Those who fail to maximize their contributions or take advantage of their employer match are missing important opportunities to help ensure they will reach their goals. When combined with target date fund defaults, auto enrollment has helped enormously in getting employees started in their plans and contributing to investments that are aligned with their age and risk tolerance. At the end of 2011, plans featuring auto enrollment boasted an overall participation rate of 82 percent compared with an overall rate of 56 percent for plans without this feature.
Beyond auto enrollment, there are other ways to engage employees and increase plan participation. Plans that offer "full employees engagement programs" – i.e., those that engage employees over a period of time through multiple media, including personalized educational messages to drive particular behaviors, online learning, tools and wizards that simplify decision-making processes, one-on-one assistance, etc. – can help drive plan performance by engaging employees to make healthy planning and investing decisions.
It is important that education programs offered by providers and advisers can target individual participants to drive/encourage them to meet their retirement readiness goal. Many of the plan providers we work with employ leverage state-of-the-art technology. Information automatically included in the quarterly reports show current deferral, employer match, age, gender, salary and growth to calculate how much additional savings is needed to achieve 80 percent of preretirement income.
We often ask the employer, "Do you know how many of your 40-year-olds are on track to reach retirement readiness?" Why is this important? Because if you know how many are not on track, but could educate them to save more, consider the possibilities. Employees may feel confident they can retire at 62, not 67 to start their dream business or follow their passion. Benefit to employer? Age composition of employees becomes younger (may require a 10- to 15-year cycle), thereby reducing cost of health insurance, disability, life and worker's compensation. It is a win-win situation for employee and employer.
When it comes to enrollment, plans adopting engagement programs were twice as likely to increase enrollment rates, as compared to plans with fewer engagement opportunities (54 percent versus 27 percent, respectively).
Employees often need help understanding how the decisions they make today can impact their savings in the future. Early intervention matters, as participants in plans that leverage educational communications after enrollment were six times more likely to increase their deferral rates than those in plans without post-enrollment communications (12 percent increase deferrals versus 2 percent, respectively).
Proactive engagement and education is critical as more than 60 percent of plans with auto enrollment – small and large alike – set the default deferral rate at only 3 percent, and 59 percent of participants have yet to change their contribution rates after being defaulted. As a result, the average deferral rate among auto-swept auto-enrollment participants is just 4.7 percent – a much lower rate than the average 8.8 percent among all plans.
Sponsors also can help ensure that deferral rates grow over time by using an automatic annual increase program, which has proven to be particularly effective for both younger and lower-income participants. In fact, for the youngest participants, more than half of all deferral increases can be attributed to an auto annual increase program. Furthermore, when automatically swept into such a program, only 6.5 percent opt out of it within 12 months.
At Maryniw Financial, we make extreme efforts to encourage the employee to increase savings rather than focus on investing. Emphasis on saving may be a simpler proposition than making investment decisions. Once the savings decision has been made, the investment process becomes easier.
For plans sponsors, the introduction of annual increase programs should be carefully considered. Jeffrey Inman, consumer behavior expert and associate dean of Research and Faculty at the Katz School of Business, University of Pittsburg, cautions: "It might be fruitful to examine the nature of annual increase programs that lead to the greatest usage level. If the increases are too large in too short of time frame, opt-outs will probably skyrocket. The key is to make it as "painless" as possible by setting lower, gradual increases."
• Terry Maryniw and Aaron Maryniw are investment advisers with Maryniw Financial, 901 E. Oak St., Lake in the Hills. Email firstname.lastname@example.org, call 847-658-9251 or visit www.maryniwfinancial.com.