Plan sponsors and their committees have a long list of responsibilities. When it comes to the 401k plan, they used to put on their fiduciary hat and worry about how to best encourage employees to join the plan, convince them to save enough, and teach them about investing.
For decades, companies (and their plan providers) spent significant time, effort, and expense, primarily through the use of traditional education (customized materials, campaigns, and in-person meetings), trying to educate employees and thereby motivate them to take actions that would benefit them in the long run—with little to show for it.
For example, in a survey Vanguard conducted, 68% of retirement plan participants knew they were not saving enough for retirement. Of those participants, 24% indicated they were going to increase their savings rates within the next month. After checking back with the group three months, only 3% had increased their contributions.
This data tells us that we need to simplify the process of enrolling or changing contributions as well as employ participant communications that are direct, clear, and concise—with a single goal. We know participants have competing priorities and traditional education alone does not work. Given competing demands on their time, participants want to be directed to make the right decision or have the decision made for them.
Then the Pension Protection Act came along with explicit regulatory approval to “fix” many of these challenges. What do we see 10 years later? Plan sponsors are automatically enrolling employees into the plan, automatically raising contribution rates to increase the likelihood they save enough, and defaulting employees into diversified investments, usually target-date funds (TDFs).
We’ve come a long way
We now live in a reality where plan sponsors don’t have the time or the money to work the way they used to, and improvements in data analytics prove that they shouldn’t.
Participants also live in a different world. Years ago they had to wait for the next season of employee meetings to get answers to their questions about retirement. Today? A few clicks on their phones or computer keyboards and their answers arrive just in time.
The new plan of attack
There are four strategies sponsors should consider to drive positive retirement outcomes for their participants. Let’s make it simple and call them Step 1, 2, 3 and 4. And yes, you should consider focusing on them in that order.
Step 1 = Plan design.
This should be the starting point for every plan sponsor. This includes determining the company match, and making plan decisions regarding autoenrollment, the default rate, automatic annual increases, and picking a suitable QDIA.
Today, 63% of large plans* at Vanguard have implemented autoenrollment. Of all plans using autoenrollment 70% have automatic annual increases. And among plans with a QDIA, 95% make those TDFs.
Step 2 = Large-scale sponsor events.
Think sweeps and reenrollments. These are the next most impactful set of activities a sponsor could drive, reengaging participants in saving who might otherwise forget to do so themselves.
One of our clients, for example, implemented an aggressive sweep campaign timed to coincide with their annual merit increases. All eligible non-participating employees were swept into the plan at a 6% contribution rate. Savings rates of existing participants saving below 6% were raised to the new minimum rate. Participants who saved between 6% and 11% received a 1% ”boost”. In the 2015 campaign, nearly 60% of participants were included in the sweep.
Step 3 = Individualized experiences.
Individualized experiences are behavioral-based digital approaches that take each participant’s situation into account and are proven to effectively drive action. At Vanguard these are the norm in every participant experience. These might include personalized nudges, framing, anchoring, and peer effects, all of which take in a more “real time” and frequent way. We can send participants more personalized messages about their next best action— and as we move away from the “calendar approach” to education, we increase our touch points with those in our plans. The advantage of these digital approaches is that they can be quickly tested, allowing for rapid learning and iteration—all in an effort to find the most effectives ways to drive participants to improve their retirement readiness. In 2015, Vanguard’s behavioral approaches drove close to 100,000 positive outcomes—including motivating participants to increase their savings rate.
Step 4 = Traditional education.
Ten years ago, traditional education was where most plan sponsors and providers spent their time. The world was different back then. Plan sponsors were primarily focused on the 401(k) plan and less focused on health care. Without data to prove otherwise, they (and everyone else) believed meetings and mailings were the best ways to educate employees and get them to save, and it was common to be highly involved in every aspect of participant communication—including visual design and language.
Meetings and mailings still have a place. They are simply far more targeted than ever before. While traditional campaigns are less effective than the digital approaches noted above, for companies with a unique goal in mind (i.e. over-investment in company stock or a large population of frequent loan takers), supplementing personal journeys with traditional campaigns may make sense. Likewise, meetings focused on key aspects of retirement readiness and transitioning to retirement are where we see the most value—as participants begin to take a holistic view of their retirement income, contemplate draw-down strategies, and think about decisions regarding Social Security. These meetings will touch far fewer participants, maybe only a handful, but can be very successful in driving action—clearly not the best way to move the masses, but valuable for those at critical decision-making junctures.
So where to start? As Stephen Covey is often quoted, “Begin with the end in mind.” And if the end in mind for you and your company is participants who are well-situated for retirement, then we suggest starting with Step 1.
*This percentage is as of December 31, 2015. Large defined contribution plans have 1,000+ participants.
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