Archive for the ‘401k plans’ Category

“Nudging” Employees towards a Better Future

Monday, October 15th, 2012

A concern for all Americans is to save enough for their retirement years.  Recent news that overall Americans for the first time since the 1930s had a negative savings rate, dramatically points out that as a nation we don’t do a good job of planning for our futures.

Other than opening personal savings accounts or making investments in the stock markets or real estate, most people have only two avenues to retirement savings – one is the mandatory Social Security system in which all employees participate through their employer.  The Social Security program is a defined-benefits plan where the amount a person can draw at retirement is fixed based upon their lifetime contributions into the plan.  While periodic increases are legislated by Congress, the benefit amounts are fixed by law depending upon the age a person retires.

The other is a defined-contribution plan such as IRAs or 401(k) plans.  In these plans, people may make tax-deferred contributions to savings accounts which are then available at retirement.  In 401(k) plans there is the added benefit of receiving a “free” employer match – in the case of one club 50 cents on each dollar the employee contributes up to 6% of income.

The unfortunate fact is that, nationally, some 30% of employees eligible to participate in a 401(k) retirement plan do not take advantage of this opportunity.  Employer and all managers have a special responsibility to promote the welfare of their employees.  So how can we encourage employees to participate in this plan that is so obviously a major benefit to them?

In the past, we have encouraged managers at all levels to use the “bully pulpit” of their position and their leadership and persuasion skills to encourage their employees to join the plan.  Many managers have done this to great effect, but still participation rates are not what they could be.

A recent book entitled Nudge, Improving Decisions About Health, Wealth, and Happiness (Thaler and Sunstein, Yale University Press, 2008) offers a number of strategies that have been proven to enhance employee participation rates.

Making savings automatic with a change in the Default Rule:  Most plans require employees to opt in to the retirement plan.  As an alternative, you could make enrollment at a specified savings rate and asset allocation automatic, requiring the employee to make a conscious decision not to participate.  A study in 2001 showed that automatic enrollments increase participation rates from 20 to 90 percent immediately, with an ultimate participation rate of 98% after 3 years.  This study also showed that the dropout rate with automatic enrollment was only slightly higher than it had been prior to automatic enrollment.

An alternative to automatic enrollment is to require every employee to make an active or Forced Decision about whether to join the plan:  In this scenario, upon hiring, employees are required to check a “yes” or “no” box for participation in the plan, and specify their savings rate and asset allocation preferences without a default option.  One company increased participation by 25% with this strategy.

Another strategy that has proven successful is to Simplify the Enrollment Process:  As with the Forced Decision, they were required to check a “yes” box for participation, but with a “basic” savings rate and pre-selected asset allocation.  With this scenario participation rates jumped from 9% to 34% in the first four months after implementation.  As an aside, it was also found in studies that the more investment options employees had; the less likely they were to participate.  As the authors say, “With more options, the process becomes more confusing and difficult, and some people will refuse to choose at all.”

While some experts argue for more education of employees, studies have shown the results to be relatively ineffective with only a small increase on participation rates.

One club provided frequent reminders of the benefits of encouraging employees to participate with flyers, reminders in newsletters, and the “Dollar a Day” Plan, yet still had a significant number of eligible employees who did not participate.  Managers should use their leadership and influence to “nudge” employees toward greater participation.  At the same time, the 401(k) plan Oversight Committees should be asked to consider alternatives to the existing enrollment process.

Thanks and have a great day!

Ed Rehkopf

This weekly blog comments on and discusses the club industry and its challenges. From time to time, we will feature guest bloggers — those managers and industry experts who have something of interest to say to all of us. We also welcome feedback and comment upon the blog, hoping that it will become a useful sounding board for what’s on the minds of hardworking club managers throughout the country and around the world.

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