Results of new study find employers can help increase employee retirement savings by adopting default automatic escalators above 1%
Voya Financial, Inc. (NYSE: VOYA), is sharing findings from a new field study conducted through the Voya Behavioral Finance Institute for Innovation focusing on finding the optimal retirement plan design settings for automatic escalation. The results of the study, which are further outlined in Voya’s thought leadership paper “How to auto-escalate your 401(k),” found that employers have an opportunity to help increase savings behaviors of their workforce by adopting higher default “automatic escalators” — and without decreasing participation.
“Over the past several years, automatic enrollment and escalation features in defined contribution plans have made it easier and simpler for individuals to start saving early and more,” said Tom Armstrong, head of Voya’s Behavioral Finance Institute for Innovation. “These powerful tools have improved retirement outcomes2 and helped close longstanding gaps in retirement plan participation; importantly, these gaps have been closed across gender, race, ethnicity and income. Therefore, understanding how to make incremental changes in the use of these features to further drive positive outcomes remains especially important in helping participants truly maximize their retirement savings potential.”
Defaults really do matter
When an individual is first enrolling in their 401(k) plan, many plan designs ask individuals if they want to enroll in auto-escalation, a feature designed to periodically increase an employee’s deferral rate to their retirement savings at set intervals until it hits the maximum contribution rate. Through automatic escalation, employees can also specify both their preferred rate of escalation and the date when such escalation will begin, which, in many cases, can be done to align with bonuses or pay increases. Today, the most common default escalator employers choose in their plan design is 1%; in other words, in setting the automatic escalation rate at 1% a year, an employee’s contribution rate will increase by 1% each year. The challenge is that, in many cases, an increase of 1% is still not allowing individuals to reach their maximum retirement savings potential. So the question remains for employers of what happens if they increase the escalator from 1% to 2%? Or, does accelerating the pace of escalation lead some enrollees to save more faster? Or, alternatively, does it lead to an increase in those declining enrollment?
According to research conducted in collaboration with Carnegie Mellon researchers Saurabh Bhargava, Richard Mason and Mark Patterson and Shlomo Benartzi at UCLA, nearly all individuals who enroll in auto-escalation choose to keep the default a 1% escalation. So to further understand the impact of leveraging different auto-escalator settings, a research study experimentally varied plan enrollees views of 1% or 2% default auto-escalation rates and whether the start date of the escalation was a year, six months or three months. While the results of the study indicate that an opportunity exists for employers to increase the default to 2% without significantly decreasing employee participation in the escalation feature of the plan, more specifically the research observed that:
- Those who enrolled at a default of 1% remained at this escalation without a consideration of an increase;
- Among the employees who were shown a 2% default escalator and decided to participate in auto escalation, roughly half ultimately stuck with the default 2%;
- The majority of the remaining individuals who were enrolled at 2% switched back to 1% but still chose to escalate; and,
- Critically, the higher default escalator of 2% did not meaningfully increase the amount of employees initially declining auto-escalation altogether.
“We live in a world of ‘auto-everything,’ which has helped to provide greater opportunity for individuals to be saving more for their future,” added Armstrong. “But by helping workers get to the right savings rate in less time, employers have a real opportunity to design auto-escalation processes that help employees be more prepared for retirement.”
Additionally, among employees who decided to enroll in automatic escalation, a significant amount of employees were also willing to escalate before 12 months had elapsed. In fact, when prompted by the default, more than half (54%) of employees appeared willing to escalate in 90 days, and with nearly seven in 10 (67%) in 180 days — suggesting that, for the majority of employees, the “future” begins within a few months. However, the more aggressive default delays, which led to escalation beginning sooner, did modestly reduce escalation enrollment (from 23% to 18%).
“Ultimately, our findings also highlight the need for additional research to help determine the optimal escalation default for different types of employees,” added Armstrong. “By creating more personalized defaults and in striving to optimize the design of retirement savings products, employers should not overlook the importance of appropriately setting and personalizing auto-escalation defaults.”
By merging behavioral science with the speed and scale of the digital world, Voya’s Behavioral Finance Institute for Innovation continues to create large-scale solutions designed to help improve individual retirement outcomes. For more information and to view the findings from the current working paper or past studies, visit Voya.com/behavioralfinance.
As an industry leader focused on the delivery of health, wealth and investment solutions to and through the workplace, Voya Financial is committed to delivering on its mission to make a secure financial future possible for all — one person, one family, one institution at a time.
Bhargava, S., Mason, R., Patterson, M., & Benartzi, S. (2022). When does the future begin? 401(k) auto-escalation over future time horizons. Working paper forthcoming.
Beshears, John and Benartzi, Shlomo and Mason, Richard and Milkman, Katherine L., How Do Consumers Respond When Default Options Push the Envelope? (October 7, 2017). Available at SSRN: https://ssrn.com/abstract=3050562 or http://dx.doi.org/10.2139/ssrn.3050562.
Dr. Benartzi was previously a paid consultant to Voya Services Company, a wholly owned subsidiary of Voya Financial.
About Voya Financial®
Voya Financial, Inc. (NYSE: VOYA), is a leading health, wealth and investment company with 7,200 employees who are focused on achieving Voya’s aspirational vision: Clearing your path to financial confidence and a more fulfilling life. Through products, solutions and technologies, Voya helps its 14.7 million individual, workplace and institutional clients become well planned, well invested and well protected. Benefitfocus, a Voya company, extends the reach of Voya’s workplace benefits and savings offerings by providing benefits administration capabilities to 16.5 million individual subscription employees across employer and health plan clients. Certified as a “Great Place to Work” by the Great Place to Work® Institute, Voya is purpose-driven and equally committed to conducting business in a way that is socially, environmentally, economically and ethically responsible. Voya has earned recognition as: one of the World’s Most Ethical Companies® by the Ethisphere Institute; a member of the Bloomberg Gender-Equality Index; and a “Best Place to Work for Disability Inclusion” on the Disability Equality Index. For more information, visit voya.com. Follow Voya Financial on Facebook, LinkedIn and Twitter @Voya.