Employees tend to respond to the implicit messages built into retirement plans

Photo of Marc Howell, FSA EA. Managing Director at Principal Financial Group

Managing Director - Enhanced Plan Design

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A specialist consulting on retirement program design

During my career, I’ve spent over 20 years consulting on retirement program design. I’ve worked with employers from coast to coast, always with the goal of helping them design retirement programs that will help both their employees and, ultimately, their organization. Initially, I worked primarily with defined benefit (DB) plans before I began to focus much more on defined contribution (DC) designs. Because of my background in defined benefit plans, I’ve been able to bring a lot of those concepts into the DC space and leverage plan design strategies to help my clients and their employees.

There are significant differences between DB and DC plans, and the single biggest difference is that DC plans typically require employees to act. With a defined benefit plan, it didn’t matter what employees did or how they reacted to the plan. Regardless of how the employee engaged with an organization’s DB plan, they could rely on receiving the benefit that was outlined. The ongoing shift towards DC plans now typically requires action on the part of the employee.

What's your retirement plan design telling your employees?

This shift has required the entire retirement industry (plan sponsors, advisors, financial professionals, consultants, recordkeepers, TPAs, the financial press, fund companies, etc.) to invest an immense amount of time, money, and effort into communicating to workers and educating them on their retirement benefits.

However, the industry is generally coming to realize that employees don’t only react to the explicit communications they receive, they can also react to the implicit message stemming from the way a plan is designed—a message that employers may not think about, or even necessarily realize, is being sent.

Time and time again I’ve encountered organizations that needed help because they found what they were doing wasn’t necessarily resulting in the desired goal. They may have provided communications for their employees on taking action to save for retirement, but the implicit messages contained in their plan design may have been saying something else entirely.

Inferring implicit messages from plan design

Auto-enrollment but no auto-escalation

An organization I worked with earlier in my career had automatic enrollment set at 2% and no auto-escalation. This organization was interested in modifying their plan design and engaged our services after learning from their advisor about an employee who was surprised to find he only had about $10,000 in his retirement account when he went to retire.
The organization realized that although they had explicitly encouraged employees to save for retirement, the implicit message of the plan was saying “automatic enrollment of 2% was the amount to save, you won’t need more.” Working with the organization and their advisor, we were able to help rectify this issue in a way that encouraged much higher savings rates for their people without increasing costs to the employer.

Highly compensated employees with low plan participation

Another example that shows the importance of implicit messaging related to plan design was at an organization I worked with many years ago. This organization had a strong non-elective contribution, and a small match on 4%, but their highly compensated workforce had low participation and deferral rates. Again, working together with the organization and their advisors, we identified that their plan design was sending an unintentional message to employees. It said, “You don’t need to worry about retirement, look at how much we’re giving you already.” By redesigning their plan in a cost neutral manner, they were able to significantly increase employee deferral rates across their population.

Employees working well past retirement age

One last example I’d like to share is that of a client who auto-enrolled their employees in the plan and used auto-escalation features to help their employees maximize the 6% match. This company was concerned because many of their employees were working well past retirement age. The issue was that the implicit message employees were receiving was that “6% is the ‘right’ amount to save.” The client made a simple change of the auto-escalation features, pushing people’s contributions beyond the match. This better aligned the implicit message of the plan’s design with the retirement needs of their workforce.
Every one of the employers in these examples explicitly encouraged their employees to increase their deferral rates and save appropriately to reach their goals, but they came to realize that the implicit message of their plan design was stronger, louder, and sometimes overshadowed their explicit messaging. None of these employers intended for their employees to infer special meaning from the plan design, but by watching the actual behavior their employees were exhibiting, it became clear these were the messages being heard.

How retirement plan design can motivate behavior

Now, I’m not suggesting anyone stop communicating explicitly with employees. On the contrary, explicit messaging is very important. But I think it’s important to make sure that explicit communications and implicit messaging are aligned so that they can work together to help employees make choices that they’ll be happy with in the long run.

My challenge to you is to reflect on how your plan design can motivate behavior. Regardless of your role, look objectively at your retirement program and consider the implicit messages the plan may be sending. The effects of implicit messages may have a much larger and farther reaching impact than you realize.

What can you do to prevent mixed messages?

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If you’re interested in exploring this further, I’d recommend reaching out to your representative to request a review of applicable plan features. Use that time to see how your plan design can be adjusted to help encourage the employee behavior you’re trying to motivate.

Want to learn more?

Check out these helpful resources and materials below. Still have questions? Reach out to your local Principal® representative or support team.
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FSA/EA - Defined benefit measurements, if applicable, are for the sole purpose of providing the plan sponsor information with respect to their plan or plans evaluated. Related analysis presented is/will be completed based on the plan’s participant data, provisions, and actuarial assumptions and methods incorporated into the DB plans most recent funding and/or accounting measurements. Analysis using different information and at future measurement dates may differ significantly from the current analysis.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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