push
Helping people improve their diet and make healthier choices is something many different groups have attempted to do over the years. Along those same lines, plan sponsors also work to improve the financial health of their participants.
The question is what is the nudge that participants need in order to get on this healthier path?
As far as diets are concerned limiting unhealthy options or making healthier options more affordable are a couple of ways groups have prompted individuals to make healthier choices. Sometimes, unobtrusive little pushes like these are all one needs to make a healthier choice. In fact a study from New Mexico State University found that when large green arrows, labeled “Follow green arrow for health,” were placed in grocery stores near the produce section, shoppers bought more fruits and vegetables.1
When it comes to employee retirement plans, plan sponsors are using automatic features and defaults to get participants headed in a healthy direction as well. It makes sense that these tools can be the nudge participants need to get started, but if that push is just a little harder it could lead to better outcomes.
Many times plan sponsors often set the default deferral rate at 3%. Why? Because if it’s any higher, the belief is that employees will take home less money, thus becoming dissatisfied with the plan and their employer, leading to an increase in opt out rates. Is this really the case? The ultimate goal of a default rate is to help employees take the first step to saving for retirement. At such a low rate are plan sponsors setting them up for success, or merely helping them miss the retirement mark?
It turns out that many participants are more invested in their financial future than plan sponsors are giving them credit for. Research has shown that using a more aggressive deferral rate won’t lead to employee dissatisfaction. In fact, a recent experiment by Shlomo Benartzi concluded that the perceived fears of using higher default rates are largely unwarranted.2
In this experiment, 10,000 employees visited a workplace retirement plan enrollment website and were prompted with a randomly assigned retirement savings contribution rate up to 11%, with 6% as the control group. Researchers found that savings rates between 7% and 10% did not result in lower enrollment when compared to the 6% control rate; moreover there was only a slight drop in enrollment at 11%.
That’s right: plan sponsors can feel confident in setting that default deferral rate higher. Plus, we know that once participants are set on this path, they will more than likely stick with it, which in the end means more money in their accounts and a healthier financial situation.
1This Way to Produce: Strategic Use of Arrows on Grocery Floors Facilitate Produce Spending without Increasing Shopper Budgets,” by by Collin Payne, PhD; Mihai Niculescu, PhD; David Just, PhD; Michael Kelly, PhD
2How Do Consumers Respond When Default Options Push the Envelope?