With the swell of baby boomer retirements well underway, now more than ever, employers are seeking to offer creative group benefits to help attract, recruit and retain employees.
No matter the trend, an employer-sponsored retirement savings plan is a cornerstone of a competitive employee compensation package. Yet the age-old question remains: Why aren’t all employees taking advantage of this significant benefit — especially those whose employers are offering a matching contribution?
Retirement should be an exciting stage in one’s life, but oftentimes Canadians are faced with competing financial demands that make it difficult to put money aside.
They enter the workforce with an average of nearly $27,000 in student loan debt that typically takes 10 years to repay, according to a 2015 survey by the Canadian University Survey Consortium.
For many, this means delaying saving for life goals such as home ownership, starting a family or retirement.
Of course, there are other factors that affect whether or not employees participate in a workplace retirement savings plan, including a set of emotional responses, the most common of these being inertia and myopia, which is really just a focus on the short-term.
It is human nature to prefer to maintain the status quo because this is easier and requires less effort than initiating a change.
This inertia helps explain why many employees would rather leave dollars on the table than go through the process of enrolling in a group retirement plan. Making enrolment effortless is key to engaging employee participation and to combat inertia.
It is also natural to place a higher value on immediate rewards over longer-term awards. After all, the future may never arrive.
This explains why it feels more rewarding to spend on short-term wants such as a vacation or a car, rather than delay gratification and put aside savings for future retirement income.
Fortunately, there are “nudges” employers can use to help leverage these barriers, including:
• automatically enrolling staff in a retirement savings plan and giving them immediate eligibility
• offering appropriate default funds for those who fail to make investment decisions
• implementing automatic escalation of contributions.
For example, in 2002, the United Kingdom found people weren’t saving enough for retirement. In response, the government implemented automatic enrollment, giving employees the opportunity to participate in a nationwide pension plan, even if employers didn’t sponsor a pension plan.
This meant employees did not have to make any effort to enrol, but would have to act to opt-out if they didn’t want to participate. This approach leveraged employees’ inertia for their own benefit.
In 2012, workplace pension plan participation in the U.K. nearly doubled, according to the Institute of Fiscal Studies, suggesting that employees are increasingly contributing as a result of automatic enrolment.
There are three simple nudges for employers to consider in boosting employee participation: make it quick, make it easy and make it count:
Make it quick
• Offer immediate eligibility: Although immediate eligibility is the most popular option among defined contribution (DC) plans (39 per cent), group RRSPs (55 per cent) and deferred profit sharing plans (34 per cent), a significant number of capital accumulation plans still require new employees to wait before they can participate.
Unfortunately, when the time comes, saving for retirement may no longer be top-of-mind, and any salary increase employees receive when they join an organization will have already been absorbed into their household budget. Eliminating the wait is one of the easiest things an employer can do to streamline administration, manage administrative risk and enhance employee participation.
• Encourage early enrolment. This can often be a challenge if not mandatory at an organization. Most employees don’t understand the advantages of enrolling in their plan as early as possible, therefore, they miss out on the benefits of investment returns and compound growth. Reinforce and educate employees about the power of compound growth.
Make it easy
• Offer appropriate default fund options: Investment menus are becoming increasingly complex, causing many to delay or avoid choosing funds. It’s
concerning that seven per cent of DC plans and 13 per cent of group RRSPs still continue to use cash, money market funds or GICs as defaults.
Because of inertia, employees in these default options won’t achieve the long-term returns needed to secure retirement income adequacy. Instead, employers are encouraged to provide target date and target risk funds as much better options for boosting long-term savings.
Make it count
• Implement auto-escalation of contributions: Employees typically perceive any decrease in take-home pay as a loss, even when it is in the form of deferred retirement income.
With automatic escalation of employee contributions made in lock-step with salary increases, their take-home pay remains relatively constant even as they are making meaningful contributions that grow their savings for the future.
• Offer a voluntary group tax-free savings account (TFSA): Canadians often place a higher value on immediate rewards and don’t think about
long-term savings. Introduce a program, such as a voluntary group TFSA, to help employees save for a wider variety of financial goals to meet short-term needs, such as buying a house, buying a car or funding their children’s education.
Offer access to tools
Remember, it is human nature for people to be more engaged when they are having fun. Offer
engaging tools to help employees explore their retirement readiness.
The complexities involved with retirement planning can overwhelm employees, triggering inertia and deterring them from making any investment decisions. They can’t make up their minds whether to enroll, what investments are right for them or how much they should save to reach their goals.
Give employees access to engaging and intuitive digital tools and online resources such as online calculators to help them explore different scenarios risk-free, reducing complexity and helping them to make decisions.
For example, many employers have implemented virtual environments that allow employees to interact with educational materials customized specifically to their plan, such as articles and videos, and presenting them in a fun and innovative way.
Others have implemented contests requiring employees to be members of the plan in order to be eligible to win prizes.
Finally, don’t let inertia or a focus on immediate priorities interfere with your enthusiasm in exploring new tactics and approaches to increase employee engagement in this important benefit.
Christine van Staden is regional vice-president, group customer, at Great-West Life in Toronto. For more information, visit www.gwl.ca.
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