Brigitte Madrian, University of Pennsylvania and National Bureau of Economic Research; TIAA-CREF Institute Fellow
October 2005 |
Employer-sponsored savings plan are only a useful tool for helping employees save for retirement to the extent that employees actually participate. But the complexity of choosing an appropriate contribution rate and asset allocation hinders many employees from making a timely participation election. There are several approaches employers can take to encourage and facilitate savings plan enrollment beyond simply educating employees about the benefits of saving for retirement. The most effective mechanism for increasing savings plan participation is automatic enrollment. Firms with automatic enrollment have participation rates ranging from 85% to 95% among those employees who are impacted. The drawback to automatic enrollment, however, is that it corrals many employees into the employer-chosen default contribution rate and asset allocation.
Another effective mechanism, simply requiring employees to make a participation election by a certain deadline, also dramatically increases participation (although not to the same extent as automatic enrollment) but does not favor any particular contribution rate or asset allocation in the same way as automatic enrollment.
A more general approach to increasing savings plan participation is to simplify the decision-making that is required. There are different ways to do this, such as offering a managed investment option, decreasing the number of investments in the fund menu, or offering employees a pre-selected menu of asset allocation options to choose from. Offering an employer match also increases incentives for savings plan participation, but is likely to be more effective in conjunction with some of these other approaches to enhancing participation.