How Plan Design May Impact Participant Behavior
At the Principal Financial Group®, we believe employees need to save at an estimated savings rate of 11-15% (a combination of individual and employer contributions over an entire working career), in order to replace 85% of their incomes at retirement. This is the level of income replacement that many participants need in retirement to maintain their standard of living.
We suggest three steps to retirement readiness:
- Strategic measurement
- Plan design changes
- Goal driven education
One of the steps that can help toward reaching your retirement plan goal is plan design changes. To help optimize your participants' opportunities to become more ready for retirement, consider the following plan design best practices:
Leveraging the automatic enrollment default rate
|3% Default Rate||6% Default Rate|
|11%+ Savings Rate||32%||61%|
|6-10.99% Savings Rate||45%||31%|
|Participant Opt Out Rate||15%||19%|
As illustrated, increasing the automatic enrollment default rate to 6% or more can have a positive impact on participant savings rates overall with minimal impact to opt out rate. In plans that have a 6% default deferral rate, nearly twice as many participants (61%) reach an overall savings rate of 11% compared to those in plans with a 3% default rate (32%), and the opt out rate is only four percent higher.
The power of the match
|100% up to 2% of pay||2%||5.3%||7.3%|
|50% up to 4% of pay||2%||5.9%||7.9%|
|25% up to 8% of pay||2%||7.2%||9.0%|
In the three different employer match formulas, the employer contribution is the same. You can see as the match "stretches," the participant contribution increases without increasing the overall matching contribution amount. "Stretching" can be a way to incent participants to save at more adequate levels.
*The total contribution adds up to 9%, instead of 9.2, because participants aren't contributing on average enough to get the full match.
Consider making plan design changes to help your participants get more retirement ready.
Contact your financial professional or representative from the The Principal® for more information.
- 2011 Principal Financial Group Retirement Readiness Survey commissioned by the Principal Financial Group, conducted by Harris Interactive online. The data was gathered May 17 through June 17, 2011, from 1,300 employers.
- Our View on Retirement Readiness: How to Move from a "Popular" Plan to a Successful Plan, the Principal Financial Group, September 2011. The estimate assumes a 40-year span of accumulating savings, as well as the following facts: Retirement at age 65; Social Security providing 40% replacement of income; annual market returns of 7%; annual inflation of 2.5%; annual wage growth of 3.5% over 40 years in workforce. The assumed rate of return for the study was hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions.
- Assuming pre-retirement annual gross income of $40,000. AON Consulting 2008 Replacement Ratio Study. http://aon.com/about-aon/intellectual-capital/attachments/human-capitalconsulting/RRStudy070308.pdf
- Chart source: (3% Default Rate)-Based on group of 23,171 participants in 117 plans with a stated employer match and a default deferral percentages of 3% as of 12/31/10. (6% Default Rate)-Data based on group of 2,579 participants in 27 plans with a stated employer match and a default deferral percentage of 6% as of 12/31/10. Deferral percentages presented are of those participating in the plan (does not include anyone that has opted out to 0%).
- Chart source: The Principal Financial Group. Analysis based on 6,560 contracts that showed a stated match formula. Total contribution percentage includes participant contribution and employer match (as of 12/31/2011).
Insurance products and plan administrative services are provided by Principal Life Insurance Company, a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.