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3 Behavioral Tips that May Help Employees Save for Retirement

David Blanchett, Morningstar Investment Management LLC


One of the most important things a plan sponsor can do to help employees save for retirement is to help them build better habits. The key is to design a program that helps make it easy for employees to make better decisions regarding their retirement.

Here are three behavioral tips to consider:

  1. Make it automatic. The potential benefits of automatically enrolling participants and automatically escalating participant deferrals are well-documented. Participants tend to take the path of least resistance and view plan defaults as being at least implicitly endorsed by the plan sponsor. Defaults are an important consideration in any type of “auto” arrangement. Many plans that were early adopters of automatic enrollment selected deferral defaults that were too small, with 3% being very common. Moving beyond the standard 3% default deferral rate to a more impactful savings rate can be paramount in making auto programs truly more impactful and allowing participants to better save for retirement. The key is setting a default savings rate that is both meaningful and likely to be adopted by participants. And for the vast majority of defined-contribution plans, this number is typically around 6% or higher.*
  2. Move the match. People tend to like free stuff, especially free money. That’s why many participants will save up to the employer match and no more. For companies that can’t increase the dollar amount of their matching contributions, it may make sense to change the match schedule. For example, instead of matching 100% on the first 3% of employee deferrals, match 50% on the first 6%, or even 25% on the first 12%. These lower match schedules often do a better job getting employees to share the load when it comes to funding retirement. The optimal match schedule is likely different for each company and will vary by plan sponsor. These relatively small changes, though, can have a big impact on a participant’s ability to save for retirement.
  3. Leverage annual enrollment. Health insurance coverage is not a one-and-done decision like choosing to participate in a defined-contribution plan. Instead, each employee must go in once a year and either reconfirm existing coverage or select new health coverage.

Plan sponsors may want to consider leveraging the well-worn path of annual enrollment, by making retirement decisions an additional consideration during the process. Something as simple as telling each employee that those who are not enrolled in the plan will be re-enrolled at the default savings rate each year may help attract employees who either decided not join the plan initially or have since opted out.

These small behavioral tips could potentially yield very powerful results for plan participants. 

Please see below for an important disclosure.

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*Starting with an initial universe of data from Charles Schwab that included 195 retirement plans covering 66,297 participants, Morningstar Investment Management LLC conducted an analysis to determine how average deferral rates may change with respect to various enrollment options for a defined contribution plan.

Important Disclosure

Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The Morningstar name and logo are registered marks of Morningstar, Inc. Opinions expressed are as of the date indicated; such opinions are subject to change without notice. Morningstar Investment Management and its affiliates shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. This commentary is for informational purposes only. The information data, analyses, and opinions presented herein do not constitute investment advice, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. Before making any investment decision, please consider consulting a financial or tax professional regarding your unique situation.

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