Although many employers have increased the default contribution rates in their retirement plans with the aim of generating higher employee savings, plan sponsors may not realize that they could increase their suggested saving rate without causing significant numbers of employees to decline to participate in the plan, according to research recently published by Voya Behavioral Finance Institute for Innovation.

The working paper, “How Do Consumers Respond When Default Options Push the Envelope?” was published on October 7, 2017, and was released in conjunction with the study’s authors, who include behavioral scientists at UCLA, Harvard, and the University of Pennsylvania. The study looked at the effect on retirement plan enrollment and savings behavior when individuals were shown savings rates above traditionally displayed levels.

According to the study’s authors, this question is especially relevant with the spread of automatic enrollment, which has been found to be an effective plan design tool for overcoming behavioral barriers to saving. Researchers noted that while many retirement plans now offer this feature, the default contribution rates are set relatively low, with most plans suggesting a 3% rate to their participants, and very few recommending a rate higher than 6%.

The subjects of the study were individuals who visited their employer’s plan enrollment website between November 2016 and July 2017. As part of the enrollment process, the subjects were randomly assigned to see a suggested contribution rate ranging from 1% up to 11%, in 1% increments. The results of the analysis showed that being prompted to select a rate between 7% and 10% did not result in lower enrollment than a 6% control rate; and that the highest rate suggested, of 11%, resulted in only a slight decline in enrollment. The study also found that while the main boost in average saving levels occurred when the suggested rate was increased from 6% to 7%, all of the higher suggested rates produced better average saving levels than the 6% rate.

In addition, the results indicated that suggesting higher rates is likely to lead to meaningful improvements in the financial security of plan participants: the authors calculated that for an employee with an annual salary of $70,000, the incremental benefits could produce additional retirement savings of $57,000 (assuming 40 years of saving with a 6% rate of return), or more than 8% of additional retirement savings over the employee’s working career.

The authors noted that the suggested rate was presented in an opt-in environment, but added that while suggested rates in an opt-in environment are a “soft” default, it may be assumed that these results also apply to “harder” defaults in auto-enrollment plans, whereby participants are automatically assigned the default rate unless they actively opt out.

From Benefit Trends Newsletter, Volume 60, Issue 12

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