Default Retirement Savings Rates Could Go Much Higher

Default Retirement Savings Rates Could Go Much Higher
October 18, 2017 Marketing GrafWebCUSO

A retirement crisis that sees most Americans poorly, if at all, financially prepared to leave the workplace could see improvement if default savings rates were pushed higher — not just a little, but a lot higher.

So says new research from Voya Financial’s Voya Behavioral Finance Institute for Innovation. In a working paper titled “How Do Consumers Respond When Default Options Push the Envelope?” The Institute, in conjunction with behavioral scientists from UCLA, Harvard and the University of Pennsylvania, examined the impact to retirement plan enrollment and savings behavior when individuals were shown savings rates above traditionally displayed levels.

While auto features in retirement plans, such as auto enrollment and auto escalation of contributions, have proved helpful in boosting both participation and savings rates, the study indicates that they could be a lot more so if savings rates were set higher. Many plans set the default contribution rate at 3%, or even lower, and few go higher than six. And that’s far from adequate to prepare someone for retirement.

“Many employers are reluctant to suggest higher contribution rates due to a concern that their workers might blindly accept what is not in their best interest, or that they might get intimidated and opt out of the plan altogether,” Dr. Shlomo Benartzi, UCLA Anderson School of Management professor and a senior academic advisor to the Institute, is quoted saying.

Benartzi adds, “However, no one had researched these concerns using a scientific approach. Would plan participants accept a seven, eight or nine percent savings rate? Can we push it even higher into double digits? Through this study, our team found these preconceived fears were largely unwarranted.”

The study tested out higher savings rates to see whether/when those rates might meet resistance, and found that, surprisingly enough, the higher rates were accepted — or at least spurred an increase in the participant’s existing savings rate, even if that increase didn’t go as high as the suggested higher rate.

Among the study’s findings: Suggesting rates between seven and 10% did not result in lower enrollment when compared to a 6% control rate. The highest rate suggested, 11%, resulted in only a slight drop in enrollment.

Also, while the main increase in average savings took place when the suggested rate was increased from six to seven percent, all of the higher suggested rates produced better average saving levels when compared to the 6% rate.

And last but not least, suggesting higher rates led to meaningful improvements in the financial security of plan participants. The researchers calculated that, for an employee with an annual salary of $70,000, the incremental benefits could produce additional retirement savings of $57,000—amounting to more than 8% of additional retirement savings for that same employee over their working career.

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