‘Lead’ Times

There’s an old saying: “You can lead a horse to water, but you can’t make him drink.” It’s a sentiment expressed by many a benefits manager (or retirement plan advisor) who has devoted significant time and effort to plan design, only to find the adoption rate by individual workers to be “disappointing.” And yet, in the retirement savings context, there’s ample evidence that individuals who have access to a savings plan at work do, in large part, take advantage of that opportunity.

Those who say that you can only “lead a horse to water” might well expect that a horse will drink when it’s thirsty, or when it needs water – but equine experts will tell you that many horses refuse to drink when they need to most, especially in times of competition, illness, travelling or stress. So, while you may not be able to make them drink, it’s generally important for their health and well being to find ways to encourage them to do so — adding a little salt in their diet, for instance, or putting an apple in their water bucket.

Similarly, all workers don’t have access to retirement plans at work, and those who do don’t always take full advantage. Some save below the employer match levels of their plan. Many older workers fail to take advantage of catch-up contributions. And a number of automatically enrolled workers leave those relatively low initial default contribution rates in place.

There are, however, steps advisors can help employers take to help. Previous EBRI research has documented the profound influence of plan design variables, as well as employee behavior in auto-enrollment 401(k) plans.1

EBRI has also looked at not only the impact that automatic enrollment can have on retirement readiness, but what the result of setting that initial default rate at 6%, rather than the “traditional” 3% (now codified in the Pension Protection Act of 2006) would be in terms of improving retirement readiness “success.”2

For example, EBRI conducted an analysis that used actual plan-specific default contribution rates and assumed the following:

• an automatic annual deferral escalation of 1% of compensation;
• employees opted out of that auto-escalation at the self-reported rates from the 2007 Retirement Confidence Survey;
• employees “started over” at the plan’s default rate when they changed jobs and began participating in a new plan; and
• the plan imposed a 15% cap on employee contributions.

The analysis found that more than a quarter (25.6%) of those in the lowest-income quartile who had previously not been successful (under the actual default contribution rates) would then be successful3 as a result of the change in deferral percentage.

As the best retirement plan advisors know, and as EBRI research has quantified, plan design can be effective at doing more than just leading workers to the opportunity to save for retirement — it can help them make decisions that improve their chances of success.


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