“Nudging” Employees to Save, and Save More

A strong company match plus auto-enrollment boosts DC plan participation and savings. But features like auto-rebalancing, targeted communications can help too.

Plan sponsors are embracing the “nudge” in a big way. From more generous company matches to automatic enrollment to targeted and timed employee communications, companies that offer defined contribution plans are adopting an assortment of features and practices geared to motivate individuals to save for retirement who previously would have held back or saved only minimally. More than half of plan sponsors (58 percent) now judge the company match in their 401(k) plan to be excellent or near-excellent, according to a recent Institutional Investor survey in partnership with Prudential. Automatic features are on their way to becoming nearly universal: more than 90 percent expect to offer auto-enrollment within three years, while close to 90 percent expect to offer auto-escalation before 2020 as well. With 86 percent of plan sponsors surveyed either currently offering target date funds (TDFs) or planning to do so in the next year, it comes as no surprise that most plan sponsors (59 percent) strongly agree they are helpful in simplifying investment decisions for less sophisticated plan participants.

One-on-one interviews with plan sponsors and pension advisers and consultants reveal that they still regard the oldest of these incentives, the company match, as the most effective nudge in the employer’s arsenal — even those with a generally more financially sophisticated workforce.

“The match is extremely important,” says Leah Mitchell, senior manager of retirement investment management at Sandia Corp. “We have a higher culture of saving than some other companies, and we’d still have saving without the match, but it’s very encouraging for employees who may be on the fence because they have a lot of other commitments.” Sandia’s 401(k) plan has $3.2 billion in assets and close to 11,000 participants. It matches two thirds of every dollar contributed up to 6 percent of pay, which is immediately vested. New hires and employees not covered by Sandia’s closed defined benefit plan receive an additional employer contribution of 6 percent of pay, that figure rising to 7 percent for employees with 15 years of service, vested after three years.

Auto-enrollment helps turn employees’ tendency toward inertia in the direction of saving. “Auto-everything!” says Robert Hunkeler, vice president of investments at International Paper, which sponsors a combined $5 billion in DC plans. “Nothing comes close to the effectiveness of automatic enrollment and automatic increases.” Auto-enrollment is especially effective at getting younger employees to start saving, helping them to build a sizable nest egg by the time they are ready to pay closer attention to their eventual retirement, says Donna Wimbec, senior manager of global benefits compliance at distiller Brown-Forman, with $448 million in 401(k) assets.

Even with an employer match and auto-enrollment, however, plan participants can undersave. If the match is too small, or if employees are auto-enrolled at too low a percentage of pay, they may assume they are doing all they have to do, and yet find themselves lagging as they approach retirement. “In that case, these features need to be revisited,” says Robyn Credico, defined contribution consulting leader, North America, at Willis Towers Watson. Consultants recommend increasing the employer match and including an additional employer contribution such that participants can achieve the equivalent of 14 to 16 percent of pay saved annually, if not right away then within a few years, and pairing that with an auto-escalation feature.

Auto-escalation can have a powerful effect on employees who were previously saving at a very low level. When a large financial services company instituted auto-escalation early this year, automatically increasing contribution levels by 1 percent per year, 20 percent of its employees were still contributing less than 6 percent of pay to the company’s 401(k) plan. After the change, nearly nine out of ten of those low contributors allowed the automatic increases to occur.

Automatic rebalancing, or auto-true-up, is another option that nudges participants onto a more directed path to retirement security. Sandia has adopted it as an elective feature, which automatically restores participants’ portfolios to their specified asset allocation according to a regular schedule, while USG Corp., a building materials manufacturer with $1 billion in 401(k) balances, provides automatic rebalance notifications to participants who request them.

Target date funds (TDFs) have the advantage of not just rebalancing but resetting participants’ asset allocation at the appropriate level for each stage of their careers. More than half (54 percent) of respondents to the Institutional Investor survey agree strongly that TDFs provide better diversification than many employees would develop on their own. Making a TDF suite the default option in the plan’s auto-enrollment structure has the added benefit of limiting or eliminating the presence of company stock in the plan, which could otherwise overexpose the participant to a single risk point, says Credico.

A strong match, automatic features and TDFs can raise participation rates and improve investment practices, but even workforces that are relatively sophisticated financially may include employees who opt out or continue to undersave. “Your average participation rate may be 90 percent, but the other 10 percent are at risk,” says Credico. Some employers, as well, are reluctant to add too many automatic features. Delta Air Lines, which has $15 billion in assets in its 401(k) plans, auto-enrolls only new hires, in part because long-term employees already have what it considers to be a good savings rate. But another reason, says Greg Tahvonen, vice president of total rewards, is that “as a company, we’re not intrusive. We believe in educating employees to make decisions for themselves.”

In these cases, another set of nudges, in the form of participant communication, can be useful. At USG employees who turn down or opt out of auto-escalation receive a notification explaining the difference it can make in their retirement savings. BMC Software, a tech firm with $700 million in 401(k) assets, couples online communications with snail-mail mailings to employees’ homes, targeting spouses who may take an active interest in retirement saving, says Natasha Taylor, director of global benefits.

Plan loans and brokerage windows, which are often seen as a risk to retirement saving, can also serve as nudges to save more, several practitioners point out. “For some people, if they feel they can’t get their money in an emergency, they may be less likely to participate,” says Ryan Gardner, managing partner and senior consultant at Fiduciary Investment Advisors. “So the ability to access their money in a true emergency is a good thing, but the number of loans should be limited.” And while “it may be more costly for the average participant to use brokerage windows,” Gardner says, “it may be a useful tool to attract and retain” employees in the plan who consider themselves to be more financially sophisticated.

A robust company match coupled with auto-enrollment undoubtedly can make a great difference for many employers concerned with trying to raise plan participation and retirement saving levels. But their experience with additional features, including auto-rebalancing, targeted communications and even loans, suggests that nudges can also help encourage specific groups of employees to save. Going forward, plan sponsors will want to build a deeper understanding of their workforce and explore new ways to turn employees’ behavioral traits in the direction of building a more secure retirement.


This study was developed by Institutional Investor, in partnership with Prudential, to identify the investment risks and behavioral challenges that need to be addressed throughout the retirement planning process and how plan sponsors, advisers and consultants are trying to overcome them.

To support this research, a survey was distributed to Institutional Investor’s audience of plan sponsors as well as advisers and consultants between January and February 2016. We received 511 completed survey responses from the plan sponsor audience and 295 completed survey responses from advisers and consultants.

Auto Enrollment: An automatic contribution arrangement that can be used as a feature in a retirement plan to allow employers to enroll employees in the company’s plan automatically upon meeting eligibility requirements.

Auto Escalation: A plan design option that allows a plan sponsor to increase participant deferrals annually by a set increment.

RISKS: Investing involves risk. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost, and it is possible to lose money. Past performance does not guarantee future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.

The target date is the approximate date when investors plan to retire and may begin withdrawing their money. The asset allocation of the target date funds will become more conservative as the target date approaches by lessening the equity exposure and increasing the exposure in fixed income type investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. There is no guarantee that the fund will provide adequate retirement income. A target date fund should not be selected based solely on age or retirement date. Participants should carefully consider the investment objectives, risks, charges, and expenses of any fund before investing. Funds are not guaranteed investments, and the stated asset allocation may be subject to change. It is possible to lose money by investing in securities, including losses near and following retirement.

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