Employers identified participation and contribution rate as the top two factors for measuring plan success, according to the Callan Institute’s 2020 Defined Contributions Trends Survey. The Employee Benefits Research Institute (EBRI) notes in its 2019 Current Population Survey, 68% of employees participate in an employer-sponsored retirement plan, though many are likely not saving enough. The Transamerica Center for Retirement Studies (TCRS) reports in its 20th annual retirement survey, that the average household retirement savings is just $50,000. TCRS also notes that employees estimate they will need about $300,000 to $500,000 to retire, less than what many experts recommend.
Employers can help increase plan participation and improve employee retirement readiness using the basics of behavioral finance. This is the practice of understanding how human behavior impacts financial decisions, then using that to influence participant preferences. Using behavioral finance data, employers can make small, but impactful changes to their retirement benefit plans.
Studies show participant decisions are heavily influenced by the default choices the plan sponsor presents. In the absence of clear directives, plan participants typically take the path of least resistance, preferring to retain default choices such as contribution rate and investment options. Employers looking to increase participation and employee contributions can take advantage of behavioral finance theory and implement automatic features.
The TCRS annual report found that most employees would be interested in these automatic features. Eighty-two percent of employees would be open to automatic enrollment and 78% would be likely to use automatic escalation to increase their retirement plan contribution by 1% every year.
These are a few examples of how behavioral finance can be used to help plan sponsors increase enrollment and help employees save more for retirement. Contact your USI Insurance Services retirement benefits advisor to discuss solutions best suited to your organizations’ goals and employees’ needs.
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