Released in concert with Voya Financial, the behavioral economist’s new white paper advances several changes to help participants get back on track with their retirement savings.
Dr. Shlomo Benartzi, UCLA Anderson School of Management professor emeritus and a senior academic advisor to the Voya Behavioral Finance Institute for Innovation, explains that if workers pull money out of their savings every decade or so—as is the case with the COVID-19 pandemic and the Great Recession—this will make it harder to accumulate enough savings.
“We recognize there will be pressure for people to withdraw money to deal with hardships, and that companies may face significant pressure to reduce their matching costs,” Benartzi writes in “Plan design during challenging times: 7 Actionable Insights from Behavioral Finance.," adding, “However, as people cash out their savings, we should also think about how plan design can help support future retirement security while simultaneously increasing the efficiency of employer matching costs.”
He goes on to note that although the pandemic and ensuing recession have largely led people to neglect the SECURE Act, it does contain important provisions that can be used to help workers save more, at least after the economy returns to full strength. Following are some of Benartzi’s suggestions.
Increase auto-enrollment deferral rates to 7%: Noting that nearly 40% of employees are auto-enrolled with a default savings rate of 3% or less—well below the rate that most employees will need to achieve financial security in retirement—the paper suggests that it’s possible to increase the default rate without increasing the number of participants opting out. Citing earlier research, Benartzi notes that rates between 7% and 10% did not result in lower enrollment when compared to a 6% control rate.
“Most importantly, these higher suggested rates can lead to improved retirement outcomes, boosting the retirement income of the workers in the study by nearly 10%,” he says.
Boost the escalator cap to 15%: The behavioral economist further suggests consideration of the SECURE Act provision encouraging retirement plans to raise the cap on auto-escalated savings rates from 10% to 15%. “This is especially important for those workers who have made hardship withdrawals as they are likely to need higher savings rates to achieve financial security,” Benartzi emphasizes.
Consider the stretch match: In acknowledging that plan design changes can be expensive and difficult given the current economic conditions, Benartzi suggests considering matching alternatives. For example, in a typical stretch match, employers reduce their match rate while increasing their match cap, but instead of offering 50 cents on the dollar up to 6% of pay, employers could offer 25 cents up to 10% or 15% of pay.
One potential issue with the stretch match, according to the paper, is that a high match cap could discourage workers who view putting 10% or 15% of their salary toward retirement as difficult, especially during a recession and why it’s important for companies to encourage participation by using savings escalators.
Consider the fixed dollar match: To make the benefits of the match easier to comprehend, companies should also consider the fixed dollar match, which converts the match into a lump sum rather than a percentage of pay. The paper notes, for example, that a company could give every worker an annual $1,200 “match” if they keep saving, which is equivalent to a 50% match on the dollar up to 6% of pay for a $40,000 income. This would be less than the typically match cost, and, behaviorally, it might make it harder for employees to leave “money on the table,” Benartzi observes.
The good news is that retirement outlook has since improved since Voya’s research from March 2020 showed that the percentage of retirement participants with a positive retirement sentiment fell by 13 points from 74% to 61%. The firm’s latest data shows that 76% of participants reported a positive retirement sentiment in December. Still, the paper notes that it is becoming increasingly clear that the pandemic may have a lasting impact on retirement outcomes for many individuals.
“There’s no denying that COVID-19 has created financial challenges for American workers and companies alike, but as a result, employees are seeking greater support from their employers in helping them to address their health and wealth needs,” says Charlie Nelson, CEO of Retirement and Employee Benefits for Voya Financial. “And while many individuals have had no choice but to withdraw funds from their retirement savings, there are many opportunities for employers to implement solutions that can help individuals get back on track, starting with small changes to the design of their retirement plan program.”
- Log in to post comments