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From Savings Shortfalls To Retirement Income Success

For many employees, the first step is overcoming their own biases toward saving and investing

by Robert Baumgarten

Mr. Baumgarten is the vice president of retirement plan sales at Standard Insurance Retirement Services, Inc. He is a 20-year veteran of The Standard and has served in various leadership and management roles. Visit

Since retirement planning is such a critical life process for workers, advisors have a special responsibility to ensure their clients are offering the right tools and advice to help employees put themselves in the best position to retire. Despite many workers knowing some retirement basics, such as starting to save early and taking advantage of a workplace plan like a 401(k), too many remain ill-prepared when they stop working. Where is the disconnect, and how can advisors help? Following are tips you can share with plan sponsors to help overcome employees’ savings shortfalls and make retirement planning simpler and more attainable.

Offer simple, clear choices

A big challenge that employees face with retirement is overcoming their own biases toward saving and investing. Behavioral finance is a field that studies the psychological biases and predispositions that can affect individuals’ financial decision-making abilities. By understanding these biases and offering solutions, plan sponsors can help employees start to make retirement planning decisions that are in their best interest and allow them to benefit from the tax advantages that come with retirement accounts.

Limiting the number of choices employees need to make when enrolling in their employer’s retirement plan while still offering adequate investment options can be a simple, yet very effective, strategy to encourage participation. For some, the time needed to research and assess each retirement savings option can seem overwhelming, lead to decision paralysis and result in the employee not taking any action at all.

Research from The Standard indicates that just 39% of employees are comfortable determining on their own how much to save, while 43% of employees aren’t comfortable selecting investment options themselves1. Helping plan sponsors keep their solutions simple and straightforward can increase the likelihood that employees will engage with a plan and be on their way to savings success.

An advisor’s role is especially important in these beginning steps. Encouraging employers to offer resources like managed account services and getting them set up with those solutions goes a long way. When evaluating such resources, look for a managed account provider that can help employees evaluate their tolerance for risk, determine how much to save and take a holistic approach, considering other assets like spousal assets and other accounts like 401(k)s, IRAs and HSAs.

Make the first step automatic

Even though limited options can make a plan easier to understand, that factor alone still may not be enough for some employees to act and actually enroll. Some workers may be hesitant about next steps, or simply predisposed to inertia: the failure to act. As a result, choosing to enroll might seem intimidating or too time-consuming for some workers.

To help employees overcome the inertia that many behavioral finance experts identify as a significant hurdle to saving for retirement, successful plan sponsors are creating automatic enrollment policies and initiating the first step of retirement saving for employees themselves. Instead of waiting for participants to opt into plans, auto-enrolling them into a Qualified Default Investment Alternative (QDIA) helps eliminate two behavioral finance challenges: choice overload and time commitment.

To help employees overcome the inertia that many behavioral finance experts identify as a significant hurdle to saving for retirement, successful plan sponsors are creating automatic enrollment policies and initiating the first step of retirement saving for employees themselves...

Not all QDIAs are created equal, though; a target date fund or managed account solution will help set employees up for success better than balanced funds, for example, so evaluate options carefully. While an employee can ultimately choose to opt out, automatic enrollments often drive higher participation by reducing the number of decisions employees must make. Having a recordkeeper who can automate and manage this process for plan sponsors and employees helps make this approach seamless to those involved.

To further help employees make informed decisions about how much to save, it is also effective for advisors or retirement plan providers to provide a “gap analysis” to the employee, which shows how close — or far — they are to being able to replace their income during retirement. This analysis shows how even a small change in an employee’s contribution rate can quickly grow their account balance and lead to a more secure future. Some retirement plan providers will even provide an initial, customized analysis for each employee with quarterly updates as part of their statement.

Encourage solid saving habits

Establishing a retirement account and contributing with auto-enrollment are solid practices, but the path to retirement success also includes increasing contribution amounts. Another step to help employees accomplish their retirement goals is encouraging plan sponsors to incorporate auto-escalation as part of their overall plan design. This can be critical for employees to do; if not, they are potentially leaving money behind that might be matched by an employer’s plan. Further, if an employee started contributing to their workplace plan at a traditional 3% or 4% contribution rate but never increased it over the length of their career, they likely would not have enough savings to replace their income in retirement.

Auto-escalation can help employees incrementally increase the amount they save over time, without the contribution rate increase seeming too noticeable or reducing too much of their take-home pay. This can be accomplished by recommending that plan sponsors time these increases to coincide with a participant’s raise or pay increase to help minimize the impact. By combining a higher default contribution rate with an auto-escalation plan of at least 1% or more each year, employees will be on a more solid path to retirement savings success.

To help your clients succeed, look for a managed account provider that will bump contribution rates each year based on employees’ needs. These resources can help set contribution rates for participants automatically based on their personal situation and how much they need to make up. This saves employers time and helps ensure an employee’s contribution escalates automatically at the right intervals every year.

By considering all the ways an employee’s retirement savings can be delayed or derailed, you can help proactively address any retirement planning barriers that may arise with your clients. When it comes to making educated choices about their retirement plan, many employees don’t know where to start. Since there are many different investment options to choose from, they often decide on investments that appear safe and familiar — or sometimes don’t decide at all. With fewer barriers, employers can see higher enrollment, participants can be more retirement-ready and you can help everyone be more successful.

In an upcoming article, we’ll look at how retirement plan providers can further help employers with day-to-day support of the plan through a variety of administrative resources, including serving as an ERISA Section 3(16) delegated administrative fiduciary.◊



1. Employees and Their Retirement,