One of the largest problems faced by group retirement plans is plan member apathy.
Repeating the same actions year over year—employee education sessions and investment advice seminars—doesn’t seem to improve participation levels so it’s time to rethink the strategy.
Some plan advisors and providers are taking steps toward using behavioural finance and saving as the key to having employees be involved in and contribute to plans at an adequate level. Some of the trends employing behavioural savings have been showing great promise, but the fact remains that learning what you are investing in is becoming secondary to learning about the most effective ways to save.
Before outlining the new trends, let’s review why employees are disengaged. In general, employees in group retirement pools have a live-for-today philosophy. Many would like more dollars in their bank account every two weeks instead of an adequate retirement saving program.
This changes somewhat if plan members settle down with a family. However, even the more mature participants still focus on immediate needs rather than building up a nest egg to last them through their retirement.
There are some key reasons behind this live-for-today behaviour:
- they don’t want to know what they need to do;
- they want more money today and will worry about retirement later; and
- they don’t want to learn about it.
How can employers help their members get to their retirement goals? Here are some examples of what employers can do.
Auto-enrollment — Employees are less likely to opt out of their plan than to opt in. Therefore, taking advantage of auto-enrollment is simply using group retirement apathy to the employee’s benefit. American firms using auto-enrollment in their group retirement plans have risen to 47% from 36% in the past four years, according to Retirement Research, Inc. But auto-enrollment has been far less popular with Canadian firms.
It’s clear that auto-enrollment goes a long way in helping employees increase their retirement savings and, in turn, appreciate a benefit provided by their employer.
Automatic increases — Members are more likely to increase their group retirement contributions if the timing is in the future. If you ask members to put more money away today, they usually have other uses designated for that money. If the increase is automatic and in the future, the member is significantly more likely to put more money away. The Save More Tomorrow (SMT) program, developed by behavioural finance experts Shlomo Benartzi and Richard H. Thaler, is a far better way to improve retirement incomes than traditional training and education sessions. SMT follows behavioural science in that a person is much more likely to agree to increase their savings in the future instead of today. It’s a common human behaviour to delay pain; the likelihood of increasing savings grows if SMT is coupled with automatic increases.
Reference points and social norms — People are more likely to increase contribution if they know their peers are doing so. In a recent study by Putnam Investments, when a How Do I Compare page was added to company pension websites, there was a 25% increase in contributions to the plan.
Proactive thinking — Traditional employee education and planning seminars are still tools that should be used by the employers to ensure members are getting access to important information about their group retirement plan. Some changes to the structure of the plan can see apathy reduce and employee satisfaction increase.
Following these suggestions can both increase the number of participants in your pension plan and help members achieve their retirement goals.