Results of new study find employers can help increase
employee retirement savings by adopting default automatic
escalators above 1%
Voya Financial, Inc. (NYSE: VOYA), is sharing findings from a
new field study conducted through the Voya Behavioral Finance
Institute for Innovation focusing on finding the optimal retirement
plan design settings for automatic escalation. The results of the
study, which are further outlined in Voya’s thought leadership
paper “How to auto-escalate your 401(k),” found that employers have
an opportunity to help increase savings behaviors of their
workforce by adopting higher default “automatic escalators” — and
without decreasing participation.
“Over the past several years, automatic enrollment and
escalation features in defined contribution plans have made it
easier and simpler for individuals to start saving early and more,”
said Tom Armstrong, head of Voya’s Behavioral Finance Institute for
Innovation. “These powerful tools have improved retirement
outcomes2 and helped close longstanding gaps in retirement plan
participation; importantly, these gaps have been closed across
gender, race, ethnicity and income. Therefore, understanding how to
make incremental changes in the use of these features to further
drive positive outcomes remains especially important in helping
participants truly maximize their retirement savings
potential.”
Defaults really do matter
When an individual is first enrolling in their 401(k) plan, many
plan designs ask individuals if they want to enroll in
auto-escalation, a feature designed to periodically increase an
employee’s deferral rate to their retirement savings at set
intervals until it hits the maximum contribution rate. Through
automatic escalation, employees can also specify both their
preferred rate of escalation and the date when such escalation will
begin, which, in many cases, can be done to align with bonuses or
pay increases. Today, the most common default escalator employers
choose in their plan design is 1%; in other words, in setting the
automatic escalation rate at 1% a year, an employee’s contribution
rate will increase by 1% each year. The challenge is that, in many
cases, an increase of 1% is still not allowing individuals to reach
their maximum retirement savings potential. So the question remains
for employers of what happens if they increase the escalator from
1% to 2%? Or, does accelerating the pace of escalation lead some
enrollees to save more faster? Or, alternatively, does it lead to
an increase in those declining enrollment?
According to research conducted in collaboration with Carnegie
Mellon researchers Saurabh Bhargava, Richard Mason and Mark
Patterson and Shlomo Benartzi at UCLA, nearly all individuals who
enroll in auto-escalation choose to keep the default a 1%
escalation. So to further understand the impact of leveraging
different auto-escalator settings, a research study experimentally
varied plan enrollees views of 1% or 2% default auto-escalation
rates and whether the start date of the escalation was a year, six
months or three months. While the results of the study indicate
that an opportunity exists for employers to increase the default to
2% without significantly decreasing employee participation in the
escalation feature of the plan, more specifically the research
observed that:
- Those who enrolled at a default of 1% remained at this
escalation without a consideration of an increase;
- Among the employees who were shown a 2% default escalator and
decided to participate in auto escalation, roughly half ultimately
stuck with the default 2%;
- The majority of the remaining individuals who were enrolled at
2% switched back to 1% but still chose to escalate; and,
- Critically, the higher default escalator of 2% did not
meaningfully increase the amount of employees initially declining
auto-escalation altogether.
“We live in a world of ‘auto-everything,’ which has helped to
provide greater opportunity for individuals to be saving more for
their future,” added Armstrong. “But by helping workers get to the
right savings rate in less time, employers have a real opportunity
to design auto-escalation processes that help employees be more
prepared for retirement.”
Additionally, among employees who decided to enroll in automatic
escalation, a significant amount of employees were also willing to
escalate before 12 months had elapsed. In fact, when prompted by
the default, more than half (54%) of employees appeared willing to
escalate in 90 days, and with nearly seven in 10 (67%) in 180 days
— suggesting that, for the majority of employees, the “future”
begins within a few months. However, the more aggressive default
delays, which led to escalation beginning sooner, did modestly
reduce escalation enrollment (from 23% to 18%).
“Ultimately, our findings also highlight the need for additional
research to help determine the optimal escalation default for
different types of employees,” added Armstrong. “By creating more
personalized defaults and in striving to optimize the design of
retirement savings products, employers should not overlook the
importance of appropriately setting and personalizing
auto-escalation defaults.”
By merging behavioral science with the speed and scale of the
digital world, Voya’s Behavioral Finance Institute for Innovation
continues to create large-scale solutions designed to help improve
individual retirement outcomes. For more information and to view
the findings from the current working paper or past studies, visit
Voya.com/behavioralfinance.
As an industry leader focused on the delivery of health, wealth
and investment solutions to and through the workplace, Voya
Financial is committed to delivering on its mission to make a
secure financial future possible for all — one person, one family,
one institution at a time.
1.
Bhargava, S., Mason, R., Patterson, M.,
& Benartzi, S. (2022). When does the future begin? 401(k)
auto-escalation over future time horizons. Working paper
forthcoming.
2.
Beshears, John and Benartzi, Shlomo and
Mason, Richard and Milkman, Katherine L., How Do Consumers Respond
When Default Options Push the Envelope? (October 7, 2017).
Available at SSRN: https://ssrn.com/abstract=3050562 or
http://dx.doi.org/10.2139/ssrn.3050562.
Dr. Benartzi was previously a paid
consultant to Voya Services Company, a wholly owned subsidiary of
Voya Financial.
About Voya Financial®
Voya Financial, Inc. (NYSE: VOYA), is a leading health, wealth
and investment company with 7,200 employees who are focused on
achieving Voya’s aspirational vision: Clearing your path to
financial confidence and a more fulfilling life. Through products,
solutions and technologies, Voya helps its 14.7 million individual,
workplace and institutional clients become well planned, well
invested and well protected. Benefitfocus, a Voya company, extends
the reach of Voya’s workplace benefits and savings offerings by
providing benefits administration capabilities to 16.5 million
individual subscription employees across employer and health plan
clients. Certified as a “Great Place to Work” by the Great Place to
Work® Institute, Voya is purpose-driven and equally committed to
conducting business in a way that is socially, environmentally,
economically and ethically responsible. Voya has earned recognition
as: one of the World’s Most Ethical Companies® by the Ethisphere
Institute; a member of the Bloomberg Gender-Equality Index; and a
“Best Place to Work for Disability Inclusion” on the Disability
Equality Index. For more information, visit voya.com. Follow Voya
Financial on Facebook, LinkedIn and Twitter @Voya.
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Media: Laura Maulucci Voya Financial (508) 353-6913
Laura.Maulucci@voya.com
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