Each year, Americans make all sorts of promises to themselves for the future: “This is the year I take my health seriously—lose weight—get in shape.” “This is the year I will learn another language and be a better spouse.” “This is the year I will keep my promises to myself.”
The reality is that the vast majority of people have good intentions, but they never stay on course and reach their goals. So does this pattern have any connection to the retirement crisis that we face in the United States?
Let’s look at a common, real life decision that most adults have to make: whether or not to become an organ donor. Germany and Austria are two countries with similar cultures. In Germany, if you would like to donate your organs when you get your driving license or an I.D., you check the box saying, “I would like to donate my organs.” Not many people like checking boxes. It takes effort, and you need to think about it. Twelve percent of people select organ donation. In Austria, you still have choice. You can still decide whether you want to donate your organs or not. But when you receive your driving license, you check the box only if you do not want to donate your organs. Only 1 percent of people check the box—so 99 percent of the people in Austria that have a driving license are organ donors.
In both cases, the majority of people do not check the box. It takes effort, it takes a little thought, and doing nothing is common. Our typical default setting is to do nothing. If this is the case, then why do we make the default setting in most 401(k) programs that employees must opt in? We need to reframe the 401(k) so that employees benefit from the retirement opportunity—instead of being left out.
To begin: We need to reframe the 401(k) opportunity as a journey with a destination. The journey, of course, is the passage from working life to adequate retirement. In theory, to make this journey successfully the employee should enroll in his/her company’s retirement program early in his/her career. The employee then gradually increases savings to an adequate level, invests wisely, and enjoys his/her life savings during retirement—and is not worried about running out of money during retirement. But the reality is that for this to happen, the employee must act against his or her nature by enrolling in the retirement plan—that is, by checking the box.
The question employers need to ask? “Is it better for the employee to be automatically enrolled, or is it better to make the employee actively take steps to enroll?” Employers should realize that the second option means that there is strong likelihood that the employee will end up not saving for retirement.
Automatic enrollment, on the other hand, would get the employee started on his or her journey. Automatic escalation would allow the plan to fly higher, saving more. In most cases, without automatic escalation, employees do not elect to increase their savings rate. Sometimes this means that they find themselves in a holding pattern—they are on the plane, but they never reach their desired destination.
Most employers say they do not use the auto enrollment and auto escalation option for three reasons:
- and a desire not to force their employees into a retirement decision.
The fear of higher cost may be the greatest challenge, but it is not insurmountable. As a business owner, look into the future and imagine a workforce that cannot retire without savings and continues to work out of need. Your healthcare costs spiral upward, your worker compensation costs rise, absenteeism goes up—and before you know it, your costs are off the charts and your production per employee drops.
Administration definitely could be a problem. In the past, keeping track of automatic enrollment and automatic escalation of deferrals was challenging and time-consuming, but times have changed. There are vendors like TAG Resources who have the technology to support these two programs without increasing your cost in time or money.
Other employers worry about the increased fiduciary risk if something goes wrong or if they make a mistake. Again, there options available to employers for a third-party fiduciary like TAG to take on the oversight and accountability for these activities. The employer’s administrative duties consist only of sending a payroll file to the vendor and letting them do all the work.
Finally, consider the fear of forcing employees into a savings program that they do not want. Employers are already forcing people into a retirement decision—not to join—because it is human nature not to take action and check the box. In most cases, these are the employees who need the most help and are being left out in the cold. Employers need to ask themselves which option is better for the employee—who still has the option to opt out if he or she does not want to participate?
We can do the right thing and pay a little more now to help provide our employees with a legitimate chance at retirement—or we can pay a lot more in employee costs in the future. This is the decision we need to make.