The Road to 15% | Helping Participants Navigate Toward Retirement Readiness

Many advisors recommend saving 15% of pre-tax earnings, including any employer match, to prepare for a secure retirement — but to accomplish this, timing is crucial. According to Forbes, savers need to begin by age 35 to retire comfortably by age 65; to retire by age 62, they’d need to get started by 25. Looking under the hood at participant data allows plan sponsors to better tailor strategies that help participants accelerate savings goals — and avoid financial speed bumps along the way.

Auto Enrollment: Taking the On-ramp

The first hurdle to reaching 15% is participation. Auto enrollment can help move the needle by countering inertia and offering a measure of social proof when employees realize many of their coworkers are participating in the company plan. According to a 2022 Human Interest study, more than 8 in 10 savers would enroll or increase their retirement plan contributions if they learned most of their colleagues were also enrolled.

Moreover, research from T. Rowe Price shows that plans with auto-enrollment boast an adoption rate of 86% versus just 44% for those without it. However, the study also notes that among participants, those not auto-enrolled “deferred almost 3% more of their salary on average (9.3%) compared with those who were auto-enrolled (6.5%)” The firm notes that this could result from an endorsement effect, where employees may conclude the rate set on their behalf is sufficient, causing them to stall in their journey toward retirement readiness. To keep them moving forward, employers can do more. 

Auto Escalation: Hitting the Gas

The initial deferral rate set by a plan sponsor can have a significant impact on how long it takes employees to reach 15%. With an enrollment default rate of 2% and an annual 1% auto-escalation, a 25-year-old employee would be 38 years old by the time they ramped up to the 15% target. Increasing the initial deferral rate to 6% or more — a trend that has increased over the last decade, according to Vanguard — gets them there at least four years sooner. Vanguard also reports that 60% of plans with auto-enrollment are defaulting participants in at a rate of 4% or higher.

Prepare to Merge
The best chance for helping participants fast track their retirement savings is by leveraging a variety of tools and resources that touch on both plan design and financial wellness offerings. Adding gas to the tank in the form of a generous employer match can further boost savings efforts.

Key takeaways: 

• Getting employees to start saving early is critical.
• Auto-enrollment and auto-escalation both can make a measurable difference — and work better when implemented in concert.
• Communicating the percentage of employees enrolled in the plan to your workforce may enhance both participation and deferral rates.
• Education around adequate savings levels to reach retirement goals may help mitigate any endorsement effects.
• Increasing automatic enrollment default rates can help participants reach optimal savings rates more quickly in plans with auto-escalation.

Helping employees stay on track with savings goals can ensure a smoother ride to retirement for workers — and help drive success for the organization.

Sources:

• https://www.forbes.com/advisor/retirement/how-much-to-save-for-retirement/  
• https://humaninterest.com/learn/articles/automatic-escalation-401k-plan/  
• https://www.fidelity.com/viewpoints/retirement/retirement-guidelines  
• https://www.troweprice.com/content/dam/fai/Collections/DC%20Resources/Automated%20Services/AutoEnrollment.pdf 

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