Blog
July 6, 2018
What’s Your Enrollment Method?
Targeting people’s urge to procrastinate is key to boosting savings under automatic enrollment, while addressing financial literacy works best for opt-in plans. This is the conclusion of a February 2018 survey done by the TIAA Institute.
In our last article “Digital Nudging” we talked about engaging employees with emails to prompt enrollment. The TIAA Institute survey below compared automatic enrollment (opt-out) to traditional voluntary sign up (opt-in).
Auto enrollment makes sense in overcoming employees’ procrastination to enroll. Also employees not knowing how to invest are defaulted into a “balanced” investment such as a Target Date Fund. A target date fund goes from more investment risk to very little risk over time. Note: This may not always be the best for young employees that want to be conservative or for older workers that want to be more aggressive with their investments.
Researchers found that employees rarely changed the 3% contribution rate with the automatic enrollment. Just like employees that don’t sign up for the “opt in” enrollment they procrastinate about changing their contribution from the 3% contribution that rate most automatic enrollment plans use. Whereas the tendencies to increase savings for the voluntary “opt in” people were much greater over time.
The study found that lower financial understanding and a misperception of how investment returns compound over time can lead employees to underestimate the cost of delaying enrollment. Additionally, in considering the relationship between financial understanding and procrastination they found that employees who were less likely to procrastinate were more likely to contribute an amount that both maximizes the employer match (when available) and had higher contribution amounts.
Ultimately the researchers concluded that focusing on the financial literacy and expanding an understanding of compound growth helps with the “opt in” or voluntary enrollment plans. Whereas efforts targeted at procrastination are likely to be the reason there are auto enrollment policies within 401(k) plans.
Need help with auto-enrollment for your employees? Get in touch with us today at 1-800-899-9141 or planservices@benefitequity.com.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.