deloitte has come out with a pretty fascinating study on retirement readiness. this may say something about what i find fascinating. at any rate…
to nobody’s surprise, employees are not doing enough to get ready for retirement. the average age of 401(k) participants is 41–50 years old—a little late to benefit from compounding interest and dollar cost averaging. employers are worried. only 15% of companies feel their employees will be ready for retirement. and they feel responsible.
so, companies are taking action, including resurrecting the contribution match, which had declined in 2009. more companies are eliminating service requirements, allowing employees to join the plan immediately (56% of participants). they’re also automatically enrolling employees, though there’s been a decline in the number of companies using this bit of choice architecture cleverness. there’s no explanation given for the decline, which is unfortunate, especially since those companies that offer automatic enrollment see a higher average contribution rate from their participants. (note: to be clear, i use the word “company” to mean study participant and “participant” to mean employee enrolled in a retirement plan.)
the thing is, you need to get automatic enrollment right. the study finds that where someone begins is where they end. once participants were enrolled in the default plan and at a certain contribution level, many didn’t budge. if the contribution level was too low or the default plan not aggressive enough, participants weren’t saving enough. attempts to fix this through a re-enrollment campaign backfired. when given another chance to consider their investment options, 45% of participants lowered their contribution or opted out of the plan altogether. while this isn’t a well-formulated question (it asks two things in one question), it shows that either way, participants were heading in the wrong direction.
the step-up contribution is also meant to outsmart our predisposition not to save. through it, participants elect to automatically increase their contributions by a certain percentage. the majority of companies (64%) have a 1% step-up; 34% let participants decide. based on this study, the step-up, as designed, is not working. sixty-seven percent of companies said 10% or fewer of their participants take advantage of this feature. this may be, in part, because only 15% of companies tie their automatic enrollment to a step-up contribution. if these were tied together, contribution levels would rise and employees would be better prepared.
companies are making efforts to save participants from themselves. unfortunately, participants are working against them. this past year’s seen increased activity in loans and withdrawals and decreased deferral rates. perhaps this trend is unavoidable, thanks to our economic woes, but many don’t understand the long-term havoc these activities wreak on their retirement funds.
the study asked companies about communication. only 37% have conducted a retirement readiness assessment. this assessment determines whether participants are saving enough for retirement. twenty-five percent are aware of the idea but are not interested. this means that companies are not aware of the severity of the problem—just as their employees are not. without this knowledge, it’s hard to know where and on what to focus.
when it comes to the most effective approach to communication about retirement planning, the companies consider group meetings (27%) most effective.when given a choice, companies were evenly split, with 41% preferring group meetings and 41% preferring one on one. only 11% were interested in learning about how PDAs make learning and accessing accounts easier. seventy-six percent of companies were not even aware of the possibilities provided by PDAs, apps and other technology advancements, like IM (instant messaging) chats.
so, what’s the problem here? employees continue not to help themselves, and financial stress, which has devastating health implications, is on the rise. employees don’t contribute to their retirement funds until it’s too late, and they withdraw from their accounts too early. employers, who feel a great sense of responsibility, are not taking the strategic steps to isolate the problems or seizing the new technologies that can more readily fix them. if companies aren’t curious about these technologies that can personalize and simplify something as intimidating as investing, retirement providers will feel no heat to develop them. group meetings are not a panacea for retirement readiness.