Behavioral economics has some hints on how financial leaders can encourage employees to save for retirement.
Each year across the country, organizations gather their employees and give a pitch about saving for retirement. A representative will dutifully explain the benefits of their employer-sponsored plan: tax savings, employer matches, investment options and the like.
And each year, most of those in attendance will decide to pass on the offer. It wouldn't be surprising if financial leaders at those organizations shrugged their shoulders and said, "Well, we tried. It's up to them to save for their retirement, not us."
Yes and no. Organizations can't force their employees to sign up, but they can take steps that likely will increase participation rates. Plus, there are good corporate financial reasons to boost those rates.
The Dismal Rate of Saving for Retirement in the United States
The big picture on retirement savings in the U.S. isn't rosy. About one-third of Americans ages 55 and above have nothing saved for retirement, according to the Government Accountability Office. When they stop working, they'll rely on government assistance to make ends meet.
Among workers who work for private employers, the participation rate in employee-sponsored defined-contribution plans, such as 401(k)s or IRAs, is 44 percent on average, according to the Bureau of Labor Statistics (BLS). (Rates are higher among those employed as professionals, but far lower for those working in service industries, reports the BLS.) Still, many of those who are participating are saving at lower rates than needed for a reasonably comfortable retirement. With Social Security already facing strains, there's not a lot of room for error for those who are undersaving.
The Shift From Defined Benefit to Defined Contribution Plans
Part of the explanation of the low participation rates may be that the retirement framework has shifted dramatically and role models haven't caught up. The parents of many current workers were able to count on a defined-benefit (pension) plan that took all the choices and responsibilities off the workers' shoulders and made it their employer's burden. But their kids have had no such guarantee. Instead, they've been asked to choose among various investment options that mom and dad never had to consider. The default tendency may be toward passivity.
This shift in plan funding also has caused some finance leaders to take a more passive approach. In selecting and overseeing the pension plans, they had to satisfy fiduciary requirements under federal law. The defined-contribution plans, while still carrying some legal duty, does not require plan sponsors to fund employee retirement benefits in all cases.
The Case of the "Financially Trapped" Older Worker
Older workers are often some of the most valuable members of an organization's staff. In many instances, they're not just knowledgeable, prudent and calm, but also hardworking and creative. These employees bring tears at their retirement parties, in part because the HR department knows how hard it will be to replace them. Yet despite their value in the workforce, these employees are stressed about their financial situations.
According to the Employee Benefit Research Institute's 2017 Retirement Confidence Survey, 38 percent of employees expect to retire at age 70 or older.
If they could, these older employees would retire. But they didn't sock enough away to make that possible. These are the "financially trapped" workers.
This lack of planning causes financial stress for those who are trapped between wanting to retire and needing to work. One big impact of that is lost productivity in the workplace. PwC's 2017 Employee Financial Wellness Survey reports that 50 percent of financially stressed employees spend three or more hours a week at work dealing with personal finances.
"Businesses can't afford to lose productivity because employees are financially stressed," says Chris Luongo, vice president of Product Marketing and Business Development for ADP Retirement Services. "A company with 50 employees could potentially lose 75 hours per week of productivity."
Lessons Learned From Behavioral Economics
Over the past few decades, economic theories have been questioned by people who had a different take on how people make financial decisions: psychologists. Leading academics, such as Daniel Kahneman of Princeton and Richard Thaler of the University of Chicago, undercut one of the main assumptions of traditional economics — that consumers are largely rational and would make the best choice based on the objective evidence available to them.
Rather, the psychologists said, people make decisions for emotional and often unconscious reasons. For example, if you told a gathering of employees at the annual enrollment meeting that most Americans are not saving enough for their retirement, you might think that's a dire warning that they should heed. Instead, they may conclude they're in good company and do nothing.
Thaler thought that the inertia that is endemic to making big decisions about retirement could be used in favor of making choices that would benefit the employee. Instead of asking employees to choose to participate in the employer's plan (opt-in), the default setting would be to automatically enroll them and put the burden on them to say no (opt-out.)
Ramping up for Effectiveness
It turns out there are far more ways to affect employees' propensity to participate than just automatic sign-ups, says Elizabeth Edwards, CEO of Volume Public Relations, a Colorado agency that combines communication and psychology.
Edwards says all of the small things can make a difference. "The size of the font may be too small for older readers, the information on a webpage may force people to scroll when they don't want to, the Q&A's might be framed to be more negative than positive," she says. "These are all points of friction that might impede the employer's goals."
Her organization recently was asked by Transamerica Corp. to revamp its approach for explaining the retirement plan it offers via employers. Edwards and her colleagues examined each and every detail and created a 142-page report on what the insurance corporation should do to improve results. The contract with Transamerica Corp. doesn't allow her to share details, except in the most general terms. So how much did enrollment increase after the revisions? Edwards sits back and smiles: "Triple digits."