A perpetual problem among retirement plan sponsors is how to motivate employees to contribute enough to ensure successful retirement income.
Prudential Retirement brought together experts in the retirement industry for a press event Wednesday night in New York to discuss tactics to overcome participant inertia, among them automatic plan features.
Automatic plan features — such as auto-enrollment, auto-escalation or automatic-annual-increase programs — encourage overall plan participation and savings rates, but is that good enough?
David Hinderstein, AIF president at Strategic Retirement Group; Jeff Snyder, vice president and senior consultant at Cammack Retirement; Jamie D. Greenleaf, principal and lead consultant at Cafaro Greenleaf; and Harry A. Dalessio, senior vice president of sales and strategic relationships at Prudential Retirement, gathered to chat about what works and what needs changing with these auto-features.
“I think auto-enrollment in some cases has been a detriment for some participants,” Greenleaf said. “Because so many plan sponsors added it and forgot about it. And the reality is, there’s been a big uptick in auto-enrollment but there hasn’t been a big uptick in the auto-escalation.”
Plan sponsors that provide auto-enrollment often have a 3% default contribution rate. But without auto-escalation as well, Greenleaf finds that “inertia sets in.”
“You’re set at 3% because that’s been what everybody’s kind of done, and then it never gets moved,” she said. “And you have a participant that’s stuck at 3% that should be saving 10% or 15% to reach their retirement goals.”
As Dalessio pointed out, that 3% contribution rate is no longer realistic.
“People can’t retire with a 2, 3, 4% savings, as much as that may have been groundbreaking in the defined contribution market,” he said. “You need to increase that. You need to get up into double-digit savings, which is overwhelming to think of coming out of the gate saving that percent of your paycheck.”
It becomes less daunting, Dalessio suggests, when the participant starts saving at a meaningful rate and increases that over the next 5-8 years with each pay increase, raise or promotion.